Are you aware that there are 30 different levels of credit scores? Many people are unaware that searching for the best credit score will yield multiple results, which can be confusing or misleading. My name is Sarah Johnson, and I have over a decade of experience in financial literacy and credit repair. My objective is to provide honest advice on various subjects, including credit scores. Throughout my career, I have assisted over twenty-five thousand clients in improving their credit scores, and I would like to share my knowledge with you. Let's dive into the topic at hand.
Contents:
Different Credit Scoring Models: An Overview
Understanding a Good Credit Score
What credit score is needed to purchase a house
Credit Score and History for Car Loans
Ways to Increase Your Credit Score
Joe's Final Thoughts for Improving Your Credit
Different Credit Scoring Models: An Overview
Credit scores are essential when it comes to borrowing money. However, there are different types of credit scores available, and it is important to understand the differences between them. The two main credit scoring models that you should become familiar with are the FICO model and the Vantage model.
1. FICO Credit Score
The FICO credit scoring model is the most widely used credit scoring model. There are eight different types of FICO models available, ranging from FICO 2 to FICO 10. The different models are used by lenders depending on the type of credit you are applying for. For example:
· Mortgage lenders usually pull your FICO 5 credit report
· Credit card companies primarily use the FICO 8 report
· Auto lenders typically pull FICO-2 reports
Why different FICO scores?
Each credit report has a different "weight," which means that certain factors critical to the lender will have a more significant impact on a credit score than others. For instance, the FICO 5 mortgage report's score will weigh heavily on previous mortgage history, while the FICO 8 report used by credit card companies will weigh more on your previous credit card history.
2. Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies to compete with the FICO scoring model. Although not widely used for lending purposes, it is gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites offer free copies of your Vantage score report.
Is the Vantage Score accurate?
The Vantage Score provides a good "general idea" of your FICO score, but it is not as widely accepted by lenders. Therefore, its accuracy varies depending on the context and usefulness of the score you want. Though the FICO score is the standard scoring model, the Vantage score is gaining popularity based on today’s standards.
Understanding a Good Credit Score
Credit scores for both FICO and Vantage models range between 350 to 850. A score of 350 reflects the worst credit score while 850 reflects the best a credit score can get. When aiming for the highest scores, it's important to understand your status relative to your goals. Here are some vital score thresholds that can help you throughout your journey to better credit scores:
620 or below
This score is regarded as bad credit due to adverse credit history, high-balance credit card accounts, or no credit cards. To improve your credit, ensure scheduled payments and ten active revolving credit accounts. Consider Credit Builder Card or OpenSky Credit Card, two secured credit cards to help you build credit. Once you reach the score range of 620, you can qualify for an FHA home mortgage.
640-680
This range is considered fair for good credit. Scores in this range indicate you have established credit, but derogatory marks, high balances on credit cards, or newly opened accounts may affect your score temporarily. If you recently opened a new account, these are temporary fluctuations, and your scores will return in due time.
740 or above
Scores over 740 are considered super-prime, with the best interest rates for most loans. Having a score over 740 means you're part of the 20% of the US population with such a credit score. Always ensure prompt payments, maintain your revolving credit card accounts, and keep up the good work!
What credit score is needed to purchase a house
The ideal credit score for buying a home depends on the type of mortgage loan you apply for. Since most mortgage loans are backed by the government, they follow similar but distinct guidelines. There are three common loan types: conventional, FHA, and VA loans.
Conventional Loans:
They are the most popular and cost-saving loans after VA loans. They do not require you to maintain private mortgage insurance (PMI), and have lower down payment requirements and better interest rates. They require a credit score of 640 and a debt-to-debt ratio of up to 43%.
FHA Loans:
The credit score requirements for FHA loans vary from 580 to 619, depending on the lender. You will need to keep a PMI at least for 11 years, increasing your mortgage cost. They have a higher debt-to-income limit of up to 50%, which allows you to purchase more homes if you have low income. The down payment requirements on an FHA loan are minimum, but they come with higher interest rates.
VA Loans:
While there is no minimum credit score required, VA Loan officers look for past defaulted loans and government-owed past-due debts. If you are a veteran, you may qualify for VA loans, which give you the best interest rates, and do not require any down payment. They also offer the most benefits for veterans of the military.
Credit Score and History for Car Loans
When it comes to buying a car, credit score is not the only determining factor for loan approval. Your credit history is equally important in assessing the risk involved in extending credit. Even though a high credit score is favorable, it has less impact on the interest rate offered.
To illustrate, lenders examine your credit history to determine the likelihood of defaulting on a car loan. A poor credit history, such as late payments or repossession, can hinder loan approval compared to someone with a good credit history. In the event of bad credit, there are special finance lenders who may qualify anyone for a car loan, but typically with added requirements including higher down payment and additional dealer fees. The dealership pays the fee to cover the risk of loan default, and this expense can affect the choice of vehicle available for loan approval. Also, having equity or a down payment will increase your leverage when buying a car on credit.
For a new car loan, a credit score over 680 is preferred by most lenders. A score below 680 could mean higher interest rates due to the borrower’s risk. The following table shows how interest rates vary based on different credit scores:
Interest Rates Based on Credit Score:
A 720 credit score or above - $5,500 in interest on average.
A 680 credit score or above - $6,600 in interest on average.
A 650 credit score or above - $8,100 in interest on average.
A 615 credit score or above - $10,200 in interest on average.
A 580 credit score or above - $13,900 in interest on average.
A credit score of 580 or less - $15,300 in interest on average.
As you can see, a higher credit score means you pay less interest, ultimately affecting your overall credit score.
Ways to Increase Your Credit Score
Improving your credit score takes time and effort. You must be patient and avoid making rash decisions that could worsen your credit problems. There are several things you can do right now to improve your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit plays a significant part in maximizing your credit scores. For those with limited credit or looking to rebuild credit, getting a large loan is not an easy feat. A secured credit card can be a good option for building credit as it emphasizes your ability to pay the card on time. Start with a card that does not focus on your credit score. Remember to keep your balance at $5–$10 each time you make a payment.
2. Request a Credit Limit Increase for Your Credit Cards
Asking for a credit limit increase can help increase your overall credit limits and lower your utilization percentage. Different credit card companies have varying processes for requesting a credit limit increase. Speak to customer service about the process. Ensure that you have an excellent payment history on a credit card of at least 7–15 months.
3. Pay Down Your Balances
Low balances are vital in keeping your credit scores high. Limit your credit card usage, and try to keep a $1–$5 balance. If you have high balances, make a game plan to pay down your debt and ultimately stop using the cards. High-interest rates coupled with outstanding credit card payments can hurt your credit score.
Joe's Final Thoughts for Improving Your Credit
Having bad credit can feel like a never-ending problem, causing a cycle of credit issues. However, it's essential to take your credit situation seriously and dedicate time and effort to improve it. By focusing on yourself and your credit, you can create significant changes in your credit score quickly. Developing an excellent credit score requires a lot of effort, but those who prioritize their credit and spending habits will see positive results. You can begin by creating a budget and working towards changing any bad spending behaviors. This will reflect positively on your credit score. If you need help or guidance with your credit score or credit repair, get in touch with Joe's office today at www.asapcreditrepairusa.com.