It may surprise you to learn that there are a whopping 30 levels of credit scores to consider. Despite this fact, many people remain unaware of this intricacy and consequently struggle to identify the best credit score for their needs due to the wealth of different answers that appear on search engines like Google. Frustratingly, much of the information available can be difficult to decipher and even misleading. Fortunately, Joe Mahlow, a seasoned financial literacy and credit repair expert of fifteen years, is here to provide you with honest and straightforward advice on this and other important topics. Joe Mahlow has already assisted over 20,000 clients in boosting their credit scores and hopes to do the same for you by providing you with all the information you need to succeed. Without further ado, let's dive into credit scores.
Contents:
Types of Credit Scores: Understanding FICO and Vantage Models
Understanding Credit Scores: Ranges, Thresholds, and Tips
What Is a Suitable Credit Score for Buying a House?
What Credit Score is Needed to Buy a Car?
Tips to Improve Your Credit Score
Insights from Joe on Improving Your Credit Score
Types of Credit Scores: Understanding FICO and Vantage Models
When it comes to credit scores, there are two main scoring models to comprehend: FICO and Vantage. It's crucial to acknowledge the differences between them as they can greatly impact your credit score.
FICO Credit Score
The FICO scoring model is the most widely used credit scoring model. Depending on the lender, they will pull different FICO reports, ranging from FICO 2 to FICO 10. Each report is based on unique scoring factors, with higher weight given to factors critical to the lender. For instance, the FICO 5 report is commonly used for mortgage lending, while FICO 8 is primarily used for credit card lending.
Why are there different FICO scores?
Each credit report has a different "weight," meaning factors crucial to the lender will have a more significant impact on a credit score than the unimportant ones. Therefore, previous mortgage history, credit card history, or auto history are crucial in determining your FICO score.
If you want to track your different FICO scores, you can create an account on www.myfico.com.
Vantage Credit Score
Developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, the Vantage Score was created to compete with the FICO scoring model. It is a newer scoring model than FICO and has been gaining popularity in certain sectors, such as personal loans and auto lending.
Is the Vantage Score accurate?
While the Vantage Score is accurate, it is not widely used for lending purposes. Therefore, it may not give an accurate representation of your actual lending score. However, it can provide a general idea of where your overall scores lie.
In the future, the Vantage scoring model is likely to be more widely used due to its ability to provide the best scoring models based on current standards. As credit reporting agencies have the most significant data, they can create the best scoring data. Therefore, it's essential to keep track of your credit health by monitoring your credit reports regularly.
Understanding Credit Scores: Ranges, Thresholds, and Tips
Credit scores are important indicators of an individual's creditworthiness. Both the FICO and Vantage scores range from 350 to 850, with the higher score signifying better credit. To help you better comprehend where you stand in terms of credit score, here is a breakdown of some important score thresholds:
1. 620 or below:
This is deemed a bad credit score. If you are in this range, you may have adverse credit history, high-balance credit card accounts, or no credit cards at all. The best way to improve your score is to make timely payments and keep ten active revolving credit accounts open. You can also opt for secured credit cards like the Credit Builder Card or OpenSky Credit Card. Once you reach the 620 credit score range, you can be eligible for an FHA home mortgage.
2. 640-680:
This range signifies fair to good credit. It reveals that you might have some derogatory marks or accounts on your credit and may need to pay down high balances on your credit cards. Newly opened accounts can also drop your scores temporarily.
3. 740+:
Any credit score over 740 is deemed "super-prime" and offers the best interest rates for most loans. Only 20% of the US population has this score. If you have a score over 740, always pay your accounts on time, and keep your revolving credit card accounts paid – congratulations, you're in great shape!
What Is a Suitable Credit Score for Buying a House?
