It may come as a surprise to many, but there are actually 30 different levels of credit scores. Despite this fact, individuals often find themselves lost in a sea of ambiguous information when searching for the best credit score on Google. Navigating through such misinformation can be a daunting challenge, and as an expert in the field of financial literacy and credit repair, I am here to offer guidance on the topic of credit scores. My name is Joe Mahlow, and with over fifteen years of experience, I have aided over twenty thousand clients in transforming their credit scores. My objective is to provide transparent advice - like the importance of understanding credit scores - in the hopes that it can be of use to you as well. So, without further ado, let's dive into the topic at hand.
Contents:
Different Types of Credit Scores
Defining a Good Credit Score
What Credit Score Do You Need to Buy a House?
Determining Your Eligibility for a Car Loan
Tips to Increase Your Credit Score
Insights by Joe: Strategies to Improve Your Credit Score
Different Types of Credit Scores
Credit scores are essential in determining your creditworthiness. However, it's crucial to understand that there are different models for credit scoring. Two popular models are the FICO and Vantage scoring models.
The FICO Scoring Model
The FICO model is widely used, with eight different models from FICO 2 to FICO 10. Each lender pulls a specific FICO report depending on the type of credit you're applying for, such as a mortgage or credit card. This is because each report has a different weight, meaning certain factors carry more significance in different types of lending. For instance, mortgage reports weigh heavily on your past mortgage history.
The Vantage Scoring Model
The Vantage scoring model was developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion. While it's gaining popularity in certain sectors, such as personal loans and auto lending, FICO remains the most recognized scoring model in the lending sector. The Vantage score is a good general idea of your FICO score. However, since it's less commonly used for lending, its accuracy can vary. In the next 5-10 years, lenders may widely use the Vantage scoring model due to its ability to provide more accurate scoring data. Ultimately, credit reporting agencies hold the most significant data collection and provide the most comprehensive scoring data. To see your different FICO scores, sign up for an account at www.myfico.com.
Defining a Good Credit Score
FICO and Vantage scores have a range of 350 to 850, where 850 is the highest attainable score, and 350 is the lowest. Knowing where you stand at each stage of your journey towards better scores can help you set realistic targets. Here are some crucial score thresholds that you should be aware of:
1. 620 or lower:
This range is regarded as bad credit and indicates that you may have a history of adverse credit, high-balance credit card accounts, or no credit cards at all. To improve your scores, you should try to make payments on time and have ten active revolving credit accounts. Choose a secured credit card like Credit Builder Card or OpenSky Credit Card as they can help build credit. When you reach a 620 credit score range, an FHA home mortgage may become an option.
2. 640-680:
Scores in this range indicate fair to good credit. Although it means that you have established credit, you may still have derogatory marks or accounts on your credit report and have high balances on your credit cards, which you should consider paying down. Newly opened accounts can also cause a temporary dip in scores, but the scores will recover.
3. 740 or higher:
Any credit score over 740 is considered "super-prime," and will get you the best interest rates for most loans. Congratulations if you have over 740, as you are part of the 20% of the US population with this score. Always make timely payments and keep your revolving credit card accounts in excellent standing to maintain your amazing score.
What Credit Score Do You Need to Buy a House?
When it comes to buying a house, the credit score requirement will depend on the type of mortgage loan you plan to apply for. Federal regulations and government backing mean that the requirements and guidelines for most mortgage loans will be similar, but not identical. The most common mortgage loan types include conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and offer the best savings option next to VA loans. They don't require private mortgage insurance (PMI), which can increase your downpayment or monthly payment and protect lenders in case of missed payments. Conventional loans feature lower downpayment requirements and better interest rates than other mortgage loans, typically requiring a credit score of 640 and a debt-to-debt ratio no higher than 43%.
FHA Loans
FHA loans offer options for borrowers with lower credit scores, usually between 580 and 619. However, it's essential to shop around for different lenders, as all loan programs have different criteria. FHA loans require PMI for at least 11 years, adding to your mortgage expenses and debt. The loan typically has a higher debt-to-income limit of up to 50%, which enables borrowers with a lower income to purchase more homes. The downpayment requirements are as low as 3.5%, allowing borrowers to secure a mortgage with less money out of pocket than a conventional loan, but typically at a higher interest rate.
