It may surprise you to learn that there are actually thirty distinct levels of credit scores. Many people are unaware of this fact, and when they search for information on the best credit scores, they often find themselves with a confusing and contradictory array of information. Unfortunately, some online resources can be misleading or difficult to follow, leading people down a frustrating path. That's where I come in – my name is Joe Mahlow, and I have been working in the field of financial literacy and credit repair for over fifteen years. My aim is to provide you with straightforward advice on a variety of topics, including credit scores. Although finding accurate information on credit scores can be tricky, I have successfully assisted over twenty thousand clients with improving their scores, and I hope to help others do the same. So let's dive in to this important subject.
Contents:
Understanding Different Credit Scores
A Guide to Good Credit Scores
What Credit Score Do You Need to Buy a House: A Comprehensive Guide
Credit History vs. Credit Score: Key Factors to Consider When Financing a Car
Tips to Improve Your Credit Score
Advice from Joe
Understanding Different Credit Scores
Credit scores are a critical element of personal finance. There are two commonly used credit scoring models: the FICO model and the Vantage model. It is important to understand both so that you can comprehend the differences in how they calculate your credit score.
1. FICO Credit Score
The FICO score is the most popular and widely used credit scoring model. There are eight different FICO models, from FICO 2 to FICO 10, which can result in different credit scores depending on your credit report. This is because each credit report has a different "weight". Factors critical to the lender carry more weightage in a credit score than less important ones. Depending on the type of lender you use, they will pull a different FICO report. For example, if you are trying to apply for a home, the mortgage lender will most likely pull your FICO 5 credit report and for a credit card, they would most likely pull your FICO 8 credit report. Auto lenders typically pull FICO-2 reports, and your scores will weigh heavily on your previous auto history.
2. Vantage Credit Score
The three major credit reporting agencies developed the Vantage scoring model as competition to the FICO model. Vantage is a newer scoring model that credit monitoring websites frequently use to provide a free credit report. While FICO currently dominates the lending sector, the Vantage Model is gaining popularity as a scoring model in personal loans and auto lending. It is essential to note that the Vantage Score will not be accurate when it comes to your actual lending score as it is not widely used for lending purposes. Use the Vantage score to get a general idea of your FICO score.
As the most significant data collection agencies outside social media companies, credit reporting agencies hold the upper hand in providing the best scoring system. In the next 5-10 years, lenders nationwide may begin using the Vantage scoring model because it can provide the most relevant scoring models based on today's standards.
A Guide to Good Credit Scores
Credit scores generated by the FICO and Vantage models both range from 350 to 850, with 350 being the worst possible score and 850 being the best. If your aim is to achieve a high score, it's important to know where you stand on the journey to building your credit. Below are some critical thresholds that will give you a better idea of where you currently are with your credit score.
1. 620 or below:
You have bad credit if your score is 620 or lower. This means that you may have some negative credit history, including high-balance credit card accounts or no credit cards at all. To improve your credit score, timely payments and opening ten active revolving credit accounts are recommended. Secured credit cards such as the Credit Builder Card or OpenSky Credit Card can help build your credit. Once your score reaches 620, you can qualify for an FHA home mortgage.
2. 640-680:
A credit score ranging from 640-680 is considered fair for good credit. Scores in this range typically indicate that you have established credit, though you may have some derogatory accounts or marks on your credit report. Paying down any high credit card balances is advisable. It's not uncommon to experience temporary drops in your score due to newly opened accounts.
3. 740+:
A score above 740 is considered super-prime and will give you access to the best interest rates for most loans. Congratulations if you've achieved a score of 740 or above, as you're among the 20% of the population with the highest credit scores. Keeping up with timely payments and maintaining paid revolving credit card accounts will ensure that you're in excellent shape.
What Credit Score Do You Need to Buy a House: A Comprehensive Guide
The credit score you need to buy a house can vary, depending on the type of mortgage loan you are applying for. Due to government backing and federal regulations, the requirements for most mortgage loans usually have some similarity, but could also differ. Nonetheless, there are three primary mortgage loan types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most sought-after loans and are generally the best savings option outside of VA loans. These loans do not require private mortgage insurance (PMI), which can be an added cost increasing the downpayment or monthly payment. PMI safeguards the lender in the event you stop making payments on your loan. Conventional loans have lower downpayment requirements and better interest rates than other mortgages. The typical credit score requirement for a conventional loan is 640, with a debt-to-debt ratio not higher than 43%.
