Were you aware that credit scores come in 30 different levels? This is something that many people are not aware of when they browse the internet for advice. Often times, the search results can be confusing and even lead down the wrong path. My name is Joe Mahlow and I've been immersed in the world of financial literacy and credit repair for over a decade and a half. As my name implies, I strive to offer honest and straightforward advice on diverse topics, including credit scores. With more than 20,000 happy clients who've received positive results and an increase in their credit score, I hope to share enough information so you too can improve your own credit score. So let's begin!
Contents:
What Are the Different Types of Credit Scores?
Understanding Credit Scores
What's the Credit Score Needed to Buy a House?
Determining Creditworthiness for Car Loans
Tips to Boost Your Credit Score
Advice from Joe
What Are the Different Types of Credit Scores?
Credit scores are determined by various scoring models, with the FICO model and Vantage model being the most commonly used. Understanding the differences between these models and how they calculate your score is crucial.
FICO Credit Score
The FICO scoring model is widely used, and there are eight different FICO models, from FICO 2 to FICO 10. Each model calculates your credit score differently, depending on the type of credit you are applying for. For example, FICO 5 is commonly used by mortgage lenders, while FICO 8 is used by credit card companies.
Why So Many FICO Scores?
Each FICO model emphasizes different factors based on the lender's needs. For instance, the FICO 5 mortgage report focuses on your previous mortgage history, while FICO 8 is impacted more by your credit card history. Auto lenders will typically pull your FICO 2 report, which weighs heavily on your auto history.
To get a better understanding of your different FICO scores, sign up for an account at www.myfico.com.
Vantage Credit Score
Vantage Score is a newer scoring model, created by Equifax, Experian, and TransUnion as a competitor to FICO. Although it's not as widely used by lenders, it's used frequently by credit monitoring websites, offering consumers a free copy of their credit report.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, it's not widely used by lenders like FICO. Instead, consider it as a general idea of your credit score. However, the Vantage Score's popularity is increasing, particularly in sectors such as personal loans and auto lending.
In the future, it's possible that lenders may start using the Vantage Scoring model more widely. The FICO model is deemed outdated by some, and credit reporting agencies hold significant sway in the industry.
Understanding Credit Scores
Both the FICO and Vantage score models have scores ranging from 350 to 850, where 850 is the best credit score, and 350 is the worst score. If you aim to achieve the highest score, it is essential to gauge where you stand. Let's take a look at some of the fundamental credit score threshold points.
Credit score of 620 or Below
Considered bad credit and indicates adverse credit history, high-balance credit accounts, or lack of credit cards.
The Credit Builder Card or OpenSky Credit Card can help improve credit scores by making timely payments and having ten active revolving credit accounts.
A score of 620 can qualify you for an FHA home mortgage.
Credit Score from 640 to 680
Considered fair for good credit.
Indicates that credit is established but may have derogatory marks, high balances on credit cards, or newly opened accounts, which can temporarily drop your score.
Credit Score of 740 or More
Considered super-prime and offers the best interest rates.
This score puts you in the top 20% of the US population.
Maintaining a 740 plus credit score requires making timely payments and keeping revolving credit accounts paid.
Overall, understanding credit scores is critical to improving and maintaining good credit. Focus on making timely payments, maintaining proper utilization rates, and keeping active credit accounts for achieving a super-prime score.
What's the Credit Score Needed to Buy a House?
The credit score required to buy a house is different for various mortgage loan options, depending on the regulations and the type of loan in question. The most common types of mortgage loans are conventional, FHA, and VA loans, and each one has its own requirements and guidelines.
Conventional Loans
Conventional loans are the most preferred loan option, as they offer lower down payment requirements and better interest rates. Unlike other loans, they do not require private mortgage insurance (PMI), which can save borrowers a substantial amount. To qualify for a conventional loan, you typically need a credit score of 640, and your debt-to-debt ratio should not exceed 43%.
FHA Loan
The FHA loan is specifically designed for those with lower credit scores, usually between 580 and 619. However, different lenders have varying requirements, so the factors may vary. The loan requires you to maintain PMI for up to 11 years, a disadvantage, and has a debt-to-income limit of 50%. Also, it may allow you to purchase a more expensive home with a low income than a conventional loan, with a minimum down payment of 3.5%, but with higher interest rates.
