It may surprise you to learn that your credit score is broken down into 30 different tiers. This fact often eludes people who search for information on how to improve their credit score online. The plethora of information available on the subject can be quite confusing, and in some cases, downright misleading. I am Joe Mahlow, and I have been working in the financial literacy and credit repair industry for more than 15 years. My aim is to provide you with straightforward advice on various subjects, including credit scores. To date, I have assisted over 20,000 clients in elevating their credit scores, and my hope is that I can do the same for you. Let's delve into the topic at hand.
Contents:
Different Kinds of Credit Scores
Determining a Strong Credit Score
What Credit Score Do You Need to Buy a House?
Determining the Credit Score Range Needed to Purchase a Car
Methods to Increase Your Credit Score
Joe's Advice on Improving Your Credit
Different Kinds of Credit Scores
Credit scores are a crucial part of the lending process, and it is important to understand that there are two main types of credit scores: the FICO score and the Vantage score. Each scoring model has its nuances, and it is vital to be aware of the differences between the two models.
FICO Credit Score
The FICO credit scoring model is widely recognized and used throughout the lending industry. This scoring model has eight different FICO models, ranging from FICO 2 to FICO 10. While this may seem confusing, the reason behind the creation of different models is simple. Depending on the type of credit you're applying for, lenders will pull a different FICO score. For example, a mortgage lender will typically pull a FICO 5 credit report, while a credit card company may use FICO 8.
One reason for the creation of multiple FICO models is that each credit report has a different "weight." This means that the factors crucial to the lender will have a more significant impact on the credit score than less important ones. For instance, a FICO 5 mortgage report will weigh heavily on previous mortgage history, while a FICO 8 report will prioritize credit card history.
To get a better understanding of your different FICO scores, sign up for an account on www.myfico.com.
Vantage Credit Score
The Vantage scoring model was developed by Equifax, Experian, and TransUnion to compete with the FICO scoring model. While FICO has been used since the seventies, Vantage is a newer scoring model. Although it's not widely used for lending purposes, Vantage is gaining popularity in some sectors such as personal loans and auto lending.
While the Vantage score is accurate, its usefulness depends on context. Since it's not widely used for lending, it won't give an accurate picture of your creditworthiness for lending purposes. However, it can give a general idea of your FICO score, which is difficult to know without paying for it or having a lender pull your credit report.
It's possible that lenders may begin widely using the Vantage scoring model in the next several years, as it's become a more reliable way to provide scoring models according to today's standards. The FICO scoring model is outdated, and it may not give users a clear representation of their credit scores. It's important to remember that credit reporting agencies have a lot of data and are some of the most significant data collection agencies outside of social media companies. Which is why they have the upper hand in providing the best scoring data.
Determining a Strong Credit Score
Credit scores are measured on a range of 350 to 850 for both FICO and Vantage models, with 350 representing the poorest credit score and 850 being the best. To reach the highest score possible, understanding where you stand is crucial. Here are some critical score ranges that you should know:
1. 620 or lower
If you’re below this threshold, your credit score falls under the bad credit category and signals adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, make timely payments, and maintain ten active revolving credit accounts. The Credit Builder Card or OpenSky Credit Card, both secured credit cards, can help build your credit. Upon reaching the 620 credit score range, you’ll start qualifying for an FHA home mortgage.
2. 640-680
This is considered fair or good credit. In this range, it’s likely that you’ve established credit, but you may have derogatory marks or accounts on your credit report. You may need to pay down high balances on your credit cards. Additionally, newly opened accounts can temporarily drop your scores, so avoid panicking if you experience a dip in your score.
3. 740 or higher
Credit scores over 740 are considered "super-prime" and provide the best interest rates for most loans. Congratulations if you have a score over 740, as you belong to the 20% of the US population with this score. Continue making timely payments and maintaining low balances on your revolving credit accounts, and you'll be in a favorable position.
What Credit Score Do You Need to Buy a House?
To determine the required credit score for a mortgage loan, you will need to consider the type of loan you are seeking. While the requirements and guidelines for most mortgage loans are similar, federal regulations and government backing can result in some differences. There are three main types of mortgage loans, including conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are one of the most popular loan options and may offer the greatest savings outside of VA loans. As opposed to other mortgage loans, conventional loans do not enforce a private mortgage insurance (PMI), which can increase your monthly payment or down payment. The typical credit score requirement for a conventional loan is 640, with a debt-to-income ratio not exceeding 43%. Conventional mortgage loans also offer better interest rates and lower down payment requirements.