2. FHA Loans
The FHA mortgage loan is for lower credit scores that range between 580 and 619. It is crucial to note that loan programs offer different options. So, perform due diligence and shop around for different lenders to get the best financial option for you. FHA loans require a mandatory PMI payment for at least 11 years, which can be an added cost to your mortgage. This loan usually has a higher debt-to-income limit of up to 50%, enabling you to purchase more homes than conventional loans if you have a lower income. Lastly, the downpayment requirement for an FHA loan is as low as 3.5% of the purchase price, allowing you to get into a mortgage with less money out of pocket than a conventional loan. However, this loan usually has a higher interest rate.
3. VA Loans
There is no official credit score requirement for the VA Loan. Still, lenders scrutinize previous defaulted loans and any government-owed past-due debts while pre-qualifying you. You are eligible for a VA loan if you served in the United States Military for at least 181 days, served 90 consecutive days during wartime, or served six years with the National Guard, and your spouse was in the military and lost their life during active duty. VA loans usually have the best interest rates available, and they do not typically require a down payment. The VA loan is an excellent way to give back to our veterans.
Credit History vs. Credit Score: Key Factors to Consider When Financing a Car
While your credit score plays a role in determining what you qualify for when buying a car, your credit history is a more crucial factor. The interest rate you're eligible for is determined by your credit history and the risk involved with extending credit. Therefore, current and past credit issues have more weight than a higher credit score. Special finance lenders will extend loans to those with bad credit, but with added criteria such as a higher down payment and fees to the dealership. Ultimately, having equity or a downpayment is beneficial when going through the car buying process on credit. Credit scores over 680 are ideal, while anything below this score increases the interest rate charged due to the risk posed to the lender. The higher the credit score, the less interest you will pay, as demonstrated in the example where someone with a 720 credit score pays, on average, $5,500 in interest on a loan, while someone with a credit score of 580 or above pays, on average, $15,300 in interest on a loan.
Tips to Improve Your Credit Score
If you want to improve your credit score, there are several things you can do immediately with minimal effort. Keep in mind that building a good credit score takes time, and it won't happen overnight. Being patient is crucial during the credit-building process. Impulsive and bad decisions with credit may worsen your problems. Here are some things you can do to boost your credit score:
Open 3-5 Revolving Credit Accounts:
Revolving credit is the best option to help maximize your credit scores. Obtaining a large loan to build credit isn't easy, especially for someone with limited credit or looking to rebuild their credit. Therefore, opening secured credit cards like Open Sky or Credit Builder Card might be a good start. They focus on your ability to pay the card on time and do not concentrate much on your credit score. Revolving credit accounts make up 30-35% of your overall score, and they are the best option to help increase credit scores quickly. It takes around 2-4 months to show the increase they will have on your credit scores. Make sure you pay your balance on time and keep it between $5-$10 each time you make a payment. Limit the use of the card to small purchases like gas or simple groceries.
Raise Your Limits:
Requesting a credit limit increase for your active revolving credit card accounts will increase your overall credit limits and lower your credit utilization percentage. Utilizing credit cards a lot is one of the factors that may hurt your credit scores the most. You can increase your credit limits to help lower your utilization percentage.
Pay Down Your Balances:
Keeping your balance low and close to zero is crucial. You don't have to use your credit cards every month. Use them for small purchases, and when it comes to paying your bill, leave about a $1-$5 balance on your credit cards. If you have high balances and cannot pay them off, make a plan to take an “x†percentage of your salary to pay the credit card down and ultimately stop using them. Limiting your credit card usage is essential because your credit card spending habits play a massive role in your overall score. Furthermore, the rates on a credit card are high, and most payments will go towards interest and not principal.
Advice from Joe
We have all experienced a time when our credit is less than perfect. However, if you are serious about improving your current credit situation, dedicating time and effort towards self-improvement and credit repair can yield remarkable results in a short amount of time. Many individuals with poor credit feel trapped in a cycle of never-ending financial struggle, but it is possible to improve your credit score if you prioritize it and focus on your spending habits. Take the first step by creating a budget and addressing any poor spending habits that may be affecting your credit score, and you will start to see a positive change. This helpful article aims to provide a better understanding of how credit works. If you require assistance with your credit score or are in need of credit repair services, don't hesitate to contact our office at www.asapcreditrepairusa.com.
- Remember that with dedication, your credit score can improve quickly.
- Prioritizing your credit is key to success.
- Start by creating a budget and working on bad spending habits.