It may surprise you to learn that there are actually 30 different levels of credit scores. Many people who search for information about credit scores are often met with conflicting information from Google. But with so much confusing and sometimes misleading information out there, it can be easy to fall down the wrong path. Hi, my name is Joe Mahlow. For the past fifteen years, I have worked in the financial literacy and credit repair space. My aim is to provide honest and unfiltered advice on a range of topics, including credit scores. Thus far, I have helped over twenty thousand clients improve their credit scores, and today, I hope I can do the same for you! So, let’s get started.
Contents:
Different Types of Credit Scores Explained
Understanding Credit Score Ranges
Good Credit Score to Qualify for a Mortgage
Determining a Good Credit Score for Buying a Car
Tips for Boosting Your Credit Score
Joe's Insights on Credit Improvement
Different Types of Credit Scores Explained
Credit scores are an essential part of the borrowing process. There are two main credit scoring models that you should be familiar with: the FICO model and the Vantage model. Understanding the key differences between the two is crucial if you want to improve your credit.
1. FICO Credit Score
The FICO scoring model is the most popular credit scoring method in use today. There are eight different FICO models, so your credit score will vary depending on the credit report used. For example, mortgage lenders will use FICO 5, while credit card companies usually use FICO 8.
Why does FICO use different scoring models? The answer is simple- each credit report has a different weighting system. The critical factors that matter most to the lender will carry a greater weight in determining your score. For example, a FICO 5 score for a mortgage application will place more significant emphasis on your mortgage payment history.
2. Vantage Credit Score
Developed by the three major credit reporting agencies, the Vantage scoring model is a relatively new competitor to FICO. It is gaining popularity for personal loans and auto lending, but it's still not widely used for lending purposes. Instead, the Vantage score is used as a free copy credit report on various credit monitoring websites.
Is the Vantage score accurate? While it's a good "general idea" of your FICO score, it is not yet used widely in lending applications. FICO remains the most recognized credit scoring model, and overall score accuracy depends on the intended use.
As credit reporting agencies continue to evolve, it is likely that additional credit scoring models will be developed. One thing is for sure- your credit score is an essential piece of financial information that you should keep tabs on regularly.
Understanding Credit Score Ranges
Credit scores are important indicators of an individual's creditworthiness. Both FICO and Vantage models rate scores from 350 to 850, where 350 is the worst and 850 is the best score. Here are some key score thresholds to remember when monitoring and improving your credit ratings:
Below 620: Bad Credit
- Limited revolving credit accounts or possibly high-balance credit card accounts
- To improve your scores, establish ten revolving credit accounts and ensure timely payments
- Consider secured credit cards like Credit Builder Card or OpenSky Credit Card
- An FHA home mortgage would be available from the 620 credit score range.
640-680: Fair for Good Credit
- Established credit but may have derogatory marks or accounts on credit
- Possibly high balances on credit cards to be paid down
- Newly opened accounts may cause temporary score drops.
740+: Super-Prime Score
- An over 740 credit score is considered "super-prime."
- Such scores could get you the best interest rates for varied loans
- Those with a score over 740 account for 20% of the US population
- Remember to pay accounts on time, keep revolving credit card accounts paid to maintain the score.
Good Credit Score to Qualify for a Mortgage
The credit score requirement to qualify for a mortgage loan depends on the type of loan you are applying for. The government-backed mortgage loans have similar guidelines and requirements. There are three common types of mortgage loans, namely conventional loans, FHA loans, and VA loans.
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Conventional Loans
Conventional loans are the most popular option outside of the VA loan. These loans offer lower downpayments and better interest rates than other mortgage loans. The typical credit score requirement for a conventional mortgage loan is 640, and the debt-to-debt ratio should not exceed 43%. Moreover, you do not need to maintain private mortgage insurance, which can add to your monthly payment.
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FHA Loan
The FHA mortgage loan is suitable for a credit score between 580 and 619. Different lenders offer different financial options, and you must shop around for the best deal. FHA loans come with a higher debt-to-income limit of up to 50%, allowing you to purchase homes with a lower income. The downpayment requirement for an FHA loan is as low as 3.5% of the purchase price, although you may have a higher interest rate. Moreover, you need to keep private mortgage insurance for at least 11 years.
