With 30 different levels of credit scores, it can be easy to get lost in the search for the best score. Google can offer a range of information on the topic, but sometimes the abundance of options can be overwhelming or even misleading. As someone who has spent over fifteen years working in financial literacy and credit repair, it's important to me to offer raw advice on important topics like credit scores. My name is Joe Mahlow, and I've successfully helped more than twenty thousand clients improve their credit scores. Today, I want to share my knowledge on this subject in the hopes that I can empower you to do the same. So, let's dive in!
Contents:
Differentiating FICO vs. Vantage Credit Scores
Understanding Credit Scores: A Guide
What Credit Score Do You Need to Buy a House?
Determining Your Credit Score Range for Buying a Car
Simple Ways to Increase your Credit Score
Joe's Advice on Improving Your Credit Score
Differentiating FICO vs. Vantage Credit Scores
Understanding credit scores is vital in evaluating your financial situation. Two scoring models you should be familiar with are FICO and Vantage. This article explains the differences between these models and why they use multiple scores.
FICO Credit Score
The FICO scoring model is the most widely used in America with eight different models, from FICO 2 to FICO 10. Each model generates a different credit score depending on factors that lenders view as relevant. To provide an example, a mortgage lender might use FICO 5 credit report to determine your creditworthiness, while credit card lenders use FICO 8 credit report. This difference in reports is due to the report "weighing" varying factors. Furthermore, each report weighs more heavily on certain types of credit history, such as a mortgage or credit card background.
Vantage Credit Score
Developed by Equifax, Experian, and TransUnion, the Vantage Score scoring model was created to rival the FICO model. While frequently used by credit monitoring websites to offer free credit reports, it still isn't as widely accepted as FICO, especially by lenders focusing on personal loans and auto lending. Nevertheless, the Vantage Score offers a general idea of your FICO score based on the data that agencies have on you.
Vantage vs. FICO
FICO has been used since the seventies and has its drawbacks. On the other hand, Vantage is a modern model that accurately predicts consumer behavior. However, loan approvals are based on FICO scores, making it the more important of the two.
Understanding Credit Scores: A Guide
Credit scores are crucial when it comes to obtaining loans, credit cards, and mortgages. Both the FICO and Vantage models use a scale of 350 to 850 to rate individuals. Those with a score of 850 have the best credit score possible, while those with a score of 350 have the worst credit score. Here are some important score thresholds you should keep in mind while building your credit:
- 620 or Below: This range is considered bad credit, and may indicate a history of adverse credit, high-balance credit cards, or no credit cards at all. To improve your credit score, focus on making timely payments, and keep ten active revolving credit accounts open. You can consider applying for the Credit Builder Card or OpenSky Credit Card, which are secured credit cards that can help boost your score. Once you reach the 620 credit score range, you can qualify for an FHA home mortgage.
- 640-680: With credit scores falling in this range, it usually means you have established credit, but there may be some derogatory marks, high balances on your credit cards, or newly opened accounts that can temporarily lower your score. It is essential to pay down high balances and not panic if your score drops temporarily.
- 740+: Any credit score over 740 is considered "super-prime" and will give you the absolute best interest rates for most loans. Congratulations if you have a score above 740, as you are part of the 20% of the US population with this score. Keep up the great work by paying your accounts on time and keeping your revolving credit card accounts paid. You will be in excellent shape for obtaining loans in the future.
What Credit Score Do You Need to Buy a House?
The credit score required to buy a house varies depending on the type of mortgage loan you are applying for. Mortgage loans are regulated by the federal government, so the requirements and guidelines are generally similar among lenders, but some differences may exist. The three most common types of mortgage loans are the conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans are the most popular mortgage loans and are the best option for those not using VA loans. These loans do not require private mortgage insurance, which saves money for the borrowers as it may not be cheap. Compared to several other loans, conventional loans have low down payment requirements and better interest rates. To qualify, you need a credit score of 640 and a debt-to-debt ratio that does not exceed 43%.
