It's fascinating to know that there are around thirty different levels of credit scores. Surprisingly, many individuals are not familiar with this fact, and as a result, they end up with misleading and confusing information from various sources, including Google searches. As an experienced financial literacy and credit repair expert, my name is Joe Mahlow and I've been in this industry for more than fifteen years. My goal is to provide you with comprehensive advice on varying topics, such as credit scores. Throughout my career, I've successfully helped over twenty thousand clients to enhance their credit scores, and I hope to provide you with enough information to do the same. Without further ado, let's dive in.
Contents:
Exploring the Different Credit Scoring Models
Determining an Excellent Credit Score
What is the Ideal Credit Score for Buying a House?
Ideal credit score for buying a car
Helpful Tips to Raise Your Credit Score
Joe's Advice on Credit Repair
Exploring the Different Credit Scoring Models
Various credit scoring models exist, but the two indispensable ones to know and understand are the FICO model and the Vantage model. Knowing the differences in how these models calculate your credit score is crucial.
FICO Credit Score
The FICO model is the most commonly used credit scoring model, with eight different models, from FICO 2 to FICO 10. Each model generates a different credit score based on your credit report. The type of lender will determine the model pulled: for example, a mortgage lender will request your FICO 5 score, while a credit card provider will use FICO 8.
So why so many FICO scores? Each credit report component has a different importance, meaning that some factors will have more significant influences on credit scores than the less important ones, depending on the lender's needs. For instance, a FICO 5 mortgage report places more weight on mortgage history, giving higher scores for good payment history.
To get a better understanding of your different FICO scores, visit www.myfico.com and sign up for an account.
Vantage Credit Score
The Vantage Score model was developed by Equifax, Experian, and TransUnion and released to compete against the FICO scoring model. Although a new scoring model compared to the FICO model, credit monitoring sites typically use Vantage to give you a free copy of your credit reports. Although FICO remains the most widely used scoring model in lending, the Vantage score is gaining popularity in some sectors like auto lending and personal loans.
But is the Vantage Score accurate? It depends on the context. Since the Vantage score is not yet widespread in lending, it may not be accurate as an actual lending score. Instead, consider the Vantage scoring model as a rough idea of where your overall scores might be and a good comparison point for your FICO score.
With the credit reporting agencies' vast collection of data, some believe that they will widely introduce the Vantage scoring model in the next 5–10 years due to its ability to provide the best algorithms based on today's standards.
Determining an Excellent Credit Score
Credit scores from the FICO and Vantage models fall between 350 and 850, with 350 ranking as the lowest credit score, while 850 is the perfect score. It’s essential to comprehend where you stand on your credit score journey when aiming for the highest scores, so here are some crucial thresholds:
1. 620 or below:
A score below 620 is regarded as bad credit and suggests adverse credit history, such as high-balance credit card accounts, or zero credit cards in your name. To enhance your credit scores, maintain timely payments and have ten active revolving credit accounts. The Credit Builder Card or OpenSky Credit Card are excellent choices for secured credit cards that can help build your credit. When your credit score reaches 620, you can begin qualifying for an FHA home mortgage.
2. 640-680:
Credit scores between 640 and 680 are seen as fair for good credit. Scores within this range imply established credit, but you may have derogatory marks or accounts on your credit as well as high credit card balances that you must pay off. There is a high chance you've recently opened a new account, causing a temporary score drop; however, don’t panic because your score will bounce back.
3. 740+:
A credit score above 740 is classified as "super-prime" and will provide the lowest interest rates for most loans. Bravo if you fall into the 20% of the US population with a score over 740! Continue making timely payments and keeping your revolving credit card accounts paid.
What is the Ideal Credit Score for Buying a House?
The answer to this query relies on the type of mortgage loan you are seeking to qualify for. You must note that federal regulations and government backing have made the requirements and guidelines for most mortgage loans largely homogenous, if not different. The three most common mortgage loan categories are; conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and ideal "savings" loan alternative apart from VA loans. These loans do not necessitate private mortgage insurance (PMI), which can be an extra cost that increases your downpayment or monthly payment. Conventional loans usually have lower downpayment requisites and better interest rates than other mortgage categories. The typical credit score requirement for a conventional mortgage is around 640, with a maximum debt-to-debt ratio of 43%.
