It may come as a surprise that your credit score can be measured across as many as 30 different levels. If you're seeking to find the best credit score out there, you're likely to receive a range of responses from Google. Unfortunately, such information can often be unhelpful and even confusing, leading you to go down the wrong path. As someone who's been a financial literacy and credit repair expert for over a decade and a half, my name is Joe Mahlow and I aim to provide brutally honest advice on various subjects, including credit scores. With the help of my guidance, I have successfully aided more than twenty thousand clients in reviving their credit scores, and it is my sincere hope to offer equally helpful information to you! So buckle up as we delve into the nitty-gritty of this topic.
Contents:
Understanding the Different Types of Credit Scores
Understanding credit score ranges
What's the Ideal Credit Score for Home Buying
The Importance of Credit History When Buying a Car
Tips for Improving Your Credit Score
Insights from Joe on Credit Improvement
Understanding the Different Types of Credit Scores
Credit scores are critical to acquiring credit, getting a loan, or applying for a mortgage. Two different and commonly used credit scoring models are: the FICO model and the Vantage model. Let's take a closer look at both of these models.
FICO Credit Score
The FICO scoring model is the most popular and widely-used credit scoring model. However, few people realize that there are eight different FICO models, including FICO 2 to FICO 10. Depending on what type of lender you use, you may receive a different credit score depending on the model used. For example, if you are applying for a mortgage, your lender will pull your FICO 5 credit report, while for a credit card, they will likely pull your FICO 8 credit report.
The differences between these credit scores depend on the factors that the lender used to weigh a report's "weight." For instance, if you have a great payment history on a previous mortgage, it will positively impact your score on a FICO 5 mortgage report. However, if you have no history or negative history, it will not.
Vantage Credit Score
Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to rival the FICO scoring model, the Vantage scoring model is newer than the FICO model, which has been in use since the seventies. Many credit monitoring websites in the United States use Vantage to give you a free copy of your credit reports.
Although FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending. However, Vantage scores cannot match the accuracy of FICO scores when it comes to lending purposes.
Vantage scores provide a general idea of a user's FICO score, and people can use this information to get an overall idea of their credit scores. Possibly in the near future, lenders will commonly use Vantage scoring models to provide accurate scoring data to their clients, replacing the older FICO model.
Understanding credit score ranges
Credit scores in FICO and Vantage models range from 350 to 850, with 350 being the worst and 850 being the best credit score one can have. It's critical to be aware of where you stand when aiming for high scores. Below are some essential score thresholds for your knowledge.
1. 620 or below
Credit score below 620 is considered bad, indicating adverse credit history, high-balance credit card accounts, or no credit cards. Having ten active revolving credit accounts and making timely payments improves credit scores. Secured credit cards like Credit Builder Card or OpenSky Credit Card can help you build credit. FHA home mortgages can be considered once the credit score reaches 620.
2. 640-680
With scores in this range, you have fair to good credit with some derogatory marks, possibly high balances on credit cards, or newly opened accounts which can temporarily lower scores. Paying down the balances, waiting for the temporary score drop to restore, and avoiding derogatory marks can help improve scores.
3. 740+
Scores over 740 are considered super-prime and ensure the best interest rates for most loans. With such a score, a person belongs to the 20% of the US population. Keeping the revolving credit card accounts paid and making timely payments maintains the great work.
What's the Ideal Credit Score for Home Buying
The answer to this question is dependent on the type of mortgage loan you are aiming to get. The prerequisites and rules for most mortgage loans will be similar or different based on federal regulation and government backing. The three types of mortgage loans are: Conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans are the most popular option, usually offering the best savings outside of VA loans. Conventional loans do not require Private Mortgage Insurance (PMI), which can be an additional cost that can increase your downpayment or monthly payment. PMI is insurance that protects the lender in case you default on the loan. Conventional loans usually include lower downpayment requirements and better interest rates than other loan types. A credit score of 640 and a debt-to-debt ratio no higher than 43% are the typical credit score requirements for conventional loans.
2. FHA Loans
The FHA loan is intended for lower credit scores, usually ranging from 580 to 619. Different loan programs have different prerequisites, so for the most optimal financial option, look around for various lenders if you are within the credit score limits. For at least 11 years, FHA loans require you to keep PMI, which can be an added expense to your mortgage and something to think about, particularly if you're on a tight budget. This loan usually has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than a conventional loan would if you have a lower income. Lastly, this loan demands a downpayment requirement as low as 3.5% of the purchase price, enabling you to obtain a mortgage with less money out of pocket than a conventional loan, but you will usually have a higher interest rate.