VA Loan
The VA loan is reserved for military personnel who have served in the military, and there is no specific credit score requirement. Instead, pre-qualification is based on past defaulted loans and outstanding government debts. The loan generally has the best interest rates, and no down payment is required. It’s a great loan option for military personnel and their families. To be eligible, you must have served in the military for 181 days, 90 consecutive days during wartime, six years with the National Guard, or your spouse died while on active duty.
Determining Creditworthiness for Car Loans
When you are in the market to buy a car, it's important to know that your credit score is not the only factor that lenders consider when approving loans. Your credit history also plays a significant role in determining what interest rates and borrowing terms you qualify for. A higher credit score is valuable, but lenders also take into account your credit history to assess the risk of extending credit to you. Late payments, previous repossession, and other issues with your credit history will make it harder for you to qualify for a loan. If you have poor credit, some lenders may still approve you, but they will add additional criteria like a higher down payment or additional fees to reduce the risk of loan default. A higher down payment or equity also gives you leverage when buying a car on credit.
Credit Score Range for Car Loans
While a particular credit score does not determine your approval for a loan, a score of 680 or higher is ideal in most cases. Anything below this score may result in a higher interest rate as it increases the risk posed to the lender. As you can see from these averages, the lower your credit score, the more interest you will pay, resulting in a higher overall cost:
Someone with a 720 or above credit score pays, on average, $5,500 in interest on a loan.
Someone with a 680 or above credit score pays, on average, $6,600 in interest on a loan.
Someone with a 650 or above credit score pays, on average, $8,100 in interest on a loan.
Someone with a 615 or above credit score pays, on average, $10,200 in interest on a loan.
Someone with a 580 or above credit score pays, on average, $13,900 in interest on a loan.
Someone with a credit score of 580 or lower pays, on average, $15,300 in interest on a loan.
Thus, you can lower your borrowing costs by improving your credit score.
Tips to Boost Your Credit Score
Improving your credit score takes time and patience. Making smart decisions and adopting healthy financial habits can help you build credit in the long run without much effort. Here are some things you can do today to start improving your credit:
1. Open 3-5 revolving credit accounts:
If you have limited credit history or are looking to repair your credit, opening revolving credit accounts can help to maximize your credit scores. Secured credit cards such as Open Sky or Credit Builder Card are a good starting point as they measure your ability to pay the card on time, not your credit score. Revolving credit makes up 30–35% of your overall credit score, and using these cards for small purchases and consistently paying off the balance can help to build credit scores quickly.
2. Request a credit limit increase:
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. This can help to avoid hurting your credit score if your credit card balances exceed 30% of your overall limits. Different credit card companies have different processes, so calling your credit card company and requesting a “Credit Limit Increase†may be necessary.
3. Pay down your balances:
Maintaining a low balance on your credit cards and paying them off on time is crucial for building credit. Make a plan to pay down high balances if you're unable to pay off your credit cards in full. Use them only for small purchases and limit overall usage to avoid running up balances again. High credit card balances can damage your credit score, and most of your payments will go towards interest and not principal.
Improving your credit can be a long process, but with patience and persistence, you can increase your credit score over time.
Advice from Joe
It's not uncommon to have poor credit, but it's essential to take it seriously and dedicate time and effort to improve it. Far too often, people with bad credit feel like it's a never-ending cycle, but with focus and commitment, you can see significant changes to your credit score. Developing a great credit score requires work and dedication, which involves prioritizing your credit and spending habits. Establishing a budget and addressing any negative spending habits is a crucial first step in improving your credit score. This article aims to provide you with a better understanding of credit. If you need guidance or assistance with repairing your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com. Here are some key takeaways:
Poor credit is not unusual, but you must make a concerted effort to improve it.
With focus and dedication, you can see significant changes in your credit score.
Developing a solid credit score requires prioritizing your credit and spending habits.
Start by creating a budget and addressing negative spending habits.
If you need help repairing your credit score, reach out to www.asapcreditrepairusa.com.