It's interesting to note that credit scores are not just limited to a single level. In fact, there are approximately thirty different levels of credit scores, which is quite a surprising discovery. However, the internet can be a tricky place to navigate when seeking answers about credit scores. One can come across a plethora of information that can be overwhelming and even misleading. With my experience of over fifteen years in financial literacy and credit repair, I am here to provide you with honest and factual advice about credit scores. My name is Joe Mahlow, and my objective is to empower you with the knowledge you need to improve your credit score. Having helped more than twenty-thousand clients over my career, my hope is to guide you as well. So without further ado, let's delve deeper into this topic.
Contents:
Understanding the Different Types of Credit Scores
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a House?
Guidelines for Determining a Good Credit Score When Purchasing a Car
Tips for Boosting Your Credit Score
How to Improve Your Credit Score: Advice from Joe
Understanding the Different Types of Credit Scores
Different credit scoring models exist, with the two most commonly known being the FICO model and the Vantage model. Both are crucial to grasp, particularly in terms of varying methods of calculating your credit score.
FICO Credit Score
The FICO credit scoring model is the most widespread and popular scoring model. While there are eight different FICO models, spanning from FICO 2 to FICO 10, your credit score could vary depending on the credit report in use. There are differences in the FICO model according to the lender you are seeking credit from. For instance, a mortgage lender is likely to pull your FICO 5 credit report, while your FICO 8 credit report is likely to be pulled if you are applying for a credit card.
The reasoning behind multiple FICO scores?
Each credit report carries a different "weight" meaning that lender-critical factors have varying impacts on a credit score than less critical ones. A FICO 5 mortgage report, for instance, places emphasis on your mortgage history, which means that having a positive payment history on such will carry more weight on your score than having no history or poor history. The same applies across various FICO scoring models. Credit card firms primarily use the FICO 8 report, with the previous credit card history carrying the most weight. Car loans, on the other hand, typically make use of FICO-2 reports with scores mainly based on past auto loan history. You can sign up on the myfico.com website to get your different credit scores and better visualize them.
Vantage Credit Score
The three main credit reporting agencies developed the Vantage Score to provide competition to the FICO model. The Vantage Score is a newer scoring model compared to FICO, which has been in use since the seventies. Though FICO still dominates the lending sector, the Vantage Score has found popularity for scoring in some areas, such as auto lending and personal loans. Credit monitoring websites typically use Vantage to provide free credit reports.
The Vantage Score's Accuracy
Though the Vantage Score is accurate, its context is essential in determining accuracy. As Vantage is not widely used for lending purposes, it may not be accurate when it comes to your lending score. The accuracy of your credit score relies on your ability to obtain a loan. Therefore, since FICO is the widely recognized scoring model, the accuracy of the Vantage Score may vary. However, the Vantage Score can offer a generalized idea of your FICO score for guidance when you cannot access your FICO score without either paying or having a lender pull your credit report. The Vantage scoring model is set to take over in 5-10 years because of its ability to provide the best scoring data based on today's standards. The FICO model lacks clarity, providing an incomplete representation of your credit scores. Credit reporting agencies are the biggest data collectors outside of social media companies. The data collection they possess gives them an upper hand in providing the best scoring data.
Understanding Good Credit Scores
Credit scores are measured by both FICO and Vantage models on a range from 350 to 850, where 350 is the poorest and 850 is the ideal score. Achieving a high credit score requires knowing where you stand and setting score thresholds. Below are some of the essential score benchmarks to help you monitor your credit score:
620 or below
Having a score below 620 is regarded as having poor credit. In this situation, you may have a history of bad credit, high-balance credit cards, or no credit cards. The ideal way to improve your score is by making regular payments and maintaining at least ten active revolving credit accounts. For instance, you can sign up for a Credit Builder Card or OpenSky Credit Card, which are secured credit cards that can help you build your credit. A 620 score range qualifies you for an FHA home mortgage.
640-680
This score range is considered fair credit. If you score between 640 and 680, you may have established credit, but with a few derogatory marks or accounts, and you may have additional high balances on your credit cards. Additionally, newly opened accounts may cause an instant temporary drop in scores. However, you should not worry because it is temporary.
740 and above
A credit score exceeding 740 is referred to as super-prime and offers the lowest interest rates on most loans. With a score over 740, you join the ranks of the 20% of the US population considered to have exceptional credit. Practicing good credit habits, such as paying all accounts on time and keeping revolving credit card accounts paid, will help maintain your score. Congratulations on achieving a 740 credit score!