2. FHA Loans
This mortgage loan is for people with low credit scores, ranging between 580 and 619. However, loan programs differ among lenders. Therefore, it is essential to research different lenders to get the best financial option for you. PMI is mandatory for the first 11 years of the loan, which is an additional cost to the borrowers. FHA loans have a higher debt-to-income limit of up to 50% compared to conventional loans, allowing you to purchase more homes with reduced income. You can also get a loan with a down payment as low as 3.5% of the purchase price, but you will have a higher interest rate than conventional loans.
3. VA Loans
While the VA Loan technically doesn't require a credit score, lenders consider previous defaulted loans, government-owed past-due debts during prequalification. To qualify for a VA loan, you may have served in the United States military for at least 181 days, served 90 days during wartime, served six years with the National Guard, or lost a spouse during active military duty. VA loans have lower interest rates, and a down payment is typically not required. These loans are ideal for veterans, and most of the time, they save a considerable amount of money.
Determining Your Credit Score Range for Buying a Car
When it comes to purchasing a car, having a good credit score is important, but your credit history is even more crucial in determining what you qualify for. While a higher credit score plays a part in the interest rate, the risk involved in extending credit is determined by current and previous credit histories. Those with credit issues, like late payments or a repossession, may face challenges when getting approved for a loan. However, bad credit or special finance lenders can qualify almost anyone for a car loan, albeit under stricter criteria. The dealership may also add fees to lessen the risk of defaulting on a loan. To have leverage when buying a car on credit, a down payment or equity is recommended.
Regarding the credit score range for a new vehicle, there's no exact number that guarantees approval as many other factors are at play. However, a credit score above 680 is ideal, as anything below increases the interest rate. The data shows that a higher credit score results in paying less interest on a loan, which can affect your overall credit score. Here's an example of how credit score affects the amount of interest paid on a loan:
- Score of 720 or above - $5,500 in interest on average.
- Score of 680 or above - $6,600 in interest on average.
- Score of 650 or above - $8,100 in interest on average.
- Score of 615 or above - $10,200 in interest on average.
- Score of 580 or above - $13,900 in interest on average.
- Score of 580 or below - $15,300 in interest on average.
Overall, your credit history is an important aspect to consider when purchasing a car, but having a good credit score can also positively impact your loan's interest rate.
Simple Ways to Increase your Credit Score
Raising your credit score requires time and patience, but there are steps you can take now to start the process. Impulsive decisions with credit will often hinder your progress, so it's essential to do this carefully. Here are a few simple techniques you can try:
- Open 3-5 revolving credit accounts
- Raise your credit limits
- Pay down your balances
Revolving credit, like credit cards, is an excellent way to build your credit score, especially if you have limited credit history. Secured credit cards, such as the Open Sky or Credit Builder Card, are good options to start with. It usually takes a few months before the increase in your credit score becomes visible, but it's worth it. Use your credit card for small purchases and ensure that you pay off your balance on time each month.
Increasing your credit limits can lower your credit utilization percentages. You can check with your credit card company to see if you're eligible for a limit increase. They might require you to provide your current income information and good credit history before granting your request.
Keeping your balance low can significantly impact your credit score. Make sure that you pay more than the minimum monthly amount, and try to keep your balances close to zero. If you're struggling to pay your credit card bills, start by paying off a portion of your debt each month and stop using the card to prevent adding more debt.
Remember, building your credit score requires discipline and persistence. Take small steps and exercise patience, and soon, you'll see the results that you're working towards.
Joe's Advice on Improving Your Credit Score
It's common to have less than perfect credit, but don't lose hope. By taking a serious approach to assessing and improving your credit situation, you can see significant changes in your credit score in a short time. Many people get stuck in a cycle of poor credit, assuming it's impossible to turn things around. However, it takes hard work and dedication to build a strong credit score. The key is to prioritize your credit and address any negative spending habits. Start by creating a budget and focusing on fixing any problem areas. By doing so, you will see your credit score reflect this improvement. This article provides valuable information on credit, but if you need additional guidance or assistance with credit repair, don't hesitate to contact our office at www.asapcreditrepairusa.com.
Key Takeaways:
- It's possible to improve your credit score quickly with dedication.
- Prioritizing your credit and addressing negative spending habits is key.
- Creating a budget is a good first step towards improving your credit.