It may come as a surprise to learn that credit scores have 30 different levels. Many people think that finding the best credit score is a straightforward process, but with the plethora of information available on the internet, it can be easy to become confused and even misled. My name is Joe Mahlow and I have spent the past fifteen years working in the financial literacy and credit repair industry. My aim is to provide you with helpful guidance on a range of topics, including credit scores. Having helped over twenty thousand clients to improve their credit scores, I hope to offer you valuable insights that can also make a difference in your life. So, let's dive in!
Contents:
Understanding Credit Scores: FICO vs. Vantage
What Qualifies as a Good Credit Score
Finding the Right Credit Score for Buying a House
Determining the Credit Score Range for Buying a Car
Tips to Improve Your Credit Score
Final Thoughts from Joe for Improving Your Credit Score
Understanding Credit Scores: FICO vs. Vantage
Credit scores can be calculated using two models: FICO and Vantage. It is essential to comprehend both models and their differences concerning how they calculate your credit score.
FICO Credit Score
FICO is the dominant and well-known credit scoring model. It has eight versions that calculate credit scores based on different credit reports. For example, if you are applying for a home loan, FICO 5 credit report will be used, whereas a credit card application may require a FICO 8 credit report. Since each credit report has different factors and weights, it impacts your credit score differently. For instance, paying off your mortgage will have a more significant impact on a FICO 5 report than a report for your credit card.
Vantage Credit Score
The Vantage Score is a new credit scoring model but is gaining popularity in some sectors, such as personal loans and auto lending. Even though it is accurate, it is still not widely used for lending purposes. Thus, it cannot accurately represent your actual lending score. In this case, Vantage can give you an overall idea of what your credit score might look like. With the data collection that credit reporting agencies have, it is highly likely that Vantage scores will be more widely used in the future.
If you're interested in checking your scores, go to www.myfico.com for a visual representation of different FICO scores. Additionally, credit monitoring websites may utilize Vantage to provide free credit reports.
What Qualifies as a Good Credit Score
Both the FICO and Vantage models have a range of credit scores from 350 to 850. While the worst score one can get is 350, the best score is 850. If you want to aspire to have the best scores, it is essential to gauge your current position while building your credit. This article highlights important score thresholds that will help you understand where you stand.
Score Thresholds:
1. 620 or below
Having a score of 620 or below is considered 'bad credit.' When your score falls below this threshold, it implies that you have an adverse credit history. Often, you may have high-balance credit card accounts or no credit cards at all. OpenSky Credit Card or Credit Builder Card can help you build your credit scores since they are secured credit cards. Making timely payments and having ten active revolving credit accounts would also enable you to improve your scores. At a 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680
A score range of 640-680 is considered fair for good credit. If you fall within this range, it shows that you have established credit, even though you might have some derogatory marks or accounts on your credit. High balances in your credit card accounts may require you to pay them down, and newly opened accounts might temporarily decrease your scores. You should not worry if you recently opened a new account because it is a temporary decrease in your scores which will recover soon.
3. 740+
A credit score over 740 is referred to as 'super-prime' and comes with the best interest rates on most loans. If you have this score, you are among the 20% of the US population. Always pay your accounts on time, and keep your revolving credit card accounts updated to maintain your good score. Congratulations on your impressive score!
Finding the Right Credit Score for Buying a House
If you're looking to purchase a house, it's important to know which credit score will qualify you for a mortgage loan. However, the specific credit score required will vary depending on the type of mortgage loan you're applying for. There are three main types of loans: conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are the most commonly used mortgage loan option. They generally offer better interest rates and lower down payment requirements compared to other loans. If you're looking to secure a conventional loan, you'll typically need a credit score of at least 640 and a debt-to-debt ratio no higher than 43%. Furthermore, conventional loans do not require private mortgage insurance (PMI), so it's an efficient way to save money throughout the entire payment period.
FHA Loans
If you have a lower credit score between 580-619, then an FHA loan might be the ideal option for you. Although it requires a higher interest rate and PMI, the down payment required is significantly lower than conventional loans and offers higher debt-to-income limits up to 50%. It's vital to shop around different lenders for the best possible rates that suit your credit score.
VA Loans
To qualify for a VA loan, you need to have served in the United States military for at least 181 days, 90 consecutive days during wartime, or 6 years with the National Guard. Alternatively, you are also eligible if your spouse was in the military and lost their lives during active duty. There is no credit score requirement with this loan but you should demonstrate no previous defaulted loans or back taxes owed. VA loans offer the best interest rates and typically don't require a down payment, making it a great option for veterans.
Determining the Credit Score Range for Buying a Car
When it comes to purchasing a car, lenders are more concerned with your credit history than just your credit score. Although a higher credit score can be beneficial, it is not the sole criterion for determining the interest rate you qualify for. If you have credit issues, lenders evaluate your past and current credit histories to assess the risk of extending credit. An applicant who has defaulted on a previous or current auto loan or has a repossession history may face difficulty in obtaining approval for a car loan. While subprime or special finance lenders are willing to approve anyone, there are specific approval criteria, including a higher down payment and additional dealership fees. Dealerships also pay a commission to mitigate any risk from defaulting on the loan. It is important to have equity or down payment to leverage a better car loan.
There is no specific credit score that guarantees approval since numerous factors are involved, including credit history. However, a credit score of 680 or above is deemed ideal for securing a car loan. Credit scores below 680 increase the interest rate that lenders charge due to the higher risk the borrower poses. This is evident from the following average interest payments:
1. A credit score of 720 or above pays an average interest of $5,500 on a loan.
2. A credit score of 680 or above pays an average interest of $6,600 on a loan.
3. A credit score of 650 or above pays an average interest of $8,100 on a loan.
4. A credit score of 615 or above pays an average interest of $10,200 on a loan.
5. A credit score of 580 or above pays an average interest of $13,900 on a loan.
The higher the credit score, the lower the interest rate, which ultimately affects your credit score positively.
Tips to Improve Your Credit Score
Improving your credit score takes time and effort, but there are things you can do right now to help increase your score. Patience is key when building credit, as irrational decisions can make things worse. Below are some actions you can take:
1. Open 3-5 revolving credit accounts:
Revolving credit, like credit cards, can help maximize your scores. A secured credit card, such as 'Open Sky' or 'Credit Builder Card', can increase your chances of approval.
2. Raise your limits:
Requesting a credit limit increase for your credit cards can increase your overall credit limits and lower your credit utilization percentage. Make sure to have an excellent payment history before requesting a credit limit increase.
3. Pay down your balances:
Keep your balance low and close to zero by using your credit cards for small purchases only. If you have high balances, make a plan to pay them down each month and ultimately stop using them.
Final Thoughts from Joe for Improving Your Credit Score
We have all experienced having less than perfect credit. However, if you dedicate your time and effort into improving your credit, you will see significant improvements relatively quickly. Unfortunately, many individuals with bad credit resign themselves to a lifetime of credit problems and believe that good credit is unattainable. Nevertheless, building an outstanding credit score is achievable, but it requires hard work and prioritization. Start by creating a budget and working on improving any negative spending habits that reflect poorly on your credit score. For further guidance and assistance with credit repair, visit our office website today at www.asapcreditrepairusa.com.