Before understanding what type of credit score is needed to qualify for a mortgage loan, it is vital to know the various types of mortgage loans available. There are three most common mortgage loan types: conventional loans, FHA loans, and VA loans, and each has its requirements and regulations. Below are the credit score requirements for each of the mortgage loan types:
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Conventional Loans
Conventional loans are the most prevalent home loan option. They offer lower downpayment requirements and better interest rates than other types of mortgage loans. Also, conventional loans do not require private mortgage insurance (PMI), which could increase the monthly payment or downpayment. However, conventional loans typically require a credit score of at least 640 and a debt-to-debt ratio of no higher than 43%.
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FHA Loans
The FHA loan could be an excellent option for individuals with a lower credit score, typically between 580 and 619. The loan type has a higher debt-to-income limit of up to 50% and downpayment requirements of 3.5% of the purchase. However, an FHA loan requires borrowers to maintain PMI for the first 11 years, which could generate more expenses.
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VA Loans
VA loans do not technically have a credit score requirement; thus, it is possible to qualify for a VA loan with a poor credit score. However, the department scrutinizes previous defaulted loans and any government-owed past-due debts when pre-qualifying you. To qualify for a VA loan, you must have either served in the United States Military for at least 181 days, served 90 consecutive days during wartime, or served 6 years with the National Guard. Spouses of military personnel who lost their lives during active duty are also eligible. VA loans have the best interest rates available and do not require a downpayment, making it a suitable option for veterans.
What Credit Score is Needed to Buy a Car?
When it comes to buying a car, your credit history is more important than your credit score. Although having a good credit score is beneficial, it plays a smaller role in determining your interest rate. Lenders evaluate your credit history to assess the risk of extending credit. Therefore, a person with a history of late payments or repossession will face more difficulties in securing a car loan than someone with a spotless credit record. Subprime lenders are willing to approve loans to individuals with poor credit history but at added costs such as higher down payments and fees to the dealership. Equity or down payment can be an advantage while buying a vehicle on credit.
Although there is no specific credit score that guarantees approval, a credit score of over 680 is ideal for obtaining better interest rates. Your credit score influences the amount of interest you will pay on a loan. A person with a credit score of 720 or more, for instance, will pay $5,500 in interest on a loan. Alternatively, a person with a score of 580 or above will pay an average interest of $15,300 on a loan. The higher your credit score, the lesser your interest rate, ultimately affecting your overall credit score.
Tips to Improve Your Credit Score
Improving your credit score is a process that requires time and patience. Rushing the process can often lead to poor decisions that will hurt your credit score further. Therefore, it is crucial to be mindful of the steps you take to improve your credit. Here are a few things you can do right now to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, can help you maximize your credit score. If you have limited or damaged credit, obtaining a large loan to rebuild credit may be difficult, but having a secured credit card like Open Sky or Credit Builder Card can give you a better chance of approval. By keeping your card balances low and making on-time payments, you can increase your credit score over time.
2. Raise Your Limits
Requesting a credit limit increase can help lower your overall credit utilization percentage, which is crucial to maintain a good credit score. The process involves calling your credit card company and filling out some information, including your current income. Keep in mind that most credit card companies want to see positive payment history on a card before considering a limit increase.
3. Pay Down Your Balances
Keeping your balances low is key to a good credit score. You can use your credit cards for small purchases to keep them active, but make sure to pay them off each month. Additionally, if you carry high balances and cannot pay them off, plan to pay a portion each month until the balances are paid down. It is essential to limit your credit card usage to avoid high-interest rates and fees. By taking these steps, you can improve your credit score over time.
Insights from Joe on Improving Your Credit Score
Admit it, we have all experienced having less-than-ideal credit scores. But taking your credit situation seriously and dedicating time and effort to improve it can bring massive changes to your credit score in no time. Sadly, some people with bad credit feel like they will have credit issues forever, making good credit seem impossible. However, focusing on your spending habits and making credit score a priority can lead to a great credit score. To start with, create a budget plan and work on correcting any bad spending habits. This move will positively impact your credit score. For better understanding of credit, check out this article. Our office at www.asapcreditrepairusa.com is ready to provide guidance and support if you need help with your credit score or credit repair.