It may come as a surprise, but your credit score can actually have up to 30 different levels. This fact can be easily overlooked when searching for reliable credit score information online. With so many varying responses from search engines, it's no wonder that individuals can find themselves feeling confused and misled. As someone who has spent over 15 years in the financial literacy and credit repair industry, my name is Joe Mahlow and I aim to provide you with honest advice on all sorts of topics, including credit scores. Throughout my career, I have successfully assisted over 20,000 clients in transforming their credit scores and I hope to do the same for you. Let’s dive in.
Contents:
Exploring Different Credit Score Models
Understanding Credit Scores and Ranges
How Your Credit Score Affects Mortgage Loans
Determining the Right Credit Score to Buy a Car
Tips for Improving Your Credit Score
Insights by Joe: Overcoming Bad Credit
Exploring Different Credit Score Models
Different models exist to calculate credit scores, but two of the most important are FICO and Vantage. When it comes to the FICO model, eight different models exist, each with its unique algorithm. Each model is designed explicitly for different lenders, such as mortgage, credit card, and auto lenders. The FICO model weighs significant factors that are relevant to the borrower’s loan history. The Vantage score is a newer model that many credit monitoring websites use to give users free access to their reports. While this model is not yet widely used, it offers an excellent general idea of the overall credit score and is gaining popularity in sectors such as auto lending and personal loans.
Understanding FICO Credit Scores
FICO is the most popular and widely-used credit scoring model, and each model is designed for different types of lenders. If you are applying for a mortgage, the FICO 5 score is most likely to be pulled, while FICO 8 is commonly used for credit card applications. The significant factors that lenders weigh for creditworthiness can vary in different reports, and each model puts heavier emphasis on certain elements than others. For example, previous mortgage payment history is critical for the FICO 5 report, while the FICO 8 report focuses more on your credit history with credit cards.
Exploring Vantage Credit Scores
While Vantage scores are not yet widely used by lenders, credit monitoring websites use them to provide users with a free credit report. It’s essential to understand that the Vantage model provides an overview, and its accuracy depends on the context within which it is used. It is gaining popularity in some sectors, such as auto lending and personal loans. As an alternative to FICO scores, Vantage gives a general idea of a borrower’s creditworthiness. In the next 5-10 years, the Vantage Scoring model may become more popular, and lenders may increasingly use it to calculate credit scores. With the vast amount of data collected from data agencies, the accuracy of the scoring models will depend on how well the agencies have collected and analyzed the data.
Understanding Credit Scores and Ranges
Credit scores, measured by both FICO and Vantage models, typically range from 350 to 850. A score of 350 denotes the weakest, while 850 is the strongest credit score you can have. The following score thresholds are crucial when you aim to achieve high scores:
1. 620 or below:
A score below this range indicates bad credit potentially caused by high-balance credit card accounts, no credit cards, or an adverse credit history. To improve your credit score, focus on having ten active revolving credit accounts and making timely payments. The Credit Builder Card and OpenSky Credit Card are excellent secured credit card options for building credit. Reaching a 620 credit score range qualifies you for FHA home mortgages.
2. 640-680:
With credit scores in this range, your credit may already be established, but with some derogatory marks or accounts and high balances on credit cards that require payment. Your scores may also temporarily decline if you recently opened accounts. In such a case, don't panic since your scores will return.
3. 740+:
Credit scores exceeding 740 are considered "super-prime" and provide the best interest rates for most loans. A credit score of 740 or more puts you in the 20% of US citizens with a great score. Keep up the excellent work by making timely payments and paying off revolving credit card accounts.
How Your Credit Score Affects Mortgage Loans
The credit score requirements for a mortgage loan depend on the type of loan you're looking for, as federal regulations and government backing impact the guidelines for eligibility. The three most common mortgage loan types are the conventional loans, FHA loans, and VA loans. Here's what you need to know about each one:
1. Conventional Loans
The conventional loan is the most popular choice and the ideal "savings" loan option outside of VA loans. These loans don't require private mortgage insurance (PMI), which lowers the cost of the downpayment or monthly payment substantially. Conventional loans typically have lower downpayment requirements and lower interest rates available than other loan types. To qualify, you'll usually need a credit score of 640 and a debt-to-debt ratio below 43%.
