It may come as a surprise, but there are actually 30 different levels of credit scores. However, it's not uncommon for people to search for the "best" credit score and receive a multitude of conflicting answers. The information available can be overwhelming and often leads individuals down a complicated path.
Joe Mahlow has been working in the financial literacy and credit repair arena for over fifteen years, and his aim is to offer straightforward advice on various topics, including credit scores. With a track record of helping over twenty thousand clients improve their credit scores, he hopes to do the same for you. So, let's dive in and learn about credit scores.
Contents:
Different Categories of Credit Scores
Understanding Good Credit Scores
Credit Score Needed to Qualify for Different Mortgage Loans
Determining an Optimal Credit Score to Buy a Car
What Are Some Ways to Improve My Credit Score?
Joe's Insights on Developing a Good Credit Score
Different Categories of Credit Scores
There are two primary credit scoring models, the FICO and Vantage models that are crucial to understand, especially when it comes to the differences in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most widely used model, with eight different types ranging from FICO 2 to FICO 10, which may show various credit scores depending on your credit report. When you seek credit, different lenders may pull a different FICO report, based on the kind of lender you choose. For instance, when you apply for a mortgage, your mortgage lender will most likely pull your FICO 5 credit report, while credit card companies will typically evaluate your FICO 8 credit report.
Why are there many FICO scores?
The critical factors considered in each credit report have different weights. Therefore, a previous mortgage's payment history will have a more significant impact on FICO 5 mortgage report than no history or negative history. Similarly, with FICO 8, credit card history impacts the score the most, while auto lenders typically pull FICO-2 reports, where previous auto history has a more significant effect on the scores. To view all your credit scores, sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score credit scoring model was introduced to compete with the FICO model and was developed by the three major US credit reporting agencies, Equifax, Experian, and TransUnion. While FICO has been used since the seventies, Vantage is relatively new and is gaining popularity in some areas such as personal loans and auto lending.
Is the Vantage Score accurate?
The Vantage Score provides a good general idea of your FICO score, as it is currently not widely used for lending purposes. While the Vantage Score can vary in accuracy when it comes to your actual lending score, as FICO is the most commonly used model. Nonetheless, Vantage has the potential to dominate the sector in the next five to ten years based on today's standards. Unlike the outdated FICO model, credit reporting agencies can collect significant and reliable data that provide the best scoring data available.
Understanding Good Credit Scores
Credit scoring models such as FICO and Vantage range between 350 to 850, with 850 being the highest score and 350 being the lowest. To successfully increase your credit scores, it is necessary to comprehend where you stand at every point when building your scores. Here are some important score thresholds to get you started.
1. 620 or Below
Below this threshold is considered as poor credit, and it is highly likely that you have a poor credit history, high-balance credit card accounts, or no credit card at all. The best way to improve your score in this range is to have ten active revolving credit accounts and make timely payments. Secured credit cards such as Credit Builder Card and OpenSky Credit Card can be instrumental in building your credit. Once you attain a score of 620, you can start qualifying for an FHA home mortgage.
2. 640-680
Credit scores ranging between 640-680 fall under the category of a fair credit score. This range is indicative of your established credit, albeit with some derogatory marks or accounts affecting your credit standing. Furthermore, high balances on your credit cards can also bring down your score. Additionally, opening a new account may temporarily reduce your score. However, this is nothing to worry about, and your score will recover.
3. 740+
Any credit score over 740 is considered to be in the "super-prime" category, and it will provide you with the best interest rates for loans. Achieving a score over 740 is worthy of congratulations since such high scores are attained by only 20% of the US population. Maintaining timely payment of accounts and ensuring revolving credit card accounts are paid will ensure you remain in the "super-prime" category, thus providing a solid financial foundation.
Credit Score Needed to Qualify for Different Mortgage Loans
The credit score required to qualify for a mortgage loan varies by the type of loan you apply for. Federal regulations and government backing make the criteria and guidelines for most loans alike, but there are differences between conventional loans, FHA loans, and VA loans. Here's what you need to know:
1. Conventional Loans
Conventional loans are the most popular and economical option apart from VA loans. With conventional loans, you don't need to purchase private mortgage insurance, which can increase your downpayment or monthly payment. As conventional loans offer better rates and lower downpayment requirements than other loans, they usually require a credit score of at least 640 and a debt-to-debt ratio below 43%.
