It's fascinating to learn that credit scores come in 30 different levels. What's surprising is that many people are unaware of this fact. Most folks looking to find the best credit score will typically turn to search engines like Google, only to be presented with a multitude of answers that can be confusing and misleading. My name is Joe Mahlow, and I'm proud to say that I've been working in the finance and credit repair field for over fifteen years. My objective is to provide you with straightforward advice on credit scores and other related topics. Having helped more than twenty thousand clients to improve their credit scores, I hope to share my knowledge and help you achieve the same. So let's delve right into it.
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Credit Scores
Credit Score Requirements for Common Mortgage Loan Types
Ideal Credit Score Range for Buying a Car
Tips for Improving Your Credit Score
Insights by Joe
Different Types of Credit Scores: FICO and Vantage
When it comes to credit scores, there are two primary models you need to be familiar with: the FICO model and the Vantage model. Understanding these scoring models is crucial since they calculate scores differently.
FICO Credit Score
The FICO scoring model is the most widely used and comes in eight different models, ranging from FICO 2 to FICO 10. Each model could provide a different credit score based on your credit report. To illustrate, a mortgage lender would most likely pull your FICO 5 credit report when you apply for a home loan, while a credit card company would use FICO 8 when deciding on your creditworthiness.
But why so many FICO scores? Credit reports have different weights, which means that significant factors for lenders will have a more substantial impact on the credit score than less critical ones. For example, if you're applying for a mortgage, the FICO 5 mortgage report would give more weight to your previous mortgage history, while a credit card company would focus more on your credit card history. If you want to see all your FICO scores, go to www.myfico.com and create an account.
Vantage Credit Score
The Vantage Score model is a new scoring model developed by the three major credit reporting agencies – Equifax, Experian, and TransUnion – as an alternative to FICO. Although FICO dominates the lending industry, Vantage is growing popular for personal loans and auto lending.
The Vantage Score provides a free credit report from several credit monitoring websites. However, since it is not widely used for lending purposes, the score might not be accurate. Still, it can give you a general idea of your overall credit score. Vantage's accuracy could vary since FICO is the most accepted scoring model, but I believe the Vantage Score will widely be used in the next 5-10 years since it's up-to-date and provides better scoring data.
Understanding Credit Scores
Credit scores from both the FICO and Vantage models range from 350 to 850, with 850 being the highest score and 350 being the lowest. It's critical to know where you stand as you improve your credit score, so we'll take a look at some important score thresholds.
620 or below
A score less than 620 is considered bad credit and indicates an unfavorable credit history, high balance credit card accounts, or no credit card usage at all. By paying on time and keeping ten active revolving credit accounts open, you can boost your score. Secured credit cards such as Credit Builder Card or OpenSky Credit Card can also assist you in improving your credit score. After reaching the 620 score range, you can apply for an FHA home mortgage.
640-680
Credit scores within this range are considered good, but derogatory marks or accounts on your credit can still exist. Credit cards with high balances and newly opened accounts can cause dips in credit scores. Still, the scores should recover shortly.
740+
Credit scores exceeding 740 are "super-prime" and will give you access to the best interest rates when applying for loans. Congratulations if you have over a 740 credit score because you belong to the top 20% of the US population. Always pay on time, manage your revolving credit card accounts well, and you'll have excellent credit.
Credit Score Requirements for Common Mortgage Loan Types
The minimum credit score requirement for buying a house depends on the type of mortgage loan you opt for. Federal regulations and government backing ensure that the requirements and guidelines for most mortgage loans are similar, but there are still some differences that you need to know. The three most popular types of mortgage loans are FHA loans, VA loans, and conventional loans, which we have outlined below:
1. Conventional Loans
Conventional loans are the most popular and often the most cost-effective loan option after VA loans. You don't need to maintain private mortgage insurance, an extra cost that would increase your down payment or monthly payment. PMI is meant to protect the lender in case you stop making payments on your loan. The credit score requirement for a conventional loan is 640 with a debt-to-debt ratio no higher than 43%.
