It may surprise you to learn that there are actually thirty different tiers to credit scores. Unfortunately, many people seeking information on the subject can become overwhelmed by the multitude of answers provided by search engines like Google. It is not uncommon for misunderstandings to arise or for misinformation to lead people down unhelpful paths. But have no fear, as an expert in financial literacy and credit repair with more than fifteen years of experience, I'm here to offer you clear and concise advice on this matter. My name is Joe Mahlow and I have assisted over twenty thousand clients in raising their credit scores. In this discussion on the topic of credit scores, I aim to provide you with the essential information you need to achieve similar results. Let's dive right in!
Contents:
Different Credit Scoring Models Explained
Understanding Credit Scores
What Credit Score Do You Need to Buy a House?
A Guide to Credit Score Requirements for Car Purchase
Ways to Improve and Build Your Credit Score
Joe's Insights on Credit Repair
Different Credit Scoring Models Explained
Understanding the different credit scoring models is important when it comes to calculating your credit score. There are two primary models: FICO and Vantage. Here's what you need to know about each of them.
1. FICO Credit Score:
- The FICO model is the most widely used scoring model with eight different versions.
- Different lenders use different FICO models and pull specific reports depending on the type of credit you are seeking.
- FICO scores weigh different factors based on their importance to the lender, which can impact your score across different reports.
2. Vantage Credit Score:
- Developed by Equifax, Experian, and TransUnion, the Vantage model is a newer alternative to FICO.
- Vantage is gaining popularity in some lending sectors, but it's not widely used for lending purposes yet, making it less accurate when it comes to your actual lending score.
- Despite this, Vantage can still give you a good general idea of where your overall scores are.
In conclusion, while FICO is currently dominant in the lending sector, Vantage is gaining ground and may become more widely used in the future. Credit reporting agencies have access to significant data, which makes their scoring models highly valuable in providing the best scoring data. If you want to check your different FICO scores, you can sign up for an account on myfico.com.
Understanding Credit Scores
Credit scores are used to determine a person's creditworthiness. Both FICO and Vantage models assign scores ranging from 350 to 850, with 350 being the lowest and 850 the highest possible score. Knowing where you stand in this range can help you set goals to achieve the highest scores possible. Below are some vital score thresholds to consider during your credit-building journey:
620 or below:
Considered bad credit, this score range indicates adverse credit history, high-balance credit card accounts, or no credit cards. To improve your score, focus on timely payments and having ten active revolving credit accounts. Try secured credit cards such as Credit Builder Card or OpenSky Credit Card. Once you reach this score range, you can start qualifying for an FHA home mortgage.
640-680:
This range is considered fair for good credit. It indicates established credit, but you may have derogatory marks or high balances on your credit accounts. Newly opened accounts can also temporarily drop your score. Don't panic if this happens; your score will return.
740+:
A credit score over 740 is considered "super-prime" and grants the best interest rates for most loans. Congratulations if you have this score, as you are part of the 20% of the US population with it. Keep up the great work by paying your accounts on time and keeping your revolving credit card accounts paid.
What Credit Score Do You Need to Buy a House?
Similar to other loan types, the requirements and guidelines for mortgage loans vary depending on the type of loan you are applying for and the standards set by federal regulation and government backing. The most common mortgage loans include conventional loans, FHA loans, and VA loans. Here's what you need to know about each of these loan types:
1. Conventional Loans
Conventional loans are popular and typically the best "savings" loan option apart from VA loans. With this type of loan, you won't have to maintain private mortgage insurance (PMI), which adds to your downpayment or monthly payment. This loan type typically has lower downpayment requirements and better interest rates than other mortgage loans. However, you should have a credit score of at least 640 and a debt-to-debt ratio of no higher than 43% to qualify for conventional loans.
2. FHA Loans
FHA loans are ideal if you have a credit score between 580 and 619. Take note that loan programs differ, so you should approach different lenders to find the best financial option for you if your credit score falls within this range. This loan requires you to maintain PMI for at least 11 years, which adds to your mortgage cost. It has a higher debt-to-income limit of up to 50%, allowing you to buy more homes than you would with a conventional loan if you have a lower income. Additionally, the downpayment requirements are lower than those of a conventional loan, making it an ideal option if you are short on cash. But note that you will have a higher interest rate on this type of loan.