3. VA Loans
The VA loan does not technically require a credit score requirement, but when pre-qualifying you, they look for previous defaulted loans and any government-owed past-due debts. To be eligible for this loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or have had a spouse who lost their lives during active duty. Typically, the VA loan has the most ideal interest rates, and they do not usually require a downpayment. The VA Loan is my favorite as it perfectly gives back to our veterans.
The Importance of Credit History When Buying a Car
When you want to purchase a car, your credit score is not the only factor that matters when determining your eligibility. Your credit history plays a significant role in determining the interest rate you qualify for. Although a higher credit score can be beneficial, it has less of an impact on your ability to secure a loan.
During the loan application process, lenders will examine your credit history to assess the risk involved in extending credit. If you have a history of late payments on previous or current auto loans, or have suffered a repossession, you may experience difficulty securing a loan.
However, some lenders specialize in providing loans to individuals with poor credit histories. These lenders will typically require specific criteria to be met, such as a larger down payment or additional fees to help lessen the risk of defaulting on the loan. Dealerships will sometimes charge additional fees to provide a loan to individuals with poor credit histories.
When buying a vehicle on credit, having equity or a down payment can provide you with more leverage. While there is no definitive credit score that guarantees approval, a score of 680 or above is ideal. Any score below this can result in a higher interest rate.
To illustrate this point further, consider the following examples:
Someone with a 720 credit score or above will pay, on average, $5,500 in interest on a loan.
Someone with a 680 credit score or above will pay, on average, $6,600 in interest on a loan.
Someone with a 650 credit score or above will pay, on average, $8,100 in interest on a loan.
Someone with a 615 credit score or above will pay, on average, $10,200 in interest on a loan.
Someone with a 580 credit score or above will pay, on average, $13,900 in interest on a loan.
Someone with a credit score of 580 or above will pay, on average, $15,300 in interest on a loan.
This data shows that the higher your credit score, the less interest you will pay, which can ultimately affect your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score may seem daunting, but taking small steps over time can help. It is important to remember that building good credit takes patience and dedication; there is no quick fix. Here are some actionable tips that can help improve your credit score:
Open 3-5 revolving credit accounts:
Getting approved for a large loan may be difficult for individuals with limited credit or those looking to rebuild their credit. Instead, opening a secured credit card that focuses on your ability to pay on time can help increase your chances of approval. Revolving credit makes up a significant portion of your overall score, so paying your balance on time and limiting spending can be beneficial.
Raise your limits:
Requesting a credit limit increase can help lower your credit utilization percentage and increase your overall credit limits. Each credit card company has a different process for requesting an increase, but typically they want to see a good payment history over time.
Pay down your balances:
Keeping balances low is crucial for maintaining good credit. Aim to use your credit cards for small purchases and pay off the balance each month. If you have high balances, create a plan to pay them down over time and limit your credit card usage. Remember, high interest rates can lead to paying more towards interest rather than principal.
These tips can help improve your credit score over time. Remember that patience is key, and by making positive changes to your spending habits, you can continue to move towards a better credit score.
Insights from Joe on Credit Improvement
It's common to encounter situations where one's credit history is less than perfect. However, if you take your credit situation seriously and dedicate time and effort to improve it, you will see remarkable changes in your credit score relatively quickly. Unfortunately, most individuals with poor credit tend to fall into a cycle of credit issues throughout their lives, feeling like there is no way out. Nevertheless, building a great credit score takes work, and those who prioritize their credit and focus on their spending will undoubtedly flourish. Creating a budget and addressing any negative spending habits will make a significant impact on your credit score. This piece provides valuable insights into comprehending credit and the ways to improve it. If you are seeking professional guidance or assistance in credit repair, don't hesitate to contact our office today at www.asapcreditrepairusa.com.
Key points:
- Taking credit situation seriously will result in significant improvements in the credit score.
- Building good credit requires hard work, and those prioritizing their credit and reducing spending will reap the benefits.
- Creating a budget and correcting bad spending habits reflects positively on your credit score.
- Seeking professional guidance or assistance for credit repair is always an option.