It may come as a surprise, but did you know that there are 30 unique levels of credit scores? For those who seek to find the best credit score, it can be overwhelming to sift through the myriad of responses from a simple Google search. Unfortunately, not only can this cause confusion, some of the information can be misleading. But that’s where I can help. I’m Joe Mahlow and I have been in the credit repair and financial literacy industry for more than 15 years. My mission is to provide unfiltered advice on a range of topics, such as credit scores, so that you can take control of your finances. Having served over 20,000 clients and helped them transform their credit scores, I strive to equip you with the knowledge to empower your financial future. So let's dive in.
Contents:
Different Types of Credit Scores Explained
Understanding Credit Scores
Credit Score Needed to Buy a House
Determining Your Credit Score for Car Loans
Tips to Improve Your Credit Score
Insights from Joe
Different Types of Credit Scores Explained
Credit scores are essential for lenders when it comes to assessing your creditworthiness. While you may be familiar with FICO credit scores, it is important to note that there are two different models: the FICO model and the Vantage model. Understanding the differences in how they calculate credit scores is crucial.
FICO Credit Score
The FICO credit scoring model is the most utilized scoring model and comprises eight different models (FICO 2 to FICO 10). Depending on the lender, you will get a different credit score based on your credit report. For example, mortgage lenders typically pull the FICO 5 report, and credit card companies usually pull the FICO 8 report. This is because each report has a different "weight," with the factors critical to the lender having a more significant impact on the credit score. For instance, the FICO 5 mortgage report weighs heavily on previous mortgage history, whereas the FICO 8 primarily considers your credit card history.
Vantage Credit Score
Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), the Vantage Score model competes with the FICO model. While Vantage is a relatively new scoring model compared to FICO, it's gaining popularity in sectors such as personal loans and auto lending. Credit monitoring websites also use Vantage to provide a free copy of your credit reports.
How Accurate is the Vantage Score?
While the Vantage Score is accurate, it's essential to note that it's not widely used for lending purposes. As such, its accuracy may not apply to your actual credit score. However, since it's a good "general idea" of your FICO score, it's worth using it to give you a rough idea of your overall scores unless you can access your FICO score. It's likely that Vantage's popularity as a scoring model will continue to rise in the future. Since credit reporting agencies have significant data, they may provide the best-scoring data based on today's standards.
Understanding Credit Scores
Both the FICO and Vantage models grade credit scores on a scale of 350 to 850, with 350 being the worst and 850 being the best credit score. Knowing where you stand on this scale is important when building your score. Here are some critical score thresholds to keep in mind:
Scores 620 or below are considered bad credit.
If you fall below this threshold, you may have poor credit history, high-balance credit card accounts, or no credit cards at all. Timely payments and ten active revolving credit accounts, as recommended by the Credit Builder Card or OpenSky Credit Card, can help you improve your credit score. Once you reach a score of 620, you can qualify for an FHA home mortgage.
Scores between 640-680 are considered fair for good credit.
With these scores, it usually means you have established credit with some derogatory marks or accounts on your credit report. You may also have high balances on your credit cards that you need to pay down. A temporary drop in scores due to newly opened accounts is common, but these scores will return.
Scores 740 and above are "super-prime" and will offer the absolute best interest rates for loans.
Congratulations if you fall in this category, as you are among the 20% of the US population with this score. Keep up the great work by making timely payments and keeping your revolving credit card accounts paid. You will be in excellent shape!
Credit Score Needed to Buy a House
The credit score required to qualify for a mortgage loan will depend on the type of loan you are interested in. Nearly all mortgage loans, due to federal regulations and government backing, have similar qualifications and guidelines. The three most common types of mortgage loans include conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most sought-after loans, and they typically offer better interest rates than other mortgage loans. PMI, or private mortgage insurance, is not required with these loans, which can be a significant cost savings. The credit score requirement for conventional loans is typically 640, and the debt-to-debt ratio cannot exceed 43%. Additionally, conventional loans typically have lower down payment requirements.