3. VA Loans
The VA loan has no specific credit score requirement, but they assess your previous defaulted loans and government-owed past-due debts during pre-qualification. To qualify for this loan, you must have served in the military, been in the National Guard, or have a spouse who was in the military and lost their lives on active duty. The best thing about this loan is that you do not usually need a down payment and have access to the best interest rates available. It is a great option for veterans.
A Guide to Credit Score Requirements for Car Purchase
When it comes to purchasing a car, having a good credit history outweighs the importance of a high credit score. While a good credit score is still a crucial factor, it is not the sole determinant in the interest rate you are offered. Instead, lenders assess your credit record to evaluate the level of risk involved in extending credit to you.
Therefore, an individual with a history of missed vehicle payments or repossession will undoubtedly have a harder time obtaining a loan than someone with a clean record. On the other hand, bad credit or special finance auto lenders are willing to qualify almost anyone for a car loan, but with specific stringent criteria that may include a higher down payment and fees to the dealership.
Even more surprising, dealerships might need to pay a fee to hedge against your probability of default, to approve you for a car loan. If you have mediocre credit, you might have seen how dealerships select a vehicle for you because they have higher margins to compensate for the diminished creditworthiness of the buyer. This is where having a down payment becomes crucial.
While there is no exact credit score that guarantees approval for a car loan, a credit score of 680 or higher is ideal. The lower your score, the more likely you will be charged a higher interest rate, depending on factors such as the size of your down payment.
Here's an overview of how credit score ranges can affect the amount of interest you'll pay on a loan:
1. Someone with a credit score 720 or higher pays an average of $5,500 in interest on a loan.
2. Someone with a credit score between 680-719 pays an average of $6,600 in interest on a loan.
3. Someone with a credit score between 650-679 pays, on average, $8,100 in interest on a loan.
4. Someone with a credit score between 615-649 pays, on average, $10,200 in interest on a loan.
5. Someone with a credit score between 580-614 pays an average of $13,900 in interest on a loan.
6. Someone with a credit score below 580 pays, on average, $15,300 in interest on a loan.
From the above data analysis, a clear trend is visible: the higher your credit score, the lower your interest rate and the overall cost of your loan.
Ways to Improve and Build Your Credit Score
There are several steps you can take that will help increase your credit score with minimal effort. It's important to remember that building a healthy credit score takes time and is not an overnight process. Practicing patience is key because rash decision-making can lead to poor credit choices that only compound problems.
Here are some things you can do to improve your credit score right away:
Open 3-5 Revolving Credit accounts (Credit Cards)
One of the most efficient ways to maximize your credit scores is to use revolving credit. This is especially beneficial for those who are looking to build their credit from scratch or rebuild their credit score. Instead of applying for a large loan, applying for a secured credit card is more likely to get approved as it is based on your ability to make payments on time and your current income. It may take 2-4 months to show the increases on your credit scores. Keep your balance low and pay it on time.
Raise your Limits!
You can request for an increase in credit limit from your credit card issuer. This can raise your overall credit limit while decreasing your utilization percentage, thereby, improving your credit score. Different credit card companies process credit limit requests differently. Call your credit card issuer and ask for a “Credit Limit Increase.†Great payment history on your credit card can make a significant difference.
Pay down your balances!
To maintain a good credit score, keep your balance low and close to zero. It's not mandatory to use your credit cards every month; limiting your usage to small purchases is a practical plan. Keep a $1 to $5 balance on your credit cards when you pay your bill. If you currently have high balances, make a monthly budget plan to tackle them and start eliminating this balance. It's essential to use credit cards wisely because, besides being high rate loans, if your payment tendencies are not healthy, you could negatively affect your credit score.
Joe's Insights on Credit Repair
We've all experienced a less than ideal credit situation at some point. However, if you're serious about improving your credit score, there are specific steps you can take to see significant changes quickly. Many individuals with poor credit fall into a cycle of financial trouble, feeling like it's impossible to repair their credit. In truth, developing a great credit score takes hard work and dedication. Those willing to prioritize their credit will ultimately win. Start by creating a budget and addressing any negative spending habits. This effort will have a direct impact on your credit score. If you need assistance with credit repair or guidance, please don't hesitate to contact us at www.asapcreditrepairusa.com.