Were you aware that there are 30 different levels of credit scores? Many people may not realize that searching for the best credit score on Google can produce a multitude of conflicting answers. It's not uncommon to come across information that is confusing, if not misleading, and can lead you down a confusing path. I'm Joe Mahlow, and I've worked in the financial literacy and credit repair industry for over fifteen years. My primary objective is to offer you straightforward guidance on various topics, such as credit scores. Throughout my career, I've helped over twenty thousand clients improve their credit scores, and I'm excited to help you navigate this important aspect of your financial life as well. So without further ado, let's dive in!
Contents:
Understanding the Different Types of Credit Scores
Determining a Good Credit Score
What is the Ideal Credit Score for Buying a House?
Determining the Credit Score Range for Car Buying
Tips to Increase Your Credit Score
Joe's Advice on Improving Your Credit
Understanding the Different Types of Credit Scores
There are mainly two types of credit scoring models that are commonly used - the FICO model and the Vantage model. Both of these models have differences in how they calculate credit scores, and it is essential to comprehend these variations to gain a better insight into your credit.
FICO Credit Score
The FICO credit score model dominates the lending industry and is widely used by lenders across the United States. There are eight different versions of the FICO model, ranging from FICO 2 to FICO 10. Different lenders may pull different FICO reports based on the type of credit you are seeking. For example, mortgage lenders usually pull FICO 5 credit reports, while credit card issuers use FICO 8 reports. The reason for having multiple FICO scores is that each credit report has a different weight, with some factors being more crucial than others. Consequently, the importance of previous mortgage history will have a more significant impact on a FICO 5 mortgage report, and your payment history on credit cards will impact your FICO 8 score the most.
Vantage Credit Score
The Vantage Score is a newer competitor in the credit scoring industry, developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion. Vantage is frequently used by credit monitoring websites to provide consumers with a free copy of their credit reports. Although FICO scores are still more widely used, the Vantage model is gaining popularity in some sectors like personal loans and auto lending. However, Vantage scores are not as accurate as FICO scores since they are not widely used by lenders for actual lending purposes. It is best to use Vantage scores as a general idea of your overall credit score.
The accuracy of the Vantage score depends on the context in which it is used. As the Vantage model is still not as recognized or widely utilized as FICO, it can vary in its accuracy compared to your actual FICO score. Credit reporting agencies are data collection agencies that can provide the best scoring data based on the most updated industry standards, which can make Vantage, in the long run, the potential scoring model of choice.
Determining a Good Credit Score
Credit scores for the FICO and Vantage models are graded on a scale of 350 to 850, with 350 being the lowest score and 850 representing the highest score achievable. Knowing where you stand is significant when trying to set achievable score goals. Here are some important score thresholds to consider.
1. Below 620
Having a score below 620 is regarded as bad credit. Possibilities include a history of negative credit, high-balance credit card accounts, or the absence of credit cards entirely. Building ten active revolving accounts with on-time payments is the best way to enhance credit scores. Try starting with the OpenSky Credit Card or Credit Builder Card, as they are secured credit cards that aid in credit-building. Once the score hits 620, eligibility for an FHA home mortgage will start.
2. Between 640 to 680
This score range is considered "fair for good credit." This means that you have established credit but possess some derogatory marks on your credit score or accounts with high balances. Newly opened accounts can temporarily decrease scores. The temporary score drop is not alarming and will eventually increase.
3. 740 and above
A credit score of 740 and above is recognized as "super-prime" and offers the best interest rates for loans. Aim for this credit score as it places you in the top 20% of the US population. By paying accounts on time and keeping revolving credit card accounts paid, maintaining high credit scores is achievable.
What is the Ideal Credit Score for Buying a House?