2. FHA Loan
The FHA loan is intended for lower credit scores, usually between 580 and 619. While all loan programs have differing requirements, you should shop around for lenders that give you the best financial outcome if you are within the credit score limits. The FHA loan makes it necessary to have PMI for the first 11 years, which is an additional cost to be aware of. This loan has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan. Lastly, the down payment requirement for this loan is as low as 3.5%.
3. VA Loan
There isn't essentially a specific credit score requirement for a VA loan, but lenders look out for previous defaulted loans and government-owed past-due debts while pre-qualifying you. You must 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 your spouse died serving in the military. The VA loan usually offers the best interest rates and usually does not require a down payment.
Ideal Credit Score Range for Buying a Car
When purchasing a vehicle on credit, your credit history is more critical than your credit score in determining your eligibility. While a high credit score is still essential, it plays a lesser role in calculating the interest rate you are eligible for. A dealership will scrutinize your current and previous credit histories to evaluate the risks involved in extending credit to you. Those with past due auto loans or repossessions face more challenges securing approval for a loan, compared with those who don't. Although lenders specializing in bad credit would qualify anyone, they impose stringent requirements, such as high deposits and additional fees, to extend the loan. The dealership has to bear this fee, so expect to pay extra charges for the vehicle to mitigate the risks of defaulting on the loan.
Conclusion
In conclusion, you must have equity or a down payment to bolster your car-buying leverage on credit. While there is no specific credit score that guarantees car loan approval, a credit score of 680 or higher is ideal. A score below 680 increases the interest rate due to the higher risks involved. For instance, individuals with a credit score of 720 or above pay an average interest of $5,500 on a loan, while someone with a score of 580 or above would pay an average interest of $15,300. This shows how a higher credit score translates to a lower interest rate, ultimately affecting your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time and patience. It's important not to make irrational or bad decisions that could make your problems worse. Here are some things you can do right now to improve your credit:
1. Open 3-5 revolving credit accounts (credit cards).
Revolving credit is an excellent option to help you build your credit scores. For someone with limited credit or looking to rebuild their credit, obtaining a large loan may be difficult. Instead, consider opening a secured credit card like Open Sky or Credit Builder Card. Revolving credit makes up 30-35% of your overall credit score, so it's the best option if you're looking to build your scores quickly. Make sure to pay your balance on time and limit the use of the card to small purchases like gas or groceries.
2. Raise your limits.
Requesting a credit limit increase can increase your overall credit limits and lower your credit utilization percentage. To avoid damaging your credit scores, make sure your credit card balances don't exceed 30% of your overall limits.
3. Pay down your balances.
Keeping your balance low is essential to maintaining good credit. If you're unable to pay off your balances, make a plan to take a set percentage of your paycheck each month to pay them down. Avoid running up your balance after paying it off, since credit card spending habits play a major role in determining your overall credit score.
Remember, building good credit takes time and effort. But following these tips can help you improve your credit score in the long run.
Insights by Joe
Credit issues are something most of us have faced at some point in our lives. However, if you are serious about improving your credit situation, putting in the time and effort to work on yourself and your credit can lead to significant changes in your credit score, and you can break free from the vicious cycle of poor credit. While it takes hard work to build a great credit score, those who prioritize their credit and spending habits will succeed. Getting started with a budget and rooting out bad spending habits is essential to boosting your credit score. This article provides valuable insights into understanding credit. If you need guidance or help to repair your credit, don't hesitate to contact my office at www.asapcreditrepairusa.com.
- Most consumers get bogged down by credit issues and believe that good credit is impossible to achieve.
- By prioritizing credit and focusing on spending habits, you can develop a great credit score.
- Creating a budget and fixing bad spending habits can have a direct positive impact on your credit score.
- To obtain guidance and help with your credit score or repair, visit www.asapcreditrepairusa.com.