30 different levels of credit scores exist, but not everyone is aware of this fact. Searching for the best credit score on Google can provide a plethora of answers, but some information can be misleading or confusing, leading individuals down a dark path. Joe Mahlow, a financial literacy and credit repair expert with over fifteen years of experience, aims to offer sincere advice on various topics, including credit scores. Throughout his career, Mahlow has helped over twenty thousand clients enhance their credit scores. In this article, he provides valuable information on the importance of credit scores. Read on to discover how you, too, can improve your credit score and boost your financial standing!
Contents:
Understanding Different Credit Scoring Models
Understanding Credit Scores
What Credit Score Do You Need to Buy a House?
Determining Qualification for a Car Loan: The Role of Credit History
Tips on Boosting Your Credit Score
Improving Your Credit Score: Insights into the World of Credit
Understanding Different Credit Scoring Models
Credit scoring models are essential tools that lenders use to assess your ability to pay back loans. While there are different credit scoring models in use, the most commonly used ones are the FICO and Vantage models. Here's what you need to know:
1. FICO Credit Score
- The FICO model is the most widely used credit scoring model, with eight different FICO scores available.
- Each FICO model weighs different factors according to the kind of loan you're applying for. For example, if you're applying for a mortgage, the lender will pull your FICO 5 credit report because it weighs heavily on previous mortgage history. For auto loans, they use the FICO 2 report, and for credit cards, it's the FICO 8 report.
2. Vantage Credit Score
- The Vantage scoring model is relatively new and was developed by the three major credit reporting agencies to compete with the FICO model.
- While it is not yet widely used for lending purposes, Vantage is gaining popularity in some sectors such as personal loans and auto lending.
- It can provide a general idea of your overall FICO score, but it may not be accurate when it comes to your actual lending score.
As credit reporting agencies have access to significant amounts of data, they can utilize this well and provide the best scoring data. While FICO is the dominant scoring model currently, Vantage may well take over in the future. To learn more, visit www.myfico.com and sign up for an account to access all your different credit scores.
Understanding Credit Scores
Credit scores can vary depending on which model you are using, such as FICO or Vantage, and can range from 350 to 850. The higher your score, the better. To give you an idea of where you stand, here are some important thresholds to keep in mind:
1. 620 or below
This is considered a bad credit score, usually indicating adverse credit history, high-balance credit card accounts, or no credit cards at all. The key to improving your score is to make timely payments and have at least ten active revolving credit accounts. Consider using a secured credit card (such as Credit Builder or OpenSky) to help build your credit. Once you reach a score of 620, you can begin to qualify for an FHA mortgage.
2. 640-680
This range is considered fair or good credit. You likely have established credit but may have some derogatory marks or high balances on your credit cards. Newly opened accounts can also temporarily decrease your score, so don't panic if your score drops temporarily.
3. 740+
Any score over 740 is considered "super-prime" and will give you the best interest rates on most loans, making you part of the top 20% of scores in the US. Keep paying your accounts on time and keeping up with your revolving credit card accounts to maintain your excellent score.
What Credit Score Do You Need to Buy a House?
To decide how high your credit score needs to be to qualify for a mortgage loan depends on the type of loan you want. Because of the federal regulation and government support, most mortgage loans have requirements and rules that are either similar or different. There are three common mortgage types you should know about: conventional loans, FHA loans, and VA loans.
1. Conventional Loans:
Conventional loans are the most sought-after loans and the best financial option available, outside of the VA loan. These loans don't require you to maintain private mortgage insurance (PMI), which can increase your monthly mortgage payment or downpayment. PMI protects the lender in case you cease to make payments on your loan. Conventional loans need a relatively low down payment and have better interest rates than other loan types. Their typical credit score requirement is 640, and their debt-to-debt ratio shouldn't exceed 43%.
2. FHA Loans
The credit score requirement for an FHA mortgage loan ranges between 580 and 619. Different loan programs have different requirements. So if you're within the credit score limits, ensure you compare different lenders to find the best option that serves your financial needs. You'll also need to keep the PMI on an FHA loan for at least 11 years, which could increase the cost of your mortgage. This loan type typically has a more extensive debt-to-income ratio of up to 50%, giving you the ability to purchase more homes than with a conventional loan type with a lower income. Lastly, the down payment requirements are as low as 3.5% of the purchase price, so you could get a mortgage with less money out-of-pocket than a conventional loan, but you'll generally have a higher interest rate.