What Credit Score Do You Need to Buy a House?
The credit score you need to buy a house depends on the type of mortgage loan you wish to obtain. Federal regulations and government-sponsored loans set requirements and guidelines for most mortgage loans. There are three common mortgage loan types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular option, aside from VA loans. Unlike other loans, they do not require you to maintain private mortgage insurance (PMI), which can increase your down payment or monthly payment. The PMI protects the lender in case you stop making payments on your loan. Conventional loans usually have lower down payment requirements and better interest rates than other mortgage loans. You typically need a credit score of 640 and a debt-to-debt ratio no higher than 43% to qualify for a conventional mortgage loan.
2. FHA Loans
The FHA mortgage loan is for lower credit scores, typically between 580 and 619. Different lenders offer various financial options for credit scores within the limits of FHA loans. FHA loans require PMI for at least 11 years, which is a significant added cost. They also have a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan if you have a lower income. The down payment requirement on an FHA loan is as low as 3.5% of your purchase price, but you'll typically have a higher interest rate.
3. VA Loans
The VA Loan technically has no credit score requirement. However, pre-qualification involves analyzing previous defaulted loans and previous government debts owed. You must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was in the military and lost their lives during active duty. VA loans typically offer the best interest rates, and they do not usually require a down payment. VA Loans are an excellent offer because they feel like a helpful giveback initiative to our veterans.
Guidelines for Determining a Good Credit Score When Purchasing a Car
When it comes to buying a car, your credit history is more important than your credit score. While having a high credit score is beneficial, it plays a smaller role in determining the interest rate you qualify for. This is because lenders assess the risk of lending money based on your past and present credit history. For instance, if you've defaulted on previous auto loans or have had a repossession, obtaining car loan financing may prove tougher for you. However, some bad credit lenders may still approve your loan, although you will be required to fulfill specific conditions, such as a higher down payment and additional fees. Dealerships, in particular, may choose the vehicle they qualify for, betting on a higher markup to cover the risk fee. Lastly, having equity or a down payment gives you more bargaining power when seeking financing to buy a vehicle on credit.
Optimal credit score range for financing a new car
Although there's no magic credit score to tell you if you're pre-approved, a credit score of above 680 is optimal for new car financing. Anything less than this increases your interest rate, given the risk of loan default. A high credit score can reduce the overall interest you will pay over the car's life, as seen in this sample:
A 720 credit score or higher will result in about $5,500 in interest on a loan.
A credit score of at least 680 will mean roughly $6,600 in interest on a loan.
A score of 650 or above will result in roughly $8,100 in interest on a loan.
A credit score of at least 615 will mean an average of $10,200 in interest on a loan.
A score of 580 or above will mean roughly $13,900 in interest on a loan.
A credit score of 580 or above may give an average of $15,300 in interest on a loan.
Thus, the better your credit score, the less interest you will pay, ultimately affecting your overall credit score.
Tips for Boosting Your Credit Score
Improving your credit score requires patience and consistent effort. While it may take time to see results, there are simple steps you can start taking right away to raise your credit score. Here are some things you can do:
Open 3-5 Revolving Credit Accounts:
Revolving credit, such as credit cards, is crucial for building credit quickly. Start with a secured credit card like Open Sky or Credit Builder Card, which primarily focus on your ability to make timely payments.
Raise Your Limits:
Requesting a credit limit increase allows you to increase your overall credit limits, lowering your utilization percentage. Contact your credit card company to initiate this process.
Pay Down Your Balances:
Paying down your balances is one of the most effective ways to improve your credit score. Make a plan to pay off your credit cards gradually and consistently, limiting your credit card usage going forward.
Remember, building a good credit score takes time and effort. By following these tips and being patient, you can improve your credit score over time.
How to Improve Your Credit Score: Advice from Joe
Credit troubles are not uncommon among us. Everyone has faced credit problems in their lives. But your credit situation can be fixed quickly if you take it seriously and put in the necessary effort. Most people with bad credit think they will have credit issues forever and believe that repairing their credit is impossible. However, it is crucial to prioritize your credit and work on your spending habits to establish a great credit score. Begin by developing a budget and eliminating any bad spending tendencies. This article provides a deeper understanding of credit. If you require assistance with credit repair or guidance on improving your credit score, don't hesitate to contact my office today at www.asapcreditrepairusa.com.