It may surprise you to learn that there are actually 30 distinct levels of credit scores. Due to the abundance of information available on the topic, it’s not uncommon for people to become overwhelmed when trying to research the best credit scores. Unfortunately, much of the advice available online can be misleading or hard to follow. My name is Joe Mahlow, and I’ve spent over 15 years helping individuals achieve financial literacy and improve their credit scores. My aim is to provide you with straightforward guidance on various topics, starting with credit scores. With my assistance, I’ve successfully helped more than 20,000 clients improve their credit scores, and I’m confident that I can help you too. So, without further ado, let's dive in.
Contents:
Understanding the Different Credit Score Models
Understanding Credit Scores
What is an Ideal Credit Score to Acquire a Home Loan?
Determining Your Creditworthiness When Buying a Car
Tips to Improve Your Credit Score
Credit Management Insights: Advice from Joe
Understanding the Different Credit Score Models
When it comes to credit scores, there are two primary models to be aware of: FICO and Vantage. Both are essential to understand as they differ in how they calculate your score.
The FICO Credit Score Model
The FICO credit score model is the most popular and widely used scoring system, with eight different models. Each model generates a different credit score based on the credit report. Lenders use different FICO models depending on the type of credit you are applying for. For example, a mortgage lender will most likely pull your Fico 5 credit report, while a credit card company will most likely use the Fico 8 model.
The reason for different FICO scores is that each credit report has different criteria that are weighted more heavily than others. For example, a FICO 5 mortgage report prioritizes previous mortgage history, whereas a FICO 8 report prioritizes credit card history. You can sign up for an account at www.myfico.com to see all your different credit scores.
The Vantage Credit Score Model
Developed by the three major credit reporting agencies, the Vantage model is a newer competitor to the FICO model, which has been in use since the 1970s. Credit monitoring websites often use Vantage to provide free credit reports, and some sectors, such as auto lending and personal loans, are starting to use it.
However, the Vantage score is not as widely used for lending purposes, so it may not be as accurate as your actual lending score. Instead, it can give you a good "general idea" of your FICO score, which is still the most recognized scoring model. In the future, the Vantage model may become more widely adopted due to its up-to-date scoring data.
Ultimately, credit reporting agencies have the most significant data collection outside social media, so they have the ability to provide the most accurate and up-to-date scoring data.
Understanding Credit Scores
Credit scores are essential for obtaining loans, credit cards, and even apartments. FICO and Vantage models range from 350 to 850, with higher numbers indicating better scores. Here are relevant score thresholds to remember:
1. 620 or below:
This signifies bad credit and implies that you may have adverse credit history, high-balance credit card accounts, or no credit cards. To improve your scores, you should make timely payments, have ten active revolving credit accounts open, and consider using secured credit cards like the Credit Builder Card or OpenSky Credit Card. Once you attain a credit score of 620 or higher, you can start qualifying for an FHA home mortgage.
2. 640-680:
This is fair, representing established credit with some derogatory marks, high balances on credit cards, or newly opened accounts that can temporarily reduce your scores.
3. 740+:
This super-prime range indicates excellent credit standing and provides the best interest rates for loans. Only 20% of the US population holds this score. Ensure that you pay your accounts on time and keep your revolving credit card accounts paid off to maintain this status.
Note: Always aim for the highest credit score possible, as it will open up more opportunities for you.
What is an Ideal Credit Score to Acquire a Home Loan?
The credit score requirement to obtain a home loan hinges on the kind of mortgage loan you are interested in securing. Different mortgage loans have various federal regulatory and government-backed guidelines and requirements to obtain one. The three common types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are extremely popular and arguably the best savings loan alternative outside of the VA loan. They do not require PMI, which can increase downpayment and monthly payment costs. PMI acts as a protective measure for lenders if you default on payment. Conventional loans typically have lower down payment requirements and better interest rates relative to other mortgage loans. These loans have a minimum credit score requirement of 640 and a debt-to-debt ratio of not more than 43%.
FHA Loan
The FHA mortgage loan is accessible to lower credit scores that usually range between 580 and 619. Loan programs vary with lenders, so check to see which ones provide the best financial option that suits you if you fall within the credit score limits. FHA loans will require you to keep PMI for at least 11 years, which can be a significant added cost to your mortgage and something to consider, particularly when budgeting. It permits a higher debt-to-income limit of up to 50% if you have a low income, enabling you to purchase more homes than a conventional loan can. Lastly, the downpayment requirements are as low as 3.5%, which means you can get a mortgage with less money out of pocket, although usually at a higher interest rate.
