Did you know that there are 30 different levels of credit scores? It's a surprising fact that many people don't realize. When you search for information on improving your credit score, you might find that there are a lot of conflicting answers online. This can be confusing and frustrating, and it's easy to get lost in all the information available. As someone who has worked in the financial literacy and credit repair field for over 15 years, I'm here to provide you with straightforward advice on topics like credit scores. My name is Emily Jones, and I've helped more than 20,000 clients improve their credit scores over the years. My hope is that I can provide you with some valuable information to help you do the same. So, let's dive in!
Contents:
Different Types of Credit Scores: FICO vs. Vantage
Understanding Good Credit Scores
What Credit Scores are Required When Buying a House?
Ideal Credit Score and History Needed to Buy a Car
Ways to Boost Your Credit Score
Advice from Joe: How to Improve Your Credit Score
Different Types of Credit Scores: FICO vs. Vantage
Credit scores are essential in determining your creditworthiness. There are two main types of credit scoring models: FICO and Vantage. Knowing the differences between these models is crucial in understanding how your credit score is calculated.
FICO Credit Score:
- The FICO model is the most commonly used scoring model in the US.
- There are eight different FICO models, ranging from FICO 2 to FICO 10.
- Each model is used for a different type of credit, depending on the lender.
- Mortgage lenders typically use FICO 5, credit card companies use FICO 8, and auto lenders use FICO 2.
- Each FICO scoring model weighs critical factors differently, depending on the lender's priorities and the type of credit in question.
Vantage Credit Score:
- The Vantage score is a relatively new scoring model.
- It was developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion.
- The Vantage score is gaining popularity in some sectors, such as personal loans and auto lending.
- It is often used on credit monitoring websites to provide consumers with a free copy of their credit report.
- While the Vantage score is accurate, it is not widely used by lenders and may not accurately reflect your actual lending score.
Overall, both the FICO and Vantage scoring models are useful tools for consumers to monitor their credit scores. While FICO is the more commonly used model, the Vantage score provides a good general idea of your creditworthiness. As the credit industry evolves, it is likely that the Vantage score will become more widely used in the future.
Understanding Good Credit Scores
Both the FICO and Vantage scoring models have a range of scores from 350 to 850, where 850 is the pinnacle of credit status and 350 is the lowest. As you strive to achieve the highest possible score, it's important to comprehend your position to assess your progress. Here are some crucial credit score thresholds to keep in mind:
1. 620 or below
If you fall in this category, your credit score is generally considered poor, which may indicate some unfavorable credit history or high-balance credit card accounts, or perhaps no credit cards at all. The most effective way to improve your credit score is to have regular timely payments and ten open revolving credit accounts. To build credit, review the Credit Builder Card or OpenSky Credit Card, both of which are secured credit cards. When you hit the 620 credit score threshold, it will be possible to obtain an FHA home mortgage.
2. 640-680
Your credit score is considered fair-to-good when it falls between 640 and 680. This score range suggests that your credit has been established, but there may be a few derogatory marks or high credit card account balances that need to be paid down. It's typical to notice a score dip when you open a new credit account, but this is temporary and will recover over time.
3. 740+
A score above 740 falls in the "super-prime" range and will give you the best interest rates for most loan types. Congratulations if you have reached this score as you are among the top 20% of the US population. To sustain such high credit status, make timely payments and keep your revolving credit card balances low.
What Credit Scores are Required When Buying a House?
When it comes to purchasing a mortgage loan, the ideal credit score varies depending on the type of loan you are looking for. Each loan type has its requirements with varying guidelines that set them apart from the rest. Below are the three most common mortgage loans; their specific requirements and guidelines:
1. Conventional Loans
Conventional loans are the most sought after loans and offer the best savings with the exception of VA loans. Conventional loans are ideal for anyone who doesn't want to maintain private mortgage insurance (PMI), which could increase their down payment or monthly payments. However, it's important to note that PMI is designed to protect the lender in case the borrower stops making payments. Additionally, conventional loans usually come with lower down payment requirements and better interest rates than other loan types. To qualify, you will need a credit score of at least 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loan
The Federal Housing Administration loans are ideal for borrowers with lower credit scores, typically between 580 and 619. It's essential to note that all federal loan programs differ from one another, so it's best to shop around for the most suitable lender. FHA loans require borrowers to maintain PMI for at least 11 years, which could increase the mortgage cost and is something to consider, especially if you're on a budget. The loan type typically has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than a conventional loan can offer, especially if you have a lower income. Lastly, this loan type requires a low down payment of 3.5% of your purchase price, thus allowing you to get into a mortgage with less money out of pocket than you would with a conventional loan. However, your interest rate may be higher.
