Were you aware that credit scores can be divided into 30 different levels? Often, people are unaware of this fact, and when they search for the best credit score, they receive a variety of responses from search engines. Unfortunately, many of these sources can be confusing or even misleading. My name is Joe Mahlow, and I have spent over fifteen years in the financial literacy and credit repair field. My objective is to provide you with unbiased and reliable advice on a range of topics, including credit scores. With my assistance, over twenty thousand clients have been able to enhance their credit scores, and I hope to offer you the necessary knowledge to accomplish the same. Let us dive right in.
Contents:
Different Types of Credit Scores
Understanding Good Credit Scores
What Credit Score is Needed to Buy a House?
Determining a Good Credit Score for Car Purchases
Tips on How to Improve Your Credit Score
Helpful Tips for Improving Your Credit from Joe
Different Types of Credit Scores
There are two primary models for credit scoring - the FICO model and the Vantage model. Understanding both of these models is essential as they differ in the way they calculate credit scores.
FICO Credit Score
FICO is the most widely used credit scoring model, with eight different FICO models from FICO 2 to FICO 10. Depending on the type of lender used, a different FICO report will be pulled, resulting in a different credit score. For instance, a FICO 5 credit report would likely be used for a mortgage application, while a credit card application would require a FICO 8 report.
Why are there so many FICO scores?
Each credit report has different critical factors that vary in their significance to a lender. For example, a FICO 5 mortgage report will primarily weigh previous mortgage history, while the FICO 8 report used for credit card applications will focus on your credit card history. Auto lenders often use FICO-2 reports, with an emphasis on previous auto history. To see all of your different scores, sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score scoring model was created by the three major credit reporting agencies to compete with the FICO model. Although it has gained popularity in some sectors, such as personal loans and auto lending, it is not widely used for lending purposes. Instead, it provides a good general idea of credit scores.
Is the Vantage Score Accurate?
The accuracy of the Vantage score can vary since it is not widely used in lending. However, it does provide a general idea of credit scores. As the Vantage model is based on today's standards, it is likely that lenders will eventually start using it more widely. While the FICO model is currently more widespread, it may be less representative of actual credit scores.
Understanding Good Credit Scores
Credit scoring models such as FICO and Vantage range from 350 to 850, with 350 being the lowest and 850 being the highest score. Having the highest scores is always a good goal to strive for, which is why it's essential to know the following score divisions to determine where you stand on your credit building journey:
1. 620 or below:
This score range is considered bad credit, resulting from an adverse credit history, high-balance credit card accounts, or having no credit cards. To improve your scores, make timely payments, and have ten active revolving credit accounts open. If you want to build credit, applying for a secured credit card can help you achieve your goal. An FHA home mortgage is attainable once you reach the 620 score range.
2. 640-680:
Scores in this ranking are considered fair for good credit. You can have derogatory accounts, newly opened accounts, and high balances on credit cards. However, newly opened accounts usually lead to a temporary dip in scores. Always remember, scores in this range will adjust.
3. 740+:
Any score above 740 is considered a super-prime credit score and will yield the best interest rates. Congratulate yourself if your credit score is 740 or higher because you are among the 20% of the US population with this score. With this excellent credit score, continue making on-time payments and keeping revolving credit card accounts paid to stay in great shape!
What Credit Score is Needed to Buy a House?
The credit score required to buy a house largely depends on the type of mortgage loan you are applying for. Most mortgage loans have similar guidelines, although some variations may exist due to government regulations like FHA loans and VA loans. There are three types of common mortgage loans, including conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and the most cost-effective option available after VA loans. They don't require private mortgage insurance, allowing you to save on both down payments and monthly payments. Conventional loans have a lower down payment requirement and interest rates than other types of mortgage loans. A 640 credit score and a debt-to-income ratio of 43% are typical requirements for this loan.
FHA Loan
The FHA mortgage loan is suitable for credit scores between 580 and 619. You should view different lenders as all loan programs are various. FHA loans require you to keep PMI for at least 11 years and a higher debt-to-income ratio of up to 50%. In exchange, you could acquire a mortgage at a lower interest rate and a downpayment as low as 3.5% of the purchase price.