2. FHA Loans
FHA loans cater to borrowers with lower credit scores, typically in the range of 580-619, although credit requirements may vary across lenders. You need to keep PMI for at least 11 years with an FHA loan, which can increase your overall mortgage expenses. However, you can opt for a downpayment as low as 3.5% of the purchase price, and the debt-to-income limit is higher, which enables low-income homeowners to buy comparatively costlier homes.
3. VA Loans
VA loans do not have a specific credit score requirement, but they do look at your past defaults and government-owed debts before pre-approving your loan application. You can qualify for a VA loan if you have served in the US military for at least 181 days, 90 consecutive days during wartime, or six years with the National Guard. The VA loan offers the lowest interest rates, and you typically don't require a down payment. It's an ideal option for veterans and their families.
Determining an Optimal Credit Score to Buy a Car
When financing a car, lenders consider not only your credit score, but also your credit history to evaluate your creditworthiness. While a good credit score is desirable, it has a secondary role in determining the interest rate that you qualify for. Rather, credit issues such as delinquencies on a current or previous auto loan or repossession pose a greater risk for lenders which can make loan approval challenging. Nevertheless, it is possible to secure a car loan even with poor credit via subprime auto lenders who impose additional fees and a higher down payment to offset this risk. These lenders allow anyone to become eligible for a loan; however, doing so results in higher interest rates. It is also important to note that dealerships incur fees from the lender to extend the loan to individuals with poor credit, and as such, a specific vehicle may be suggested to the buyer due to its higher markup. In general, having a down payment while purchasing a car on credit is beneficial.
The Credit Score Range for a New Car
There is no fixed credit score that guarantees loan approval for purchasing a car because several factors are taken into consideration. However, a credit score above 680 is optimal and helps to avoid higher interest rates. The amount of interest one pays is directly proportional to their credit score. For instance, someone with a credit score of 720 or above would pay an average of $5,500 in interest on a loan. In contrast, those with credit scores below 680 would pay even higher interest rates due to their increased risk. Consequently, it is essential to maintain a good credit history and score to avoid unnecessary expenses while purchasing a car.
What Are Some Ways to Improve My Credit Score?
Improving your credit score requires effort, but there are many essential things you can do today to help increase it. Keep in mind that it takes time to build a good credit score, so patience is key. The most critical thing you can do when building credit is to be patient, as people who act impulsively often make poor credit decisions that exacerbate their problems.
Here are some things you can do right now to improve your credit:
Open three to five revolving credit accounts (credit cards).
Revolving credit is an excellent way to maximize your credit score, especially if you have limited credit or are looking to rebuild it. While obtaining a large loan takes work, opening several credit cards (such as a secured credit card like Open Sky or Credit Builder Card) gives you the best chance of approval. Revolving credit makes up 30-35% of your overall credit score, so it is the quickest way to build your score. Remember to pay your balance on time and keep it between $5 and $10 each time you make a payment. Use the card only for small purchases like gas or basic groceries.
Increase your credit limits.
If you have active revolving credit card accounts, you can increase your credit limits quickly. This will help increase your overall credit limit and decrease your credit utilization percentage. Most people use their credit cards a lot, and if your credit card balances exceed 30% of your overall limits, it can hurt your credit score. So, to avoid this, you can increase your credit limits.
To increase your limits, call your credit card company and request a "Credit Limit Increase." Fill out some information, including your current income, to go before the credit team. Ensure you have seven to fifteen months of excellent payment history on the credit card before requesting this.
Pay down your balances.
Keeping your balance low and close to zero is crucial to improving your credit score. Use your credit cards for small purchases and only leave about a $1-5 balance on them when you pay your bill each month. If you have high balances currently and no way to pay them off, create a plan. Take a percentage of your paycheck each month to pay the credit card down and stop using the card. Limit your credit card usage since your credit card spending habits play a massive role in your credit score. Credit card rates are incredibly high, and most of your payments will go towards interest and not principal.
Joe's Insights on Developing a Good Credit Score
It's common to encounter financial difficulties that cause bad credit scores. However, if you dedicate the necessary time and energy to work on your credit situation, you can witness significant improvements to your score in no time. Often, people with poor credit feel like they are trapped in a never-ending cycle of financial issues; nonetheless, good credit scores are achievable if you commit to improving your credit score and spending habits. To do this, it involves developing a good financial plan and being mindful of your spending habits. With the right plan, you can experience the benefits of a great credit score. This article aims to provide valuable insights on credit. If you need help with your credit score or repair assistance, do not hesitate to contact us at www.asapcreditrepairusa.com.