3. VA Loan
VA loans do not necessarily have a credit score requirement, but lenders will look for any past defaulted loans and any overdue government debts during the pre-qualification process. To be eligible, you must have served in the US Military for at least 181 days, 90 consecutive days during wartime, or served six years with the National Guard. Also, if your spouse was in the military and died while on active duty, you might be eligible. The VA loan typically offers the best available interest rates, and you won't have to make a down payment. The VA loan is an excellent loan option for our veterans.
Ideal Credit Score and History Needed to Buy a Car
When purchasing a vehicle, your credit history holds more weight than your credit score. While having a higher credit score plays a role in your eligibility for a loan, it matters less when determining the interest rate you qualify for. Loan issuers will review your credit histories to determine the risk involved with lending you money. Delinquent or past due loans can hinder your chances of getting approved for a car loan. Poor credit or special finance lenders may extend loans to anyone, including those with prior vehicle repossessions. Such lenders have specific approval criteria with higher down payments and fees for the dealership. Likewise, car dealerships charge fees to reduce their risk if they approve a loan to someone with complicated credit. Having a down payment when purchasing a vehicle helps you have negotiation power when it comes to credit on the loan amount.
Credit Score Range for Car Loans
There's no definitive credit score that ensures loan approval as multiple factors dictate eligibility. However, a credit score above 680 is ideal. A credit score below 680 tends to increase your interest rates and thus your repayment risk. According to recent data, the difference in interest rates for someone with a 720 credit score is almost $5500, while a 680 credit score interest rate is over $6600. A poor credit score of 580 or less can lead to an interest rate of almost $14,000, highlighting the importance of a higher credit score. As the data demonstrates, the increase in credit score reduces repayment risk and car loan interest rates.
Ways to Boost Your Credit Score
Improving your credit score takes time and effort, but there are some critical steps you can take right now that require little effort on your part. Patience is key when building credit, as impulsive decisions can make matters worse. Here are some things you can do today to increase your credit score:
Open 3-5 revolving credit accounts:
Revolving credit can help you maximize your score, even if you have limited credit history or need to rebuild your credit. It can take time to build credit with a large loan, so a secured credit card like Open Sky or Credit Builder Card is a great place to start. Make sure you pay the balance on time and limit your usage to small purchases like gas or groceries.
Raise your limits:
Request a credit limit increase to help decrease your credit utilization percentage. You can do this online or by phone, and most companies require a few months of excellent payment history before approving a request.
Pay down your balances:
Keeping your balances low and close to zero is crucial for a good credit score. Only use your credit cards for small purchases and pay your bill each month. If you have high balances, make a plan to pay them down over time and limit your usage to avoid running up the balance again.
Remember that building a good credit score takes time, but these steps will help you get there faster.
Advice from Joe: How to Improve Your Credit Score
It's not uncommon to have struggled with maintaining good credit in the past. However, with a serious effort and focus on both yourself and your credit, you will see significant improvements to your credit score in a relatively short amount of time. Many people with bad credit fall into a trap of thinking that it's impossible to have good credit again, but it is possible with hard work and dedication. Developing a great credit score takes time, but those who prioritize their credit and spending habits will ultimately succeed. Begin by identifying bad spending habits and creating a budget that reflects your new priorities. By doing so, you will start to see improvements reflected in your credit score. For more information on understanding and improving your credit, please visit our website at www.asapcreditrepairusa.com. If you need guidance or support in repairing your credit, please reach out to our office today.
Key points:
- Improving your credit score requires dedication and effort.
- Creating a budget and cutting bad spending habits can lead to improved credit.
- Don't give up hope on reaching good credit again.
- For help with credit repair, visit www.asapcreditrepairusa.com.