VA Loan
VA loans do not have a minimum credit score requirement, but you must not have defaulted on any loan and check for any past-due debts owed to the government. To qualify for VA loans, you need to have served in the military, National Guard, or your spouse lost their life during active duty. VA loans offer the best interest rates and usually do not require a down payment, making them an excellent option for veterans and military families.
Determining a Good Credit Score for Car Purchases
When it comes to purchasing a car, your credit history plays a more crucial role in determining your eligibility than your credit score. While a high credit score is beneficial, the interest rate you qualify for is mainly determined by your credit history. Lenders assess your past and present credit activities to assess the risk of extending you credit. Late payments or repossession of a previous loan make it more challenging to get a loan approval than someone who has never defaulted on a loan. Special finance lenders may qualify almost anyone, including those with repossessions, but will add specific criteria, like higher down payments and extra fees. Dealerships pay a fee to reduce the risk of loan defaults and approve you for the loan, causing them to assign you higher markup vehicles. Lastly, having equity or down payments increases your credibility in purchasing a car on credit.
Credit Score Range Suitable for Buying a New Car
There's no exact credit score that can guarantee approval since numerous factors, as mentioned earlier, play a part. However, a credit score above 680 is ideal to avoid high-interest rates due to your perceived risk. The interest a lender charges is dependent on your credit score. For example:
1. A credit score of 720 or more pays an average interest of $5,500.
2. A credit score of 680 or above is charged an average interest rate of $6,600.
3. A credit score of 650 or above will pay, on average, $8,100 in interest on a loan.
4. A credit score of 615 or above generates an average $10,200 in interest on a loan.
5. A credit score of 580 or above may result in an average interest of $13,900 on a loan.
6. A credit score of 580 or higher may average $15,300 in interest on a loan.
This data shows that a high credit score guarantees lower interest rates, affecting your overall score.
Tips on How to Improve Your Credit Score
Building a good credit score is a process that takes time and effort. Having patience is key, as impulsive and unwise decisions can worsen your financial situation. However, there are various actions you can take to boost your credit score:
1. Acquire multiple revolving credit accounts:
Revolving credit, such as credit cards, is an excellent way to increase your credit score. Starting with a secured credit card that doesn't scrutinize your credit history like Open Sky or Credit Builder Card is advisable, as they emphasize timely payments and current income above other factors. Revolving credit contributes to 30-35% of your credit score, and small additions such as gas or grocery purchases can help increase it over time. Maintaining a balance of $5-$10 and paying on-time is recommendable.
2. Request an increase in your credit limits:
Requesting an increase in your credit limit from your credit card company could reduce your overall credit utilization percentage. Exceeding the 30% credit utilization threshold could harm your credit score. If eligible, you can either request it online or by calling the company. Some credit cards may require a credit team's approval, so having an excellent payment history is essential before applying, between seven to fifteen months.
3. Keep your balances low:
You are not obliged to use your credit cards monthly; thus, only use them for minor purchases. It's best to pay your bills and leave a balance between $1-$5. However, if you have high credit card balances and can't afford to pay them off, make a plan to take a certain percentage off your paycheck monthly to pay off the cards. High credit card balances can directly impede your ability to improve your credit score.
Remember, impatience and poor spending decisions can disrupt your credit score's growth, and developing good payment habits takes time. However, by following the tips suggested above, you can start to see your credit score improve.
Helpful Tips for Improving Your Credit from Joe
Having less than ideal credit can feel overwhelming, but it's important to know that the situation is not hopeless. By dedicating time and effort to addressing your credit, you can make significant improvements to your score relatively quickly. Many people with poor credit feel stuck in a cycle of credit issues, but it is possible to break out of this pattern. Achieving a great credit score requires hard work and a commitment to smart spending, but those who make this a priority will ultimately succeed. Start by creating a budget and identifying any problematic spending habits, as these will have a direct impact on your credit score. For more guidance on credit repair and score improvement, visit our website at www.asapcreditrepairusa.com.
Joe's Recommendations:
1. Take your current credit situation seriously.
2. Break the cycle of bad credit.
3. Prioritize your credit and focus on spending habits.
4. Create a budget.
5. Fix any bad spending habits.
6. Visit www.asapcreditrepairusa.com for help with credit repair.