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VA Loan
The VA loan is a government-backed loan that helps veterans who meet the prequalifying criteria. There isn't a credit score requirement for the VA loan, but they are looking for previous defaulted loans and any government-owned past-due debts. If you have served in the United States Military for a specific time, you are eligible for a VA loan. This loan offers the best interest rates and usually does not require a down payment, offering more flexibility to veterans.
Determining a Good Credit Score for Buying a Car
When it comes to purchasing a car, your credit history has a greater impact on what you can be approved for than just your credit score. While a higher credit score is essential, it is not the most significant factor when it comes to the interest rate you are qualified for. For car loan applications, your credit report is closely assessed to determine the risks associated with extending credit. Thus, a person with a bad credit history, including late payments and a repossession, will find it more difficult than someone with good credit history to obtain approval for a loan. However, some lenders specializing in bad credit or special finances can provide car loans to almost anyone, although with specific restrictions such as a higher down payment, additional fees, and interest rates. In such cases, the dealership might also have to pay a fee to cover the risk of the borrower defaulting on the loan. Equity or a down payment is necessary when it comes to buying a vehicle on credit.
The Credit Score Range for Buying a New Car
While no exact credit score can guarantee approval since numerous aspects are involved, a credit score above 680 is generally considered ideal. If your score falls lower than this limit, the interest rate you will be charged is likely to increase due to the heightened risk you pose to the lender. Based on the current market, someone with a credit score of 720 or above will likely pay an average of $5,500 in interest on their loan, whereas someone with a score of 580 or above will pay an average of $15,300. Therefore, it is clear that the higher your credit score, the lesser interest you will pay, ultimately affecting your overall credit score.
Tips for Boosting Your Credit Score
Improving your credit score is possible with some simple steps that require little effort but take time to build a good credit rating. It is best to be patient since impulsive choices can damage your credit. Here are some things you can do now to improve your credit score:
Open 3-5 revolving credit accounts
Open 3-5 revolving credit accounts, such as credit cards, to increase your credit score. A secured credit card, like Open Sky or Credit Builder Card, which emphasizes timely payments, is suitable for those with limited credit or seeking to rebuild it. Since revolving credit makes up 30-35% of your overall credit score, it is the quickest way to raise it. Use the card for small transactions and pay $5-10 each time. Remember that the process takes 2-4 months to show results, and you need to make payments on time.
Raise your credit limits
Raise your credit limits by requesting a credit limit increase for your active credit card accounts. This will enhance your overall credit limit and lower your credit utilization percentage. Keeping your credit card balances under 30% of your limits is crucial to avoid harming your credit score. You can apply for a credit limit increase through your online portal or by calling the credit card company. You will need to provide information, including your income and excellent payment history of 7-15 months.
Pay down your balances
Pay down your balances so that they stay low and close to zero. Use your credit cards for small purchases instead of hefty transactions to keep the balance low. Leave a $1-5 balance on credit cards when paying bills. If you have high balances, creating a payment plan can help you to eliminate debt to limit the use of credit cards. The key is to limit your credit card usage to improve your overall credit score.
Joe's Insights on Credit Improvement
We have all faced challenges in maintaining a good credit score at some point in our lives. However, the road to credit recovery is not a hopeless journey. With dedication, effort, and intentional improvements, you can see significant changes in your credit score in no time. Unfortunately, many individuals become stuck in a cycle of poor credit, thinking it is impossible to attain a good score again. Building a solid credit history requires effort, and the determined few who are ready to work on it will eventually reap the benefits. Begin by developing a budget and identifying and addressing any poor spending habits; these will directly impact your credit score. If you are seeking credit advice or credit repair services, feel free to contact us at our site, www.asapcreditrepairusa.com, for assistance.
Key points to remember:
Bad credit situations can be turned around with effort and commitment.
Prioritize improving your credit score to reap its benefits.
Create a budget, address poor spending habits, and monitor credit regularly. Contact us at www.asapcreditrepairusa.com for guidance on credit repair and credit improvement services.