3. VA Loans
The VA loan type technically doesn't have a credit score requirement, but they do check for government-owed past-due debts and previous defaulted loans when pre-qualifying you. To qualify for a VA loan, you must have served in the military for at least 181 days, served continuously for 90 days during war time, served six years in the National Guard, or your spouse should have been in the military and lost their lives serving their country. The VA loan usually has the best interest rates compared to other loan types, and you don't necessarily need a down payment. The VA loan is especially beneficial for veterans, and many people prefer it over other loan types.
Determining Qualification for a Car Loan: The Role of Credit History
In the process of buying a car, one's credit history is of greater significance than their credit score. While a high credit score is important, the interest rate that borrowers qualify for is largely based on their credit history. Lenders tend to scrutinize both current and prior credit histories to evaluate their risk in extending credit. Consequently, individuals with a less than stellar credit history, such as late loan repayments or a repossession, face more difficulty securing a car loan than those with good credit history. However, auto loan lenders that specialize in lending to higher-risk borrowers may still finance one's purchase provided that they meet certain criteria, such as a higher down payment and additional fees. Notably, having equity or a down payment can offer the most leverage when buying a vehicle on credit.
Ideal Credit Score Range for Buying a New Vehicle
While no credit score alone can determine if one will qualify for a car loan, borrowing is easier with a credit score of 680 or higher. Credit scores below 680 often translate to higher interest rates and an increased cost of debt reflecting a borrower's risk. Current data reveals that a 720 credit score or higher can get an average interest rate of $5,500, whereas someone with a 580 credit score or higher would pay an average of $15,300 in interest on a car loan. Consequently, the higher the credit score, the lower the interest paid, thus positively affecting one's overall credit score.
Tips on boosting your credit score
Boosting your credit score is not an overnight process. It takes time, effort, and patience to make significant progress. Understanding the dos and don'ts of building good credit will help you avoid irrational decisions that can affect your score negatively. Here are practical steps you can take to improve your credit:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is an easy way to maximize your credit score, especially if you have limited credit or need to rebuild your score. Opening a secured credit card that doesn't focus solely on your credit history, such as Open Sky or Credit Builder Card, is a good starting point. Revolving credit makes up 30-35% of your credit score, and it's the best option for building your score quickly. It may take 2-4 months for increased credit scores to reflect, but ensure you pay your balance on time, and keep it at $5-10 when you make a payment. Only use the card for small purchases like gas or groceries.
2. Increase your credit limits
Requesting a credit limit increase for your active revolving credit accounts can increase your overall credit limits and lower your credit utilization percentage. Most credit card balances exceeding 30% of your credit card limit can hurt your credit score.
How to increase your credit limits:
Different credit card companies have different processes. You can either do it online or call your credit card company to request a "Credit Limit Increase". Once you fill out the necessary information, including your current income, their credit team will decide. Credit card companies usually require 7-15 months of excellent payment history before considering a credit limit increase.
3. Keep your balances low
Maintain low balances on your credit cards by leaving a balance of $1-5 when you pay your bill each month. It's advisable to use your credit cards for small purchases only. If you have high balances and can't pay them off, make a plan to pay them off gradually each month.
Remember, your credit card spending habits contribute significantly to your overall credit score. Limit your credit card usage and aim to keep your balances low. The interest rates on credit cards are usually high, and most of your payments go towards interest and not principal.
Insights by Joe
We've all experienced having subpar credit at some point. However, if you're committed to improving your credit situation, you can achieve massive improvements in your credit score in a relatively short period. It's common for people with poor credit to resign themselves to a lifetime of credit issues, but this doesn't have to be the case. Building an excellent credit score takes significant effort, and those who prioritize their credit and spending habits will reap the benefits. Start by devising a budget and tackling any problematic spending habits you may have, as this will have a direct positive impact on your credit score. This article offers valuable insights into the world of credit. If you require assistance with your credit score or need help with credit repair, please don't hesitate to contact my office via www.asapcreditrepairusa.com.