It's amazing to think that there are actually 30 different levels of credit scores! It's not something that most people are aware of when they start searching for the best credit score online. There's so much information out there that it can be overwhelming and even misleading, making it easy to get lost down the wrong path. It's Joe Mahlow here, with over fifteen years of experience in the financial literacy and credit repair industry. My aim is to provide you with unbiased guidance on a range of topics, starting with credit scores. I've helped more than twenty thousand clients improve their credit scores, and I'm here to pass along what I've learned so you can achieve the same results! So, without further ado, let's dive into this topic and get you on your way.
Contents:
What are the Different Kinds of Credit Scoring Models?
What Constitutes a Good Credit Score?
What is the Ideal Credit Score to Purchase a House?
Credit History is More Important than Credit Score When Buying a Car
Ways to Improve Your Credit Score
Insight from Joe
What are the Different Kinds of Credit Scoring Models?
Credit scores vary, and two scoring models to be aware of are the FICO and Vantage models. It's important to understand the differences between them when it comes to calculating your score.
1. FICO Credit Score:
The most popular and widely used model, FICO, has eight different models, from FICO 2 to FICO 10, meaning your score will differ based on your credit report. When you apply for credit, depending on the lender, they may pull a different FICO report. A mortgage lender will most likely pull a FICO 5 credit report, whereas a credit card company primarily uses the FICO 8 report. This is because the factors that are significant to different lenders have different weights.
2. Vantage Score:
The Vantage Score scoring model, developed by the three major credit reporting agencies, is relatively new compared to FICO. It is gaining popularity in sectors such as personal loans and auto lending. Although not widely used for lending purposes, credit monitoring websites use Vantage to provide a free copy of your credit report.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but its accuracy varies concerning your lending score. The FICO model is still the most recognized and widely used scoring model in the lending sector. However, the Vantage model provides an excellent general idea of your FICO score and allows you to view it for free without having to pay for it or have a lender pull your report. In the next 5-10 years, we could see Vantage widely used due to its ability to provide the best scoring models based on current standards.
What Constitutes a Good Credit Score?
Credit scores are in the range of 350 to 850 for both FICO and Vantage models, where the higher your score, the better your credit. Throughout your credit-building journey, it's vital to know which score ranges you need to reach, and here are some essential score thresholds:
1. 620 or below:
If you fall in this category, you have poor credit that you can improve by making timely payments and having ten active revolving credit accounts open. You can also opt for Credit Builder Card or OpenSky Credit Card, which are secured credit cards that help improve your credit. Once you reach a score of 620, you'll be eligible for an FHA home mortgage.
2. 640-680:
Scores in this range signify fair to good credit. However, if there are derogatory marks or accounts on your credit, you're advised to pay down high card balances and wait for your recent accounts' temporary drop to return.
3. 740+:
A credit score over 740 is considered "super-prime" and grants you the best interest rates for most loans. If you're part of the 20% of the US population with this score, maintain timely payment of accounts and revolving credit card accounts to safeguard your credit status.
Congratulations if you have a score of 740+ - you're in excellent shape!
What is the Ideal Credit Score to Purchase a House?
When it comes to obtaining a mortgage loan, having a desirable credit score is crucial. The score requirement varies according to the type of mortgage you seek. The most popular mortgage loans are conventional loans, FHA loans, and VA loans. Let's take a closer look at these mortgage options.
Conventional Loans
Conventional loans are popular as they have lower down payment requirements and better interest rates compared to other mortgage loans. Conventional loans do not require PMI, which can increase monthly payments. The standard credit score requirement is 640 with debt-to-debt ratios not exceeding 43%.
FHA Loan
FHA loans cater to borrowers whose credit scores range between 580 and 619. However, different lenders offer varying options, so it is essential to shop around for the best deal. FHA loans require PMI for at least 11 years. The down payment can be as low as 3.5% of the purchase. The debt-to-income limit is higher, allowing potential homeowners to purchase more homes. But this loan typically has higher interest rates.
VA Loan
There isn't a credit score requirement for a VA loan. However, prequalification determines if you have any previous defaulted loans or government-owed past-due debts. This loan option is designed for veterans who have served in the military for at least 181 days, 90 consecutive days during wartime, six years with the National Guard, or whose spouses have lost their lives during their military service. VA loans usually have the lowest interest rates, and a down payment is not required. It's an excellent option for our veterans.
Credit History is More Important than Credit Score When Buying a Car
When it comes to buying a car, your credit history plays a more significant role than your credit score in determining the interest rate you qualify for. While a higher credit score is advantageous, lenders primarily assess your credit history to gauge the risk involved in extending credit. Having credit issues, such as late payments, repossession, or default, can make getting approved for a car loan challenging. Special finance lenders may approve anyone, regardless of their credit score or history, but with conditions such as a higher down payment and extra fees. Dealerships may also charge a fee to help mitigate the risk of loan default. In such cases, the lender may approve a specific car, which the dealership has a higher markup. Having equity or a down payment before buying a car on credit can give you added leverage. While there's no specific credit score range that guarantees approval, individuals with a credit score over 680 are considered ideal. Anything below this score can attract a higher interest rate, which poses more risk to the lender. This is evident from the approximately $5,500 interest paid by a person with a credit score over 720, compared to the approximately $15,300 paid by someone with a score of 580 or more. Therefore, the higher your credit score, the less interest you'll pay, which, in turn, impacts your overall credit score.
Ways to Improve Your Credit Score
Improving your credit score is a gradual process that requires patience and consistent effort. Rushing to build a good credit score can lead to hasty decision-making, exacerbating the issue you were trying to address. However, certain steps can help improve your credit score right away. Here’s what you can do:
1. Open 3-5 revolving credit accounts
Building a credit history through loans could be difficult, but receiving a secured credit card from lenders like Open Sky or Credit Builder Card, which does not prioritize your credit score, could improve your chances of approval. 30-35% of your credit score comprises revolving credit, and it is easier to improve your credit score by paying small amounts rather than a large loan.
2. Raise your limits
The credit utilization percentage, the ratio of credit card balances to credit card limits, determines 30% of your credit score. Requesting a credit limit increase by calling the credit card company or through the online portal could help raise your overall credit limits and lower your utilization percentage.
3. Pay down your balances
Keeping your balance close to zero is vital for improving your credit score. Instead of using credit cards extensively, use them for small purchases and pay off some of the balance every month. If you have existing high balances, pay them off by creating a payment plan, and avoid using them in the future. Running the balance up after paying off your credit card can worsen your credit score.
Insight from Joe
We've all experienced the frustration of having a less-than-perfect credit score. However, if you're committed to improving your credit, you will begin to see significant changes in your score fairly quickly. Many individuals with poor credit assume that it's impossible to turn things around, but this ultimately leads to a cycle of financial instability. Developing a solid credit score takes hard work and dedication, but those who are willing to prioritize their finances and adjust their spending habits will ultimately succeed. Start by creating a budget and addressing any bad habits you may have; this will have a direct impact on your credit score. This article provides valuable insights on the topic of credit. If you require guidance or assistance with credit repair, don't hesitate to contact our office today at www.asapcreditrepairusa.com.
List of key points to remember about credit repair:
- Take your credit situation seriously and commit to improving it
- Poor credit often leads to a lifetime of financial difficulty
- Developing a great credit score requires hard work and dedication
- Prioritize your finances and adjust your spending habits to achieve success in credit repair
Contact www.asapcreditrepairusa.com for credit repair assistance.