2. FHA Loan
FHA mortgage loans are designed for borrowers with lower credit scores, usually between 580 and 619. Each loan program has unique guidelines, so shop around with different lenders for the best financial option to suit your needs. FHA loans require you to maintain PMI for at least eleven years, which can add significantly to your mortgage. However, this loan type typically has higher debt-to-income limits, allowing those with lower incomes to buy more expensive homes. FHA loans have a lower downpayment requirement of 3.5%, but they usually come with higher interest rates than conventional loans.
3. VA Loan
VA loans don't have a credit score requirement, but lenders will look for defaulted loans and past-due debts owed to the government. To qualify, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, been part of the National Guard for six years, or be the spouse of a military member who lost their life during active duty. The VA loan has the best interest rates available, and borrowers generally don't need a down payment. This loan option is an excellent way to thank our veterans for their service.
Determining the Right Credit Score to Buy a Car
When it comes to buying a car, your credit history is a more important factor than your credit score. Even though having a good credit score is significant, it doesn't significantly affect the interest rate you qualify for. Car loan lenders assess your past and later credit history to determine the risk involved in granting credit. A person who has defaulted on an earlier auto loan or missed payments in their credit history may have a harder time getting approved for a loan. In contrast, special finance lenders usually qualify anyone for a loan notwithstanding their past credit issues but impose several specific criteria to be met, such as a higher down payment and additional dealership fees. This leads to a higher markup on the car by the dealership- the dealer willingly pays a fee to reduce the risk of lending the loan to the purchaser. Finally, to gain more leverage when buying a car on credit, it helps to have equity or a downpayment.
The Credit Score Range for Purchasing a New Vehicle
Although determining a specific credit score range for granting approval is difficult, a credit score of 680 or higher is ideal. Anything below this score may mean an increase in the interest rate charged due to the borrower's risk. The interest rate you will pay on a car loan will depend on your credit score. For instance, a person with a 720 credit score or above would pay an average of $5,500 in interest; a person with a 580 credit score or above would pay an average of $15,300 in interest on the same loan. It is evident from this data that the higher your credit score, the less interest you pay, thereby affecting your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time and effort, but there are important things you can do right now to help increase your score. It's important to practice patience and avoid making irrational decisions that could harm your credit. Here are steps you can take to improve your credit score:
1. Open 3-5 revolving credit accounts:
Credit cards are a great way to build your credit score, especially if you're looking to rebuild or have limited credit. Secured credit cards like Open Sky or Credit Builder Card can be a good place to start as they focus more on your ability to make payments on time.
2. Raise your credit limits:
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage, which can help improve your score.
3. Pay down your balances:
Keep your balance low and close to zero, and make sure to pay your bills each month. If you have high balances, make a plan to pay them down gradually to avoid running them back up again.
Remember that good credit habits take time to build, so be patient and consistent, and avoid making unnecessary purchases on credit cards whenever possible.
Insights by Joe: Overcoming Bad Credit
We have all experienced the challenge of having a less-than-ideal credit score. However, if you are willing to take a serious approach to improve your credit situation, and dedicate time and effort towards developing better credit habits, you can witness significant positive changes in your credit score. Unfortunately, many people with bad credit are trapped in a cycle of persistent credit issues, feeling like they are unable to ever achieve good credit again. Improving your credit score takes a lot of hard work and effort, but those who prioritize their credit and focus on their spending patterns can succeed. Begin by establishing a budget and addressing any negative spending behaviors to directly impact your credit score. This article aims to enhance your knowledge of credit. To receive assistance and guidance with your credit score or credit repair, contact our office today at www.asapcreditrepairusa.com.