Were you aware that your credit score has 30 different levels? This fact is often overlooked by individuals in search for the best credit score, resulting in inconsistent search results from Google. It's common for information about credit scores to be misconstrued and difficult to comprehend. My name is Joe Mahlow and I have spent 15 years in the financial literacy and credit repair industry. My objective is to provide straightforward guidance on various topics, including credit scores. Through my experience, I have successfully assisted over 20 thousand clients in improving their credit scores, and I aspire to offer you enough knowledge to do the same. Let's delve into credit scores, shall we?
Contents:
Understanding the Various Models of Credit Scores
Determining a Good Credit Score
Determining the Credit Score Needed to Qualify for a Mortgage Loan
Determining Credit Requirements for Buying a Vehicle
Tips to Improve Your Credit Score
Joe's Insights on Credit
Understanding the Various Models of Credit Scores
Credit scores are crucial in determining your eligibility for loans, rental applications, and paying for essentials you may otherwise have to save up for. There are two main credit scoring models: FICO and Vantage. While FICO dominates the lending sector, there are differences between how the two models calculate your credit score, making it essential to understand both.
The FICO Model
FICO has eight different models, ranging from FICO 2 to FICO 10, with each lender using a different report type. For example, while a mortgage lender will mostly use a FICO 5 report, credit card companies mainly use a FICO 8 report. Each of these reports has a different "weight," meaning different factors will have a varying impact on your credit score depending on their importance to the lender. For instance, your previous credit card history impacts the FICO 8 score the most. If you want to check your FICO scores, sign-up on myfico.com for better representation.
The Vantage Model
The Vantage Score was developed by the three major credit reporting agencies- Equifax, Experian, and TransUnion. This new model is in direct competition with FICO, and though FICO remains dominant, Vantage scores are gaining popularity in some sectors like personal loans and auto lending. Vantage score is used by many credit monitoring websites to offer a free copy of credit reports. However, since the Vantage score is not widely used for lending purposes, it has limited accuracy as an actual lending score. It still provides a good general idea of where your credit score is and is a great way to know how you fare overall. While FICO may still dominate today, it won't be long before Vantage gains widespread use in the lending sector because of its superior scoring method based on the modern context.
Determining a Good Credit Score
Both the FICO and Vantage models use a range of 350 to 850 to score credit, with 350 being the lowest and 850 the highest. Setting your goals to attain the highest possible score requires understanding your credit standing throughout the journey. Below are essential score thresholds to help you know where you stand while building your scores.
1. 620 or below
This score is considered bad credit and suggests adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your score, make timely payments and have ten active revolving credit accounts open. The Credit Builder Card or OpenSky Credit Card are secured credit cards that can help you build your credit. Reaching this range will qualify you for an FHA home mortgage.
2. 640-680
This score is considered fair for good credit. Scores in this range indicate established credit, but you could have derogatory marks, high balances on your credit cards that you need to pay down, or recently opened accounts that can temporarily lower your scores.
3. 740+
This score range is super-prime and places you among the 20% of the US population. You get the best interest rates for most loans, giving you great financial leverage. Aim to keep your revolving credit card accounts paid, make payments on time, and maintain your score. If you have a score above 740, congratulations!
Determining the Credit Score Needed to Qualify for a Mortgage Loan
The credit score you need to qualify for a mortgage loan depends on the type of loan you are seeking. Federal regulations and government backing bring about similar or different requirements and guidelines for the three most popular mortgage loan types: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most preferred loans besides VA loans. They do not require private mortgage insurance (PMI), which can increase your monthly payments or downpayment. A credit score requirement of 640 and a debt-to-debt ratio no higher than 43% are typical for conventional mortgage loans. These loans usually have lower downpayment requirements and better interest rates than other loan types.
FHA Loan
The FHA mortgage loan is specifically for lower credit scores, typically between 580 and 619. Note that loan programs vary in their specifics, so if you meet the credit score limits, shop around for lenders to find the best financial option for you. With the FHA loan, you are required to pay PMI for at least 11 years, something to consider if you are on a budget. The loan has a higher debt-to-income limit of 50%, making it possible to purchase more homes if you have a lower income. It also requires a lower downpayment of 3.5% at the time of the purchase, but the interest rates typically are higher.
VA Loan
There isn't a technical credit score requirement for the VA loan because pre-qualification involves looking for previous defaulted loans and any past-due government-owned debts. If you 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 your spouse was in the military and lost their life during active duty, you can qualify for a VA loan. This loan type usually has the best interest rates available and rarely requires a down payment. The VA loan is an excellent way to show appreciation to our veterans.
Determining Credit Requirements for Buying a Vehicle
When looking to purchase a car, your credit history carries more weight than your credit score in determining your eligibility for a loan. While a high credit score is beneficial, it does not have as significant an impact on the interest rate you qualify for. Lenders evaluate your credit history to assess the risk associated with extending credit to you. Late payments, prior repossession, or delinquent auto loans may limit your options for getting approved. In some cases, qualifying for a vehicle loan through a bad credit or special finance lender may require meeting additional criteria, such as a higher down payment and fees passed onto the dealership. These factors often result in the dealership lending money at a higher rate, which may influence the type of vehicle that you can buy. You can improve your chance of approval and reduce your overall cost by funding a down payment or building equity.
Ideal Credit Score Range for Buying a New Car
Obtaining approval for a vehicle loan is not based entirely on having a specific credit score. However, as a general rule of thumb, a minimum score of 680 is desirable. Having a lower score can increase the amount of interest charged to offset potential lending risks. Based on a comparison of interest rates for various credit scores, a credit score of 720 or above is optimal, with an average of $5,500 interest paid on the loan. In contrast, those with a score of 580 or less pay an average of $15,300 in interest on the same loan. Knowing how your credit score impacts your interest rate can allow you to take proactive steps toward obtaining favorable financing options.
Tips to Improve Your Credit Score
Improving your credit score takes time and requires patience. However, there are key actions you can take right now to help you achieve your goal. Here are some tips you can follow to start boosting your credit score today:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is an effective way to improve your credit score. It provides you with the best chance of approval, especially if you have limited credit or need to rebuild your credit. Start by opening a secured credit card that focuses on your ability to pay the card on time, and limit the use of the card to small purchases.
2. Raise Your Limits
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. You can quickly request this increase online or by calling your credit card company.
3. Pay Down Your Balances
Keeping your balance low and close to zero is crucial for building your credit score. Avoid running up a balance that becomes difficult to pay off each month. Instead, make a plan to pay down your credit card balances and limit your credit card usage to small purchases. Remember that your credit card spending habits will play a massive role in your overall credit score.
Joe's Insights on Credit
We've all experienced times when our credit isn't up to par. However, addressing your current credit situation and devoting time and effort towards improving your credit can yield significant improvements to your credit score in a fairly short amount of time. Most individuals with poor credit become trapped in a cycle of ongoing credit problems and are convinced that it's impossible to rebuild their credit. But with diligence and an emphasis on good credit habits, you can attain a strong credit score. First, create a budget and work to resolve any problematic spending patterns that may be impacting your credit score. This article provides valuable insight into the world of credit. If you require assistance in improving your credit score or need credit repair services, contact my office today at www.asapcreditrepairusa.com.