Let's unveil a little known fact about credit scores- did you know that there are 30 different levels of credit scores? But, it can be puzzling when searching for the best credit score as Google generates multiple varied results. Sometimes these search results can be misleading and lead you down a rabbit hole. My name is Joe Mahlow, and I have an extensive experience spanning over fifteen years in the financial literacy and credit repair space. I aim to provide you with straightforward and unbiased advice on varied topics, and today's topic is credit scores. Having helped over twenty thousand clients transform their credit scores, I'm hopeful that the information I provide will help you achieve the same results. So, let's dive in!
Contents:
What are Different Kinds of Credit Scores?
What Qualifies as a Good Credit Score
Credit Score Needed to Buy a House: Explained by Loan Type
Determining the Credit Score Range to Secure a Car Loan
Tips for Improving Your Credit Score
Final Thoughts from Joe for Improving Your Credit Score
What are Different Kinds of Credit Scores?
Credit scores are calculated using two primary models, the FICO and the Vantage score. Knowing the key differences between these two models is vital. The FICO model is the most commonly used credit scoring model, with eight different FICO models each producing a distinct credit score. Different FICO credit scoring models are used by different types of lenders, depending on the type of credit you have applied for. For example, if you are applying for a mortgage loan, a mortgage lender will most likely use the FICO 5 score. Auto lenders, on the other hand, typically pull your FICO 2 report. The weight given to each credit history will vary based on the importance of past creditors.
In contrast, the Vantage scoring model
is a newer scoring model developed by Equifax, Experian, and TransUnion recently. This model is frequently used by credit monitoring websites to deliver free credit reports. Although the FICO model remains the most widely utilized model, certain sectors, such as auto lending and personal loans, are turning to Vantage as a more reliable credit scoring model. It is worth noting that Vantage cannot provide an accurate lending score, but it can offer you a rough approximation of your overall credit score.
What Qualifies as a Good Credit Score
Credit scores under the FICO and Vantage models range from 350 to 850. A score of 350 is the worst credit score that one can have, while the best credit score is 850. While aiming for a good credit score, it is vital to comprehend where you stand in your credit-building journey. Here are some crucial score limits:
620 or below
If your score is below this threshold, you may have some detrimental credit history, high-balance credit accounts, or no credit cards at all. To improve your credit scores, ensure timely payments and have at least ten active revolving credit accounts open. Secured credit cards such as the Credit Builder Card and OpenSky Credit Card can help build your credit. Once your score is in the 620 range, you may qualify for an FHA mortgage.
640-680
Credit scores in this range are considered fair for good credit. Though you have established credit, you may have some derogatory marks or accounts, high credit-card balances that you need to pay down, and newly opened accounts that may temporarily reduce your credit score. A temporary drop in credit scores is nothing to worry about, especially when you have recently opened new accounts.
740+
Having a credit score of over 740 is considered "super-prime" and offers the best interest rates for most loans. If you have a score of over 740, you are part of the 20% of the US population with the best credit scores. Always ensure timely payment of accounts and keep revolving credit card accounts paid to maintain this excellent credit score. Congratulations on having a great credit score!
Credit Score Needed to Buy a House: Explained by Loan Type
The answer to this question varies depending on the type of mortgage loan you are seeking. While most mortgage loans have similar requirements and guidelines due to federal regulations and government backing, there are some differences between conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and offer the best "savings" loan option besides the VA loan. They do not require private mortgage insurance (PMI), which can be an added cost increasing your downpayment or monthly payment. The typical credit score requirement for a conventional mortgage loan is 640, and the debt-to-debt ratio should be no higher than 43%. These loans have lower downpayment requirements and better interest rates than other mortgage loans.
2. FHA Loans
The FHA loans cater to lower credit scores, typically between 580 and 619, but shop around lenders as all loan programs differ. The PMI for FHA loans must be kept for at least 11 years, which can increase mortgage costs and influence your budget. This mortgage loan type has a higher debt-to-income limit of up to 50%, enabling you to buy more homes if you have a lower income. The downpayment requirements for FHA loans are as low as 3.5%, so it allows you to buy a house with less money out of pocket than a conventional loan. However, the interest rate is higher.
3. VA Loans
The VA loan is for veterans who 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 whose spouses died in active duty. There is no technical credit score requirement, but the program looks for previous defaulted loans and government-owed past-due debts when pre-qualifying you. This loan type typically has the best interest rates and does not require a down payment. It is an excellent option for those who have served our country.
Determining the Credit Score Range to Secure a Car Loan
Your credit history takes precedence over your credit score when purchasing a car. Although a good credit score is important, it has less impact on the interest rate you qualify for. Instead, lenders assess your credit histories to evaluate the risk involved in extending credit. For example, previous late payments or repossession significantly affect your loan approval chances. It is generally easier to secure an auto loan with financial service providers that specialize in special finance or bad credit loans, albeit with additional criteria like higher down payment and dealership fees. Even with bad credit, having equity or a downpayment improves your leverage when buying a car on credit.
Credit Score Range for Car Financing
To determine approval, there is no specific credit score, given the factors that lenders consider. However, a credit score over 680 is ideal since anything below that increases your interest rate. The interest rate you pay is directly proportional to your credit score. For instance, someone with a credit score of 720 or above incurs an average interest rate of $5,500 on a loan, whereas someone with a credit score of 580 would have an average interest rate of $15,300 on a loan. Given this data, it is clear that the higher your credit score, the less interest you pay.
Tips for Improving Your Credit Score
Improving your credit score is not an overnight process; it takes time and patience. Making rational decisions with your credit is important since impulsive decisions can make your credit problems worse. Here are some things you can do right now to help improve your credit score:
Open 3-5 Revolving Credit accounts (Credit Cards)
- Revolving credit is one of the best ways to increase your credit scores.
- Open a secured credit card that does not focus on your credit score to have the best chance of approval.
- Using revolving credit makes up 30-35% of your overall credit score and is the fastest way to build your credit.
- It is essential to pay your balance on time and keep it low.
Raise your Limits!
- Requesting a credit limit increase can help increase your overall credit limit and lower your credit utilization percentage.
- Increasing your credit limit can help you avoid crossing the 30% limit, which can hurt your credit score the most.
- Call your credit card company to request credit limit increases and fill in the required information.
Pay down your balances!
- Paying down your balances can help reduce your overall credit utilization percentage.
- Use your credit card for small purchases to keep the card active, and leave a balance of $1-5 on your card.
- For high balances, make a game plan and pay a fixed percentage of your paycheck each month to pay down your balances and stop using credit cards.
- Limit your credit card usage to maintain a good credit score. Most of your credit card payments go towards interest and not principal.
Final Thoughts from Joe for Improving Your Credit Score
It's no secret that many of us have struggled with less-than-stellar credit at some point. However, if you're committed to addressing your current credit situation and putting in the effort to improve it, you can quickly see changes in your credit score. Unfortunately, many people with bad credit resign themselves to a lifetime of credit problems and assume that good credit is out of reach. But achieving a great credit score requires hard work, and those who are willing to prioritize their credit and focus on their spending habits are the ones who will come out on top. Start by devising a budget and making an effort to fix any harmful spending habits you may have. This will positively impact your credit score. For more resources and assistance with credit repair, visit our website at www.asapcreditrepairusa.com.