VA Loan
While there is no strict credit score requirement for VA loans, offering a comprehensive review of your previous defaulted loans and any overdue debts you owe the government is necessary during pre-qualification. To qualify, you need to have served in the military, for instance, serving for 181 days or more serving 90 consecutive days during wartime, serving for six years with the National Guard, or having a veteran spouse who died while on active duty. VA loans commonly have the lowest interest rates, and a down payment is not usually required. I believe it to be an excellent reward for our veterans.
Determining Your Creditworthiness When Buying a Car
When it comes to buying a car, your credit history is the most critical aspect of determining your eligibility for financing. While having a high credit score is important, it's not the only factor that lenders consider when offering interest rates. They also examine your past and present credit histories to evaluate whether extending credit poses a risk. For instance, having a history of late auto loan payments or a repossession can make it more difficult for you to get approved for a loan. Nevertheless, the worst credit or special finance lenders are willing to provide car loans to almost anyone, regardless of past repossessions, but with added requirements such as higher down payments and additional dealership fees. In such cases, dealerships pay the fee to help reduce the risk of a loan default. You might have experienced this if you have bad credit and have gone through a dealership, where they choose the car model you're eligible for because of the higher markup on the car to account for the fee. Additionally, it's essential to have equity or a downpayment when purchasing a vehicle on credit to have more leverage.
Although there is no exact credit score that can guarantee loan approval due to multiple factors involved, those above 680 are generally considered ideal for a new vehicle. Anything under this credit score range could increase the interest rate you pay because of the risk you pose to the lender. The overall interest rate charged is dependent on the credit score range which you fall in, with higher credit scores resulting in lower interest rates, affecting the overall credit score. Check out the following examples of how credit scores affect the interest rates on loans:
A credit score of 720 or above will pay, on average, $5,500 in interest on a loan.
A credit score of 680 or above will pay, on average, $6,600 in interest on a loan.
A credit score of 650 or above will pay, on average, $8,100 in interest on a loan.
A credit score of 615 or above will pay, on average, $10,200 in interest on a loan.
A credit score of 580 or above will pay, on average, $13,900 in interest on a loan.
A credit score of 580 or below will pay, on average, $15,300 in interest on a loan.
As you can see, the higher your credit score, the lesser you pay in interest rates, which impacts your overall credit score.
Tips to Improve Your Credit Score
There are several steps you can take to boost your credit score with minimal effort, though building a good credit score takes time and patience. You can take the following actions to start improving your score today:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, is an effective way to maximize your credit score even if you have limited or damaged credit history. Consider applying for a secured credit card from a trusted company like Open Sky or Credit Builder Card that prioritizes your ability to make timely payments over your credit score. Revolving credit accounts for 30-35% of your score, and properly using these accounts can yield rapid score increases.
2. Request a Credit Limit Increase
If you already have revolving credit accounts, you can usually call your credit card company to request a limit increase. This helps increase your overall credit limit, thus reducing your credit utilization percentage. Make sure you have made consistent, timely payments for 7-15 months before requesting an increase, as companies want to see a strong payment history.
3. Pay Down Balances
Keeping balances low and close to zero is critical for your credit score. You don't have to use your credit cards every month, and when you do, try to limit purchases to small, essential items. Leave a small balance of $1-5 each month to signal to creditors that you're using the account responsibly. If you have high balances, create a plan to pay down a portion of your debt each month. Don't run the balances back up, as this will hurt your credit score. High credit card rates often result in most payments going towards interest instead of principal.
Remember, patience is key when building credit. Resist the urge to make irrational spending decisions that will hurt your credit in the long run. Use the above tips to get started on improving and maintaining your credit score.
Advice from Joe
Admittedly, a lot of people have had to face the consequences of having poor credit in the past. The good news is that with a focused approach and a bit of hard work, you can dramatically improve your credit score in no time. Unfortunately, many individuals fall into the trap of perpetual credit woes, making it seem like a hopeless task to regain a good credit standing. Building a strong credit score indeed requires consistent and sustained effort. Those who place credit management at the top of their priority list and work on their spending habits will ultimately come out victorious. Starting with devising a budget and correcting your expenses, you can easily see changes in your credit score. This article offers valuable insight into credit management. If you need assistance in credit score improvement or credit repair, feel free to contact our office at www.asapcreditrepairusa.com.