It may surprise you to learn that your credit score can be categorized into 30 different levels. Unfortunately, many people seeking information on credit scores may find themselves inundated with conflicting, and sometimes confusing, advice from various sources. My name is Joe Mahlow, and I have spent the last fifteen years working in the world of financial literacy and credit repair. My objective is to provide straightforward and unvarnished guidance on a range of topics, including the often-misunderstood subject of credit scores. Having assisted more than twenty thousand clients to improve their credit scores, I am excited to offer my insights and support to help you accomplish the same. Let us dive in!
Contents:
Types of Credit Scores and How They are Calculated
Determining a Good Credit Score
Determining the Credit Score Needed to Qualify for a Home Loan
Determining Credit Requirements for Car Purchases
Ways to Boost Your Credit Score
Joe's Insights on Credit Improvement
Types of Credit Scores and How They are Calculated
Credit scores are crucial when it comes to lending or applying for credit. There are two major types of credit scoring models, FICO and Vantage, which are both essential to understand as they calculate credit scores differently.
FICO Credit Score
FICO is the most popular credit scoring model in use today, with eight different models ranging from FICO 2 to FICO 10. Credit scores can differ depending on the type of credit report pulled by different lenders. Mortgage lenders, for example, typically use FICO 5, while credit card companies primarily use FICO 8. Different reports weigh different factors, which is why there are so many various FICO credit scores.
Vantage Credit Score
Developed by the three major credit reporting agencies, Vantage is a newer scoring model in comparison to FICO, developed to compete with it. While FICO is still the most recognized scoring model, Vantage is gaining popularity in some sectors such as personal loans and auto lending. However, it is important to note that Vantage may not be as accurate as FICO since it is not widely used in lending purposes.
Why are there So Many FICO Scores?
Each credit report has a different "weight," meaning that the factors that are critical to lenders will impact the credit score more than the less important ones. For instance, a FICO 5 mortgage report weighs heavily on prior mortgage history, while FICO-2 reports are typically used by auto lenders and weigh heavily on previous auto history.
Conclusion
Credit scores are essential for anyone who applies for credit. To better understand your different FICO scores, it is advised to create an account on www.myfico.com. Overall, credit reporting agencies are the most significant data collection agencies, and although FICO dominates the lending sector, Vantage is gaining popularity.
Determining a Good Credit Score
Credit scores under the FICO and Vantage models can vary from 350 to 850, with 350 considered the worst and 850 being the best score. It is vital to keep the highest score in mind while developing your financial objectives. This requires an understanding of score thresholds to plot a course that takes you from point A towards point B.
Points to Consider:
1. 620 or below:
This is considered a poor credit score. Individuals with this score have some credit history issues, or they may have high-balance credit card accounts. Improving credit scores requires timely payments and having at least ten revolving credit accounts available. Secured credit cards like Credit Builder Card or OpenSky Credit Card can aid in building credit. Upon reaching a 620 credit score range, FHA home mortgage qualification becomes available.
2. 640-680:
This is considered fair for good credit. Scores in this range typically indicate established credit but may still have some derogatory marks or accounts on their credit report. High balances on credit cards that require payment and newly opened accounts can impact credit scores temporarily.
3. 740+:
Having a credit score of over 740 is considered "super-prime." It enables one to get the best interest rates on most loans. People with these scores form the top 20% of individuals in the USA. Paying accounts on time, with all revolving credit accounts up-to-date, ensures these high scores remain constant. Congratulations, if you have over a 740 credit score, for you are in good shape!
Determining the Credit Score Needed to Qualify for a Home Loan
The required credit score to obtain a home loan varies depending on the type of mortgage loan you seek. Federal regulations and governmental backing have produced similar standards and stipulations across the most popular loan types, including the conventional, FHA, and VA loan options.
1. Conventional Loans
Conventional loans provide the most common and favorable loan option outside of the VA loan. These loans typically have a lower down payment requirement and lower interest rates than other loan options. A conventional loan may not require private mortgage insurance (PMI), saving you money on down payment and monthly payments. The minimum credit score requirement for a conventional mortgage loan is 640, and borrowers must maintain a debt-to-debt ratio below 43%.