The credit score you need to buy a house depends on the type of mortgage loan you qualify for. Mortgage loans are typically regulated by the federal government, so the requirements and guidelines for most loans are similar, with some exceptions. There are three most common mortgage types: conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are the most popular ones, and usually the best savings option after VA loans. They don't require private mortgage insurance (PMI), which can add to your monthly payment or down payment if you don't pay it. PMI is for protecting the lender in case you default on your loan. Conventional loans typically have lower down payment requirements and better interest rates than other loans. You will need a credit score of at least 640 and a debt-to-debt ratio of no more than 43% to qualify.
FHA Loans
An FHA mortgage loan is suitable for lower credit scores, usually between 580 and 619. However, different lenders have different loan program requirements, so shop around to get the best financial option for you. FHA loans require PMI for at least 11 years, which can increase your mortgage cost. However, they typically have higher debt-to-income limits of up to 50%, which enables you to buy more homes on a lower income. The required down payment on an FHA loan can be as low as 3.5% of the purchase price, which is lower than for a conventional loan, but the interest rate is usually higher.
VA Loans
VA loans do not have a minimum credit score requirement, but lenders look for previous defaulted loans or government-owed past-due debts as they pre-qualify you. To qualify for a VA loan, you need to 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 be a military spouse who lost their life during active duty. The VA loan generally has the best interest rates and does not usually require a down payment, which is why it is an excellent option for our veterans.
Determining the Credit Score Range for Car Buying
When it comes to purchasing a car, it's essential to understand that your credit history is more crucial than your credit score. Even though a higher credit score is beneficial, it won't play a significant role in determining your interest rate. Therefore, before applying for a car loan, it's crucial to take a look at your previous and current credit histories to evaluate the risk involved in the lending decision. While someone with a great credit score may face minimal interest rates, a borrower with a lower score may end up with a higher interest rate due to the extra risk they pose to the lender.
Here's an example to further elaborate on this:
If you have a 720 credit score or above, you'll pay an average of $5,500 in interest on a loan.
If you have a 680 credit score, you'll pay an average of $6,600 in interest on a loan.
If you have a 650 credit score, you'll pay an average of $8,100 in interest on a loan.
If you have a 615 credit score, you'll pay an average of $10,200 in interest on a loan.
If you have a 580 credit score, you'll pay an average of $13,900 in interest on a loan.
If you have a credit score of 580 or above, you'll pay an average of $15,300 in interest on a loan.
As evident from the data, the interest rates increase as the credit score goes down due to the higher risk to the lender. While lenders who specialize in bad credit or special finance may approve almost anyone for a car loan, they often add more criteria like higher down payments or extra fees to reduce the risk of default. So, to have the most leverage while buying a car on credit, it's better to have equity or a down payment.
Tips to Increase Your Credit Score
Increasing your credit score requires effort and patience, as building a good credit score takes time and not overnight. By making the right moves, you can boost your score significantly. Here are some tips to help you increase your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is an excellent option to increase your credit score. A secured credit card, such as Open Sky or Credit Builder Card, can help rebuild your score. Make sure to pay on time and keep the balance low.
2. Raise your limits
Requesting a credit limit increase for active revolving credit accounts can help increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a “Credit Limit Increaseâ€.
3. Pay down your balances
Reducing your balance to zero is critical. Limit your credit card usage, and leave about $1-$5 on your credit cards when paying your bill each month. Pay down high balances and ultimately stop using credit cards to reduce your overall debt.
Joe's Advice on Improving Your Credit
We've all faced the frustration of having less-than-ideal credit. However, if you truly commit to improving your current credit situation and put in the necessary effort, you can rapidly see significant changes to your credit score. Unfortunately, many individuals with poor credit feel trapped in a never-ending cycle of debt and feel that improving their credit seems impossible. But, developing a great credit score takes time and work, and those who prioritize their credit and focus on their spending habits can attain good credit. Start by developing a budget and dedicating yourself to fixing any damaging spending habits, which will have a direct impact on your credit score. If you want to get a better understanding of credit or need guidance and help to improve your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com.
Here are a few key takeaways to remember:
- Improving your credit takes time and effort.
- Don't fall into the trap of thinking that you'll always have bad credit.
- Prioritize your credit and watch how your spending habits impact your score.