FHA Loans
FHA mortgage loans serve those with lower credit scores, typically ranging from 580 to 619. Shop around for different lenders offering different financial options for that credit score. Although the required down payment is relatively low, around 3.5%, the loan comes with a higher interest rate and necessitates a PMI for at least 11 years, which obligates you to pay an extra fee on your monthly payments. FHA loans allow for a higher debt-to-income ratio of up to 50%, which can be helpful when purchasing a home with low income.
VA Loans
VA loans lack technical credit score prerequisites, but they will investigate any previous defaulted loans and government-owned past-due debts during pre-qualification. However, 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 your spouse was in the military. VA loans provide the best interest rates available, without the need for a down payment, making them perfect for veterans.
Determining the Credit Score Range Needed to Purchase a Car
When it comes to purchasing a car, your credit history is likely to hold more weight than your credit score. While a good credit score is important, the interest rate you qualify for will depend on an evaluation of your previous and current credit histories. Factors such as late payments, repossession and other credit issues will increase your risk level, making it harder to obtain approval for a loan. Although the worst credit or special finance lenders will approve almost anyone for a car loan, they will demand criteria such as higher down payments and fees to extend credit to you. It's important to prepare by having equity or a down payment when buying a car on credit.
To give you an idea of how interest rates vary according to credit score, we provide some detailed examples below. There is no exact credit score needed for approval since many factors come into play, but a score over 680 is ideal. Anything lower may increase the interest rate you are charged due to the extra risk you pose as a borrower.
Example of Interest Rates tied to Credit Score Range:
Credits score of 720 and above are charged an average of $5,500 in interest on a loan.
Credits score of 680 or above are charged an average of $6,600 in interest on a loan.
Credits score of 650 or above are charged an average of $8,100 in interest on a loan.
Credits score of 615 or above are charged an average of $10,200 in interest on a loan.
Credits score of 580 or above are charged an average of $13,900 in interest on a loan.
Credits score of 580 or higher subject to paying on average $15,300 in interest on a loan.
By analyzing the above data, it's possible to see how a higher credit score will lead to lower interest rates and vice versa.
Methods to Increase Your Credit Score
If you're looking to improve your credit score, there are several easy steps you can take right now. However, it's important to remember that building a good credit score takes time and requires patience. Rushing to make changes may lead to mistakes that can negatively affect your credit score.
The following are three ways to improve your credit score:
Open 3-5 revolving credit accounts (credit cards)
Revolving credit is the best option for building your credit score. If you have limited credit or are rebuilding your credit, it may be difficult to get a large loan. Instead, consider applying for a secured credit card, such as Open Sky or Credit Builder Card. These credit cards focus on your ability to pay the balance on time, rather than your credit score. Revolving credit accounts for 30-35% of your credit score and using it responsibly can lead to quick improvements. It may take around 2-4 months to see an increase in your credit score, but try to pay your balance on time and keep it between $5-$10 each month. Limit your use of the credit card for small purchases, such as gas or groceries.
Increase your credit limits
Requesting a credit limit increase for your existing credit cards can help increase your overall credit limit and lower your credit utilization percentage. It's essential to keep your credit card balances within 30% of your overall limit to avoid negatively affecting your credit score. Contact your credit card company to request a "Credit Limit Increase" and provide your current income information. Most credit card companies require at least 7-15 months of excellent payment history before agreeing to an increase.
Pay down your balances
It's crucial to keep your credit card balance low and close to zero, as it plays a significant role in your overall credit score. Use your credit cards for small purchases and leave a balance of $1-$5 when paying the bill. If you have high balances, make a plan to pay them off with a percentage of your paycheck each month. Once you've paid off your balances, limit your credit card usage to avoid having to pay high-interest rates and keep most of your payments towards interest and not principal.
Joe's Advice on Improving Your Credit
We have all faced the challenge of having suboptimal credit at some point. However, if you are determined to make positive changes, your credit score can improve dramatically in no time. Many individuals who experience credit problems end up feeling hopeless and believe that they will never have good credit again. Without a doubt, achieving a high credit score requires diligence and effort, but anyone can do it by prioritizing their credit and correcting bad spending habits. Begin by creating a budget that is guided by your intended goals and by identifying and addressing any problematic spending habits. Your credit score will inevitably reflect the progress you make. Should you need assistance in improving your credit score, don't hesitate to contact our office at www.asapcreditrepairusa.com.
Key Points:
• Having poor credit is a common experience
• Taking your credit situation seriously and investing effort in improving it can lead to significant changes to your credit score
• Good credit requires work but is achievable by prioritizing your credit and spending habits
• Creating a budget and correcting any bad spending habits is a good starting point
• For help with improving your credit score, contact Joe's office at www.asapcreditrepairusa.com.