Many people are unaware that there are actually 30 different levels of credit scores. When looking for the best credit score, it's not uncommon to come across conflicting information from Google. Unfortunately, some of this information can be not just confusing but also misleading. My name is Joe Mahlow and I have been working in the field of financial literacy and credit repair for more than fifteen years. My aim is to provide you with unfiltered advice on various topics such as credit scores. Over the years, I have helped over twenty thousand clients significantly improve their credit scores and I hope to do the same for you today. So without further ado, let's get started.
Contents:
Different Types of Credit Scores Understanding FICO and Vantage Models
Understanding What is Considered a Good Credit Score
Understanding Credit Scores and Mortgage Loan Requirements
Determining the Ideal Credit Score for Purchasing a Car
Tips for Improving Your Credit Score
Insights from Joe on Boosting Your Credit Score
Different Types of Credit Scores: Understanding FICO and Vantage Models
Credit scores are essential when it comes to applying for loans. However, with many different credit scoring models in use, it can sometimes be hard to understand your credit score. This article will discuss the two most popular credit scoring models: the FICO model and the Vantage model.
1. FICO Credit Scores
The FICO credit scoring model is by far the most popular and widely used credit scoring model. There are eight different FICO models used, from FICO 2 to FICO 10, which can cater to different types of lenders (e.g., credit card companies, auto lenders, and mortgage lenders). Each credit score depends on the report that each lender uses. For instance, mortgage lenders usually pull the FICO 5 report, while credit card companies pull the FICO 8 report. The factors that affect each credit score will vary based on the type of loan you're applying for. The more important factors for each lender, such as your previous mortgage or auto history, will have a greater impact on your credit score and also on the FICO report that the lender uses.
2. Vantage Credit Scores
The Vantage scoring model is a newer credit scoring model that was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO scoring model. Although not as widely used by lenders compared to FICO, credit monitoring websites frequently use it to give you free access to your credit reports. Personal loans and auto lending sectors have started using Vantage for scoring models. Although Vantage can give you a good general idea of where your credit scores are, its accuracy may vary as it is not as widely used as FICO for lending purposes.
In conclusion, credit scores are an essential factor to consider when applying for loans. By understanding different credit scoring models, you can better understand how lenders evaluate your creditworthiness. Although FICO is currently the most widely used scoring model, Vantage is gaining popularity in some sectors, and its accuracy and dominance might increase in the future.
Understanding What is Considered a Good Credit Score
Credit scores from both FICO and Vantage models range from 350 to 850. With 350 being the lowest and 850 being the highest possible credit score, setting a goal to achieve the highest possible scores is essential. Along the way to achieving this goal, it is important to track your scores, and I will provide you with some crucial score thresholds.
1. 620 or below
This range is considered bad credit, indicating some negative credit history, high-balance credit card accounts, or no credit cards at all. Make timely payments and hold ten active revolving credit accounts to build your credit score. Secured credit cards such as Credit Builder Card or OpenSky Credit Card can be helpful in building your credit. Once you reach the 620 credit score range, you qualify for an FHA home mortgage.
2. 640-680
Credit scores within this range represent fair to good credit. You have established credit, but some derogatory marks may exist, and high balances on credit cards may exist, too. Newly opened accounts may also drop your scores temporarily. The drop in your scores is a temporary occurrence, and your scores will return.
3. 740+
Scores over 740 are considered "super-prime" and help you secure the best possible interest rates for most loans. Congratulations if you have over 740 credit score as you are among the top 20% of the US population with such score. Always ensure that you pay your accounts on time, keep your revolving credit card accounts paid, and you will be in excellent shape.
Understanding Credit Scores and Mortgage Loan Requirements
The ideal credit score for buying a house depends on the type of mortgage loan you are exploring. Federal regulations and government support mean that most mortgage loan requirements will be similar yet different. There are three common types of mortgage loans - conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans are a popular option outside of VA loans. You can avoid keeping private mortgage insurance (PMI), which covers the lender in case of payment delinquency. One advantage of conventional loans is that they have lower down payment requirements and better interest rates than other mortgage loans. The typical credit score requirement for conventional loans is 640, with a debt-to-income ratio of no more than 43%.
