It might come as a surprise to you, but there are actually about 30 different credit score levels. It's quite common for people to feel lost when they try searching for reliable information on the best credit score. Unfortunately, there's plenty of confusing, and even misleading information out there that can make the process even more daunting. My name is Joe Mahlow, and I've been working in the financial literacy and credit repair industry for over fifteen years. My primary objective is to provide unfiltered and honest advice on a range of topics to help you succeed. On this occasion, we’ll explore the topic of credit scores. In the past, I have assisted over twenty-thousand clients in improving their credit scores, and over the next few paragraphs, I’ll share advice and guidelines that can potentially help you too. Let’s dive in.
Contents:
Different Credit Score Models and Their Significance
Understanding Credit Scores: What is Considered a Good Score?
What Credit Score Do You Need to Buy a House?
Determining the Credit Score Range for Purchasing a Car
Easy Ways to Improve Your Credit Score
Joe's Insight on Credit Improvement
Different Credit Score Models and Their Significance
Understanding the different credit scoring models is essential, particularly in how they impact your credit score calculation. Two common models to know are the FICO model and the Vantage model.
FICO Credit Score
The FICO credit scoring model is the most commonly used and recognized across the country. With eight variations of FICO models, each can generate a different credit score, depending on your credit report. Different lenders use different models, so while applying for a mortgage, for example, the lender is likely to pull your FICO 5 credit report, while a credit card lender is more likely to pull your FICO 8 credit report. Each report has varying weights for different factors, and the most critical ones to a lender carry more weightage than less critical ones. An excellent payment history on previous mortgages will weigh more heavily on your FICO 5 score than no or negative history. Similarly, previous credit card history will significantly impact your FICO 8 score, and a great history of auto loans will weigh heavily on your FICO 2 score.
Vantage Credit Score
Developed by Equifax, Experian, and TransUnion, Vantage Score is a new credit scoring model that competes with FICO. It's not widely used for lending purposes but is gaining traction in some sectors, such as auto lending and personal loans. Credit monitoring sites use Vantage to give a free copy of credit reports. Vantage is a good indicator of your overall scores when it's hard to know your FICO score without paying for it or having a lender pull your credit report. While Vantage Score is accurate, its accuracy highly depends on the context of the question, and since FICO is the most recognized scoring model, Vantage's accuracy may vary.
Conclusion
Both the FICO and Vantage credit scoring models are valuable in providing ideas about credit scores. FICO remains the most recognized and commonly used scoring model, and each report has a variable weightage for different factors. Meanwhile, Vantage can offer an indication of your overall credit score. However, as data collection agencies continue to evolve, including social media companies, credit reporting agencies will have to offer the best scoring data to stay competitive.
Understanding Credit Scores: What is Considered a Good Score?
When it comes to credit scores, there are two main models: the FICO and Vantage scoring systems. Both systems use a range of 350 to 850, with 350 being the worst and 850 being the best score. To set your goal on achieving the highest score possible, it's important to be aware of where your credit score stands throughout the process of building credit. Here are some score thresholds to keep in mind:
1. 620 or below
A score of 620 or lower is generally considered poor credit. It's possible that you have a history of late payments, high credit card balances, or no credit card activity at all. The best way to improve your score is to make timely payments and maintain at least ten active revolving credit accounts. Two popular options for secured credit cards that can help build your credit are the Credit Builder Card or OpenSky Credit Card. Once your score reaches 620, you can start qualifying for an FHA mortgage.
2. 640-680
If your credit score falls in this range, it's considered fair for good credit. Scores in this range often suggest that you have established credit but may have some marks or accounts on your credit history that are derogatory. Additionally, your credit card balances may be high and you may have recently opened new accounts, which can result in a temporary drop in your scores.
3. 740+
A credit score of 740 or higher is considered "super-prime" and can help you secure the best interest rates for most loans. If you have a score over 740, congratulations! You're part of the 20% of the US population with this score. To maintain your score, make sure to always pay your accounts on time and keep your revolving credit card accounts paid.
What Credit Score Do You Need to Buy a House?
When it comes to buying a house and getting a mortgage loan, the required credit score depends on the loan type you are applying for. Most mortgage loans, due to federal regulations and government backing, have similar guidelines and requirements. There are three common types of mortgage loans: conventional, FHA, and VA loans.
Conventional Loans
The most popular loan type is conventional loans, which are typically the best option outside of VA loans. They do not require private mortgage insurance (PMI), which other loans do, that can increase your monthly payment or down payment. Conventional loans have lower down payment requirements and better interest rates than other loan types. You will need a credit score of at least 640 and a debt-to-income ratio of 43% or less to qualify.
