It may come as a surprise to many, but did you know that there are actually 30 different levels of credit scores? With so much information available online about what constitutes the best credit score, it can be difficult to navigate through the plethora of conflicting advice. In fact, much of the information surrounding credit scores can be downright confusing, and it's easy to find yourself lost in a maze of misleading information. However, as someone who has been working in the financial literacy and credit repair space for over fifteen years, I hope to provide you with straightforward and practical advice on the subject. My name is Joe Mahlow, and throughout my career, I have successfully transformed the credit scores of over twenty thousand satisfied clients. So, whether you're looking to improve your credit score or simply want to learn more about it, I'm here to help. Let's dive in.
Contents:
Different Types of Credit Scores: Understanding the FICO and Vantage Models
Understanding Credit Score Ranges
Credit Score Requirements for Different Mortgage Loan Types
Determining the Ideal Credit Score for Buying a Car
Tips to Improve Your Credit Score
Insight from Joe
Different Types of Credit Scores: Understanding the FICO and Vantage Models
1. FICO Credit Score
There are eight different FICO models, and each one provides a different credit score depending on the credit report being evaluated. The FICO model is commonly used in the lending sector, and different FICO reports are pulled by lenders depending on the type of credit application.
2. Why So Many FICO Scores?
Each FICO credit report has a different "weight," meaning that the factors that are most important to a lender will have a more significant impact on the credit score. For example, a FICO 5 mortgage report will credit mortgage history more than any other factor.
3. Vantage Credit Score
The Vantage Score is a newer scoring model that was developed by the three major credit reporting agencies to compete with the FICO model. Vantage is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending.
4. Is the Vantage Score Accurate?
While the Vantage Score is accurate as a general idea of one's creditworthiness, it is not as widely used for lending as the FICO score. The FICO model still dominates the lending sector.In conclusion, it is worthwhile to know both the FICO and Vantage models and their differences, as they may be used in different sectors of lending. Each model has its own specific credit reports, and understanding how they calculate credit scores can help you make better financial decisions.
Understanding Credit Score Ranges
Credit scores, both FICO and Vantage models, have a range of 350 to 850. A score of 350 is the poorest credit score while 850 is the best score you can achieve. It is important to know where you stand on your credit journey, so here are some crucial score thresholds to keep in mind:
1. 620 or Below:
This score is considered bad credit, indicating adverse credit history, high-balance credit card accounts, or no credit cards. Improving your credit score can be achieved by making timely payments and having ten active revolving credit accounts. Try using a secured credit card, such as the Credit Builder Card or OpenSky Credit Card. Qualify for an FHA home mortgage when reaching the 620 credit score range.
2. 640-680:
Considered fair for good credit, this range indicates established credit with derogatory marks or accounts. You may have high balances on credit cards, or have recently opened a new account, causing a temporary drop in your scores, so don't panic.
3. 740+:
Any score above 740 is considered super-prime and provides the best interest rates for loans. Achieving this score puts you in the top 20% of the US population. Keep up the good work by paying your accounts on time, and keeping your revolving credit card accounts paid.
Credit Score Requirements for Different Mortgage Loan Types
The credit score requirements for mortgage loans vary depending on the type of loan you are applying for. Federal regulations and government support mean that most mortgage loans have similar guidelines and requirements. The most popular mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most common type of mortgage loan and are generally the best option outside of VA loans. They do not require you to maintain private mortgage insurance (PMI), which saves you money on your downpayment or monthly payment. Conventional loans have lower downpayment requirements and better interest rates than other mortgage loans. You need to have a credit score of at least 640 and a debt-to-debt ratio of no higher than 43% to qualify for a conventional loan.
2. FHA Loan
The FHA loan is suitable for people with lower credit scores, typically between 580 and 619. However, the credit score requirements may differ depending on the lender. FHA loans require you to maintain PMI for at least 11 years, which could increase your mortgage cost, especially if you are on a budget. The debt-to-income limit is higher, up to 50%, which means you can purchase more homes with a lower income. The downpayment requirements are as low as 3.5% of the purchase, but you may pay a higher interest rate.
3. VA Loan
The VA loan does not have a specific credit score requirement, but the lenders look out for past defaulted loans and outstanding government debts. To qualify for a VA loan, you must have served in the United States Military for at least 181 days, 90 consecutive days during wartime, or six years with the National Guard. Alternatively, if your spouse lost their life during active duty, you could also qualify. The VA loan usually offers the lowest available interest rates and does not require a downpayment, which makes it an excellent option for veterans.
Determining the Ideal Credit Score for Buying a Car
When it comes to financing a car purchase, lenders focus less on your credit score and more on your credit history. While a high credit score is critical, it has a lesser impact on the interest rate you qualify for. Loan providers scrutinize your credit report to weigh the risk of extending credit with a focus on credit history such as late payments, repossessions, and existing loans. Those with a tarnished credit history may find it harder to be approved for a loan than those with a clean record. Auto dealers with poor credit lenders may approve anyone for a car loan, but attach specific criteria such as a higher down payment and additional fees. These lenders charge the dealership fees to subside the risk of default. They, in turn, increase the interest rate charged on the loan to cover the added expense. Though not precise, for those planning to score a new vehicle purchase, a credit score over 680 is ideal. A score lower than 680 increases the interest rate you pay, based on a risk analysis. Depending on the credit score, the interest rates can vary considerably. Comparatively, some with a score of 720 receive a better interest rate and pay an average of $5,500 in interest, while someone with a score of 580 is charged much higher interest rates, with an average of $15,300 in interest. In essence, a higher credit score reduces the interest paid, impacting the overall score.
Tips to Improve Your Credit Score
Improving your credit score takes time and patience. Rushing it often leads to bad financial decisions that worsen your situation. Here are some things you can do to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit such as credit cards can help maximize your credit scores. Starting with a secured credit card like Open Sky or Credit Builder Card can give you a better chance of approval even with limited credit or when rebuilding your credit. Revolving credit makes up 30-35% of your overall credit score and is the best option to help you build credit quickly. Keep your balance at $5-10 each time you make a payment, and limit your use of the card to small purchases.
2. Request a Credit Limit Increase
If you have active revolving credit card accounts, you can quickly request a credit limit increase to lower your credit utilization percentage. Call your credit card company and ask for a "Credit Limit Increase." They'll want to see 7-15 months of excellent payment history before they agree.
3. Pay Down Your Balances
Keeping your balance low and close to zero is crucial. Try to pay down your credit card as much as possible or make a game plan to pay an 'x' percentage of your paycheck each month to pay off the credit card. Leave a $1-5 balance on your credit card but avoid raising your balance again. Remember, your credit card habits will play a crucial role in your overall credit score.
Insight from Joe
Almost everyone has experienced having less than ideal credit at some point. However, if you approach your credit situation with earnestness and dedicate the time and energy to improve your financial behavior, your credit score will see significant changes in a relatively short amount of time. Regrettably, many individuals with bad credit fall into the trap of believing that they are stuck with credit problems forever, convinced they cannot regain good credit. Though it takes considerable effort, those who prioritize their credit and focus on improving their spending habits will succeed. Begin by developing a budget and addressing any problematic financial behaviors; this will translate into positive results for your credit score. If you seek education or assistance with improving your credit score or require credit restoration services, don't hesitate to contact my office today at www.asapcreditrepairusa.com.