2. FHA Loans
FHA loans allow lower credit scores, typically within the 580-619 range. Each loan program works differently, so it's essential to shop around for a lender that is financially viable for you. With FHA loans, you will need to keep PMI for at least 11 years, which can add to your mortgage cost. However, this loan has a higher debt-to-income limit of up to 50%, allowing you to purchase homes even with lower incomes. The down payment required on an FHA loan can be as little as 3.5% of the purchase price but comes with higher interest rates.
3. VA Loans
With VA loans, there isn't a specific credit score requirement. However, pre-qualification values depend on your previous defaulted loans and government-owed past-due debts. You must have served in the US military for at least 181 days, served 90 days consecutively during a time of war, servicing six years with the National Guard, or lost your spouse while on active duty. The VA loan has favorable interest rates and typically does not require a down payment, making it an excellent option for veterans seeking a mortgage.
Determining the Ideal Credit Score for Purchasing a Car
When purchasing a car, your credit history often plays a more significant role in determining loan qualifications than the credit score itself. While a higher credit score is beneficial, it has minimal impact on the interest rate you qualify for. When assessing a loan application from someone with credit issues, creditors investigate previous and current credit histories to determine the risk of extending credit. For persons who've defaulted on prior car loans or had their vehicle repossessed, securing a loan becomes more challenging. The worst credit or special finance lenders, however, will provide car loans to nearly everyone, regardless of past repossessions, albeit with additional criteria such as extra fees and high down payments to mitigate the chances of default. Dealerships have to compensate for the higher risk of the borrower defaulting on the loan, and they do so by charging additional fees to lend you the money, selecting vehicles with a higher markup that will cover the fee. As a result, having equity or upfront payment will provide you with more leverage when buying a vehicle on credit.
There's no specific credit score that can guarantee loan approval because various factors influence the process.
However, having a credit score above 680 is typically considered desirable when purchasing a new car. Anything below 680 increases the interest rate charged since the borrower poses a higher risk to the lender. For instance, someone with a credit score of 720 or higher will pay an average of $5,500 in interest on a car loan, whereas someone with a credit score of 615 or higher will pay an average of $10,200. The data shows that the higher the credit score, the lesser the interest paid, and the overall credit score improves.
Tips for Improving Your Credit Score
Building a good credit score takes time, and it won't happen overnight. Being patient is key, as impulsive decisions with credit often lead to further problems. Nevertheless, you can do a few things right now to improve your credit, such as:
1. Open 3-5 revolving credit accounts
Revolving credit is one of the best ways to improve your credit score. Obtaining a large loan requires substantial work and often disqualifies those with limited or poor credit. Opt for a secured credit card that focuses on your ability to pay on time, rather than your credit score. A successful payment history can improve your credit score by 30-35%.
2. Raise your limits
Request a credit limit increase for your credit cards, which can help increase your overall credit limit and decrease your credit utilization percentage. Each credit card company has different processes, so it's best to contact them for more information.
3. Pay down your balances
Aim to keep your credit card balance low and close to zero. You are not required to use your credit cards every month, so use them wisely. When paying your bills, leave a balance of about $1-5 on your credit card. If you currently have high balances and cannot pay them off, create a plan to pay them down every month. Remember, your credit card spending habits will significantly affect your overall credit score. To avoid accruing interest on your payments, limit your credit card usage.
Insights from Joe on Boosting Your Credit Score
Many people have experienced a less-than-ideal credit situation in their lives. However, if you place importance on your current credit standing and commit to improving it, you can witness significant changes in your credit score in a short period of time. It is common for consumers with poor credit to feel trapped in a never-ending cycle of credit problems and consider good credit an unattainable goal. Building a great credit score requires hard work, but those who prioritize their credit and spending habits can succeed. Begin by creating a budget and addressing any negative spending patterns to directly impact your credit score. To learn more about credit and receive guidance or credit repair assistance, make sure to contact my team at www.asapcreditrepairusa.com.