FHA Loan
For lower credit scores, FHA loans are available to those with scores between 580 and 619. Although FHA loans require PMI for at least 11 years, they offer a higher debt-to-income limit of up to 50%. They also only require a minimum down payment of 3.5% of the purchase price. Still, you can expect to have a higher interest rate.
VA Loan
There is no credit score requirement for a VA loan, but lenders will look for previous defaulted loans and government debt when pre-qualifying borrowers. To qualify for a VA loan, 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 have a spouse who lost their life during active duty. VA loans typically have the best interest rates available, and no down payment is required. This loan option perfectly gives back to our veterans.
Determining the Credit Score Range for Purchasing a Car
When it comes to buying a car, your credit history is more crucial in determining your eligibility than your credit score. Even though having a higher credit score is vital, it plays a less significant role in the interest rate you qualify for. Essentially, your previous and current credit histories are assessed to determine the risk of extending credit when you apply for a car loan. A person who has had issues with credit, such as being late on a current or past auto loan, or repossession, may face difficulties in getting loan approval. Nevertheless, subprime lenders can qualify virtually anyone for a car loan, even if they have previously had repossessions. However, they may attach specific criteria that must be met for loan approval, such as a higher down payment or dealership fees to reduce the risk associated with you defaulting on your loan. Surprisingly, the dealership can also pay a fee to help guarantee loan approval, which is often covered by the car's increased markup. Finally, the best way to secure leverage when purchasing a car on credit is to have equity or a down payment.
The Credit Score Range to Consider when Buying a New Vehicle
There is no definite credit score to indicate loan approval, considering various factors like those previously discussed. However, a credit score above 680 is considered ideal. Anything below this score could result in a higher interest rate due to increased lender risks. The table below shows examples of how interest rates are affected by credit scores:
- Someone with a 720 credit score or above will pay, on average, $5,500 in interest on a loan.
- Someone with a 680 credit score or above will pay, on average, $6,600 in interest on a loan.
- Someone with a 650 credit score or above will pay, on average, $8,100 in interest on a loan.
- Someone with a 615 credit score or above will pay, on average, $10,200 in interest on a loan.
- Someone with a 580 credit score or above will pay, on average, $13,900 in interest on a loan.
- Someone with a credit score of 580 or above will pay, on average, $15,300 in interest on a loan.
The data shows that having a higher credit score results in lower interest rates and improves overall credit scores.
Easy Ways to Improve Your Credit Score
Improving your credit score is a gradual process that requires patience. Making hasty decisions with your credit will only aggravate the situation. If you're looking to improve your credit score, here are some things that you need to do right away:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is an excellent option to help you increase your credit score. A secured credit card like Open Sky or Credit Builder Card is a good place to start, especially if you have limited credit or are trying to rebuild your credit. Revolving credit makes up 30-35% of your overall credit score and is the best option to help build your credit score quickly.
2. Raise Your Limits!
Requesting a credit limit increase can help increase your overall credit limits and lower your credit utilization percentage. Most credit card companies have different processes; some will allow you to do it online, while others will require you to call in. You can call your credit card company and request a "Credit Limit Increase." They will review your current income and credit history before accepting your request.
3. Pay Down Your Balances!
Keeping your balance low and close to zero is critical. High balances can hurt your credit score the most if your credit card balances exceed 30% of your overall limits. If you currently have high balances, you need to make a plan to pay your credit card down.
By following the simple steps outlined above, you can gradually increase your credit score over time. Keep in mind that it takes time and effort to build a good credit score, but it is not impossible. With patience and perseverance, you will achieve your goal.
Joe's Insight on Credit Improvement
Many people have faced the struggle of having poor credit. However, the good news is that it is achievable to turn things around swiftly if you are serious about your credit status and willing to work on yourself. Unfortunately, many individuals with poor credit fall into the trap of accepting their fate and believe that improving their credit score is unattainable. Yet, obtaining an excellent credit score takes time and effort, and those who prioritize their credit and are committed to improving their spending tendencies will ultimately succeed. Start by creating a budget and changing any negative spending behavior, which will directly impact your credit score. If you wish to learn more about credit or require credit repair assistance, do not hesitate to reach out to my team at www.asapcreditrepairusa.com.
Takeaways:
Having bad credit is a common struggle
Improving your credit is achievable with dedication and self-improvement
Many people give up on improving their credit score, but it is a worthwhile effort
Honing excellent credit requires effort and prioritization
Start by creating a budget and changing negative habits
Contact www.asapcreditrepairusa.com for credit repair assistance