2. FHA Loans
FHA loans are designed for borrowers with lower credit scores, typically between 580 and 619. You should review the requirements of various lenders before selecting a loan program. With an FHA loan, you must maintain PMI for a minimum of 11 years, adding to your mortgage cost. While FHA loans allow a higher debt-to-income limit, up to 50%, the down payment requirement on an FHA loan is as low as 3.5% of the total purchase price, resulting in higher interest rates and monthly payments.
3. VA Loans
VA loans do not have strict credit score requirements; however, the lender will evaluate prior loan defaults and any government debts when pre-qualifying you for a loan. You may qualify for a VA loan if you have served in the US military for at least 181 days, served 90 consecutive days during wartime, or served six years with the National Guard. Alternatively, if your spouse was an active-duty military member and passed away, you may also qualify. VA loans often offer the best interest rates and usually do not require a down payment. These loans are an excellent option to support and honor our veterans.
Determining Credit Requirements for Car Purchases
When considering purchasing a car, your credit history is generally more critical than your credit score. However, a higher credit score can still impact the interest rate offered to you. Lenders will examine your credit history to determine the risk involved in providing credit, making previous issues like tardiness on prior auto loans or repossession a significant roadblock. There are lenders with less stringent requirements, yet applicants may need to fulfill specific borrower criteria, such as higher down payments or additional dealership fees. These fees can instantly increase if you've struggled with credit issues in the past. For this reason, having equity or a down payment may aid you in obtaining a car on credit.
Credit Score Aim for Car Loans
Though no specific credit score guarantees approval for car loans, a score over 680 can prove most beneficial. As a borrower, you'll be charged interest due to the level of risk you pose to the lender. Here is a general example illustrating the difference in interest rates based on your credit score:
Interest Rates Based on Credit Score:
- A credit score of 720 or higher can expect to pay an average of $5,500 in interest on a loan.
- A score between 680 and 719 can anticipate paying $6,600 on average.
- A score between 650 and 679 can expect to pay, on average, $8,100 in interest.
- A score between 615 and 649 can anticipate paying $10,200 in interest.
- A score of 580 to 614 will have an average interest of $13,900 on a car loan.
- A score under 580 can expect to pay an average of $15,300 on a car loan.
From these numbers, it's clear that a higher credit score corresponds to a lower interest rate, and this, in turn, affects your future credit score.
Ways to Boost Your Credit Score
Improving your credit score takes time and effort. However, there are several things you can do to start building a good credit score now. Being patient during the process is crucial to avoid making hasty and poor decisions that could worsen your credit record. Here are some useful tips to boost your credit score:
Open 3-5 Revolving Credit Accounts:
Raise Your Limits:
Pay Down Your Balances:
Revolving credit is a great option to maximize your credit score, especially for those with limited or no credit history. Secured credit cards like Open Sky or Credit Builder Card can help to improve credit scores quickly by proving your ability to pay on time and maintain a good credit record.
Requesting a credit limit increase is a quick way to raise your credit score. Creditors will consider your current income and payment history to determine if you can handle more credit. A higher credit limit can help to lower your utilization percentage, making it easier to maintain a good credit score.
Keeping your credit card balance low and close to zero is essential to maximize your credit score. You should limit your credit card usage and pay the credit card down each month or make a plan to pay off the high balances over time. Paying your bills on time and leaving a small balance on your credit cards is a way to maintain a good credit record. Remember, high-interest rates mean most of your payments go towards interest, not the principal balance.
Joe's Insights on Credit Improvement
Most of us have struggled with low credit scores at some point in our lives, but it's crucial to take this matter seriously and put in the effort to work on ourselves and improve our credit. Many people fall into the trap of believing they will always have poor credit, but it's entirely possible to see significant improvements in a short amount of time. Improving your credit score requires dedication, but those who prioritize their credit and focus on their spending habits will succeed. Consider creating a budget and addressing any problematic spending habits to positively impact your credit. This article aims to provide an understanding of credit, and if you require credit guidance or repair services, you can reach out to our office at www.asapcreditrepairusa.com. The team at ASAP Credit Repair USA is ready to assist you.
Key points:
- It's important to take credit improvement seriously and work to enhance your credit scores.
- Many individuals wrongly believe that good credit is impossible for them to achieve.
- Those who focus on improving their credit and managing their finances can see significant results.
- Creating a budget and addressing any problematic spending habits can have a positive effect on your credit score.