2. FHA Loans
If your credit score is between 580 and 619, an FHA loan may be your best option. Shop around for lenders to find the one that offers the best financial deal. You will be required to carry PMI for at least 11 years, which may add to your monthly mortgage payment. FHA loans provide a higher debt-to-income limit of up to 50%, meaning you may be able to afford a more expensive home if you have a lower income. While the down payment requirement for an FHA loan is as low as 3.5%, the interest rate on this type of loan is usually higher than conventional loans.
3. VA Loans
If you 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 your spouse passed away while serving, you may qualify for a VA loan. These loans typically have the most competitive interest rates and don't require a down payment. Your credit score won't necessarily disqualify you, but they will consider any defaulted loans or government-owned debts when pre-qualifying you. The VA loan is an excellent way to give back to our military veterans.
Determining Your Credit Score for Car Loans
While your credit score plays a role in determining your eligibility for a car loan, your credit history and current standing are equally important. Interest rates are primarily based on your credit history, rather than your credit score. It means even with a high credit score, having a shaky credit history could result in a higher interest rate. In most cases, lenders take your past and present credit reports into account when giving out car loans. Late payment histories or having repossessions on your record could make it challenging to get a loan. Even if you have a poor credit score, some lenders will still give you a loan but may ask for higher equity or add additional fees and conditions. Dealerships which take similar risks to offer loans may have to pay extra fees or have higher trade margins on the vehicles sold to you. Typically, a higher down payment or equity puts you in a better position when purchasing a car through credit.
The Ideal Credit Score Range for New Car Loans
Credit scores are not the only determining factor. However, it is essential to note that a credit score of around 680 or above is deemed reasonable. A score lower than 680 could result in a more substantial interest rate. Based on the available data, someone with a 720 score or better is likely to pay $5,500 worth of interest on a loan. Someone with a score of 680 or above will pay an average of $6,600 in interest on a loan. For a score around 650 or above, the interest rate on loans jumps to an average of $8,100. A score of about 615 will mean an average interest of $10,200, and a score of 580 could see the interest rise up to $13,900 or more. Never forget that a higher credit score results in a lower interest rate, allowing you to maintain a favorable credit score.
Tips to Improve Your Credit Score
Understanding that building a good credit score takes time is essential, and it is not an overnight process. It requires patience. Making impulsive and irrational decisions can worsen your problems. Here are some things you can do right away to enhance your credit scores:
1. Open 3-5 revolving credit accounts:
One of the best options to help maximize your credit scores is a revolving credit. It is easier, especially for someone looking to rebuild credit or with limited credit. Revolving credit makes up 30-35% of your overall credit score and is an ideal way to build credit scores quickly. Secured credit cards like Open Sky or Credit Builder Card, which focus on your ability to make on-time payments, are the best option for people with limited credit. Use the card only for small purchases like gas or groceries and ensure to pay off the balance on time.
2. Raise your limits:
Request a credit limit increase for your credit cards. Most people utilize their credit cards a lot, and the credit card balances exceeding 30% of your overall limits can hurt your credit scores the most. Increasing your credit limits will help lower your utilization percentage.
How to raise your limits:
Call your credit card company and request a "Credit Limit Increase," and fill out the necessary information, including your income. Credit card companies usually want to see 7-15 months of excellent payment history on a credit card before they agree to raise the credit limit.
3. Pay down your balances:
Keeping your balance low is crucial. Only use credit cards for small purchases and leave a $1-5 balance on your credit card while paying the bill on time. If you have high balances and cannot pay off your credit cards, make a plan to pay down the balances with a percentage of your paycheck each month and ultimately stop using them. Remember that credit card usage plays an enormous role in your overall credit score, and it is essential to limit your credit card usage. Additionally, high-interest rates on credit cards mean most payments will apply to interest and not the principal amount.
Insights from Joe
We've all faced the challenges of having a sub-par credit score. However, if you take your credit situation seriously and devote time and effort to improving it, you'll witness significant changes in your credit score in no time. Don't fall into the trap of believing that bad credit is a life sentence; with hard work, it can be turned around. Building great credit requires a lot of effort, but those who are committed to prioritizing their credit and modifying their spending habits will achieve success. To begin, create a budget and work towards rectifying any poor spending habits that may be hurting your credit score. This article provides valuable insights into the world of credit. If you require guidance or assistance with your credit score, or if you need credit repair, please visit my office at www.asapcreditrepairusa.com.