VA Loans
With VA loans, there isn't technically a credit score requirement, but lenders look into previous defaulted loans and government-owned past-due debts when pre-qualifying. To qualify, 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 be a spouse or dependent of a veteran who lost their life during duty. The VA loan usually offers the best interest rates and doesn't require a downpayment, making it an excellent option for veterans.
Determining Your Eligibility for a Car Loan
When considering buying a car, your credit history is a vital factor in determining your eligibility for a loan, as opposed to just your credit score. While a good credit score is beneficial, it is not the sole determining factor in the interest rate you will qualify for. Lenders assess your credit history to evaluate the risk involved in extending credit. If your credit history shows previous late payments, repossession, or defaulting on an auto loan, it can make it more challenging to get approved for a loan. However, bad credit or special finance lenders may have more relaxed criteria for approving car loans. They may require you to meet specific terms such as a higher down payment and additional fees for approving the loan. Dealerships may also charge the buyer fees to extend a loan to them. When buying a vehicle on credit, having equity or a down payment provides more leverage.
Credit score range for purchasing a new vehicle
While there is no specific credit score that guarantees approval because other variables affect the process. A credit score of over 680 is seen as ideal. Scores lower than this can increase the interest rate charged since it increases the lender's risk. A credit score below 580 can significantly impact the interest rate you'll pay. A higher credit score lowers your payments as shown in the data below:
1. A borrower with a credit score above 720 will pay about $5,500 in interest on a loan.
2. A borrower with a credit score of 680 or above will pay an average of $6,600 in interest on a loan.
3. A borrower with a credit score above 650 will pay on average $8,100 in interest on a loan.
4. A borrower with a credit score above 615 will pay approximately $10,200 in interest on a loan.
5. A borrower with a credit score above 580 will pay an average of $13,900 in interest on a loan.
6. A borrower with a credit score of 580 or above will pay on average $15,300 in interest on a loan.
In conclusion, while a good credit score is important in purchasing a car, your credit history plays a more significant role in determining your eligibility for a car loan. A better credit score can, however, significantly lower the interest rate charged on an auto loan.
Tips to Increase Your Credit Score
Enhancing your credit score takes time and patience. Making prudent decisions with your credit and exercising patience is vital to building a good credit score. Here are some things you can do now to improve your credit score:
1. Apply for 3-5 revolving credit accounts, such as credit cards.
Revolving credit makes up 30-35% of your overall credit score and is the best option for those with limited credit history or those who need to rebuild their credit. You can start with a secured credit card that focuses on your ability to pay on time, such as Open Sky or Credit Builder Card. Pay each balance on time and keep it affordable; limit it to buying small items.
2. Request a credit limit increase for your active revolving credit card accounts
This can raise your overall credit limit and reduce your credit utilization percentage. Most credit card companies allow requests on the online portal or via phone call. Before agreeing to a credit limit increase, credit card companies expect to see an excellent payment history on a credit card for seven to 15 months.
3. Pay down your balances and keep them low.
Try to keep your credit card balances at or near zero and limit credit card usage to essential purchases. To pay down high balances, create a game plan of paying a fixed percentage of your paycheck each month. This step will not only enhance your credit score but also help limit the exorbitant interest rates.
Insights by Joe: Strategies to Improve Your Credit Score
At some point, we have all experienced having mediocre credit. Your present credit status should be taken seriously and given enough attention and time to fix. Believe it or not, this can result in significant improvements in your credit score in no time. Most people with poor credit often feel they are trapped in a vicious cycle with bleak prospects of ever having good credit again. Building a good credit score requires hard work and effort, but prioritizing your credit and spending habits will pay off. You can start by creating a budget and addressing any bad spending habits you may have. This simple approach can have a positive impact on your credit score. This article aims to provide you with a better understanding of your credit. If you need assistance in improving your credit score or require credit repair services, please reach out to us today at www.asapcreditrepairusa.com.