FHA Loan
FHA Mortgage loans are suitable for lower credit scores, typically ranging from 580 to 619. Bear in mind that various loan programs have specific requirements, so it is wise to shop around for different lenders who provide the best financial option for you, provided you remain within the credit score limits. FHA loans usually mandate a minimum of 11 years of the PMI, an added cost to your mortgage, and a factor to keep in mind, particularly if you're on a budget. This loan type typically has an increased debt-to-income limit of up to 50%, allowing you to purchase more homes than you would with a conventional loan with a lower income. The downpayment requirements for FHA loans are just 3.5% of the purchase price, enabling you to enter a mortgage with less money out of pocket than a conventional loan. The interest rate, however, is usually higher.
VA loan
The VA loan does not have a stated credit score requirement. However, lenders often consider your history of previously defaulted loans and any government-owed past-due debts when pre-qualifying you. 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 lives in the military while on active duty. The VA loan usually has the best interest rates available and typically does not require a down payment. The VA loan is particularly helpful and appropriate for veterans.
Ideal credit score for buying a car
When it comes to purchasing a car, your credit history is more important than your credit score. While a higher credit score does matter, it's only one aspect of the interest rate equation. Lenders evaluate the risk involved in lending to you based on your previous and current credit history when you apply for a car loan. This means that individuals who have had delinquencies or repossessions may find it more challenging to get approval for the loan. However, credit-challenged borrowers can qualify for loans from subprime and special finance lenders, but with additional requirements, such as paying higher down payments and dealership fees.
In terms of credit score ranges for new vehicles, there isn't an exact number as multiple factors influence the approval process. Still, a score over 680 is considered ideal, while anything below may mean higher interest rates due to the risk profile. As an example, a 720 credit score will pay an average of $5,500 in interest, while a 580 credit score will pay around $15,300. Therefore, your credit score's higher it is, the less interest you will pay, which will impact your overall credit rating. Remember, having equity or a downpayment when buying a car on credit will help in negotiating a better deal.
Helpful Tips to Raise Your Credit Score
Improving your credit score takes time and effort, but it’s achievable. Making impulsive decisions with your credit is likely to worsen the situation, so patience is vital. Here are some things you can do today to increase your credit score:
1. Open 3-5 Revolving Credit accounts
With limited credit history or if you're looking to rebuild your credit, obtaining a large loan can be challenging. You can increase your credit score quickly by opening revolving credit accounts such as credit cards. Secured credit cards that don’t focus on your credit score are recommended since they focus more on your ability to pay the card on time and having a stable income. Paying balances on time and keeping them at $5–$10 is crucial. Limit the use of the card to small purchases like gas or essentials.
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. Most credit cards require 7-15 months of excellent payment history before agreeing to do so.
3. Pay down your balances
Keeping your balance low and close to zero is necessary. You don’t have to use your credit cards each month, but small purchases are recommended. Leave approximately a $1–$5 balance on your credit cards when paying your bills each month. If you have high balances, create a strategy to pay them off with an "x" percentage of your paycheck each month.
Remember, your credit card spending habits play a massive role in your overall credit score. Limit your usage and avoid running up the balance. High-interest rates mean most of your payments go towards interest and not the principal amount.
Joe's Advice on Credit Repair
We've all experienced being burdened with a poor credit history at some point. However, by acknowledging your current credit standing and dedicating time and effort to improving it, you can witness significant progress in your credit score in no time. Contrary to popular belief, a bad credit score doesn't need to be a lifelong struggle. Building a great credit score requires a considerable amount of effort, but it's achievable for those who prioritize their credit and spending habits. Creating a budget and revamping any unsatisfactory expenditure practices can have a substantial influence on your credit score. This article aims to further enrich your understanding of how credit works. If you require assistance with credit repair, don't hesitate to reach out to our offices at www.asapcreditrepairusa.com. Here's what I suggest: