It's a common misconception that there is only one type of credit score. In reality, there are actually 30 different levels of credit scores that exist. When individuals search for information on what constitutes a good credit score, they often receive a variety of conflicting answers from various sources online. This can lead to confusion and misunderstanding in regards to credit scores. As someone who has worked within financial literacy and credit repair for more than fifteen years, I understand the importance of providing clear and concise advice regarding topics such as credit scores. Throughout my career, I have helped over twenty thousand clients improve their credit scores, and I hope to offer you enough information to do the same. So, let's get started!
Contents:
Different Types of Credit Scores: An Overview
Qualifying Your Credit Score
Qualifying Credit Score for Home Loans
Determining Credit Score for Buying a Car
Strategies for Improving Your Credit Score
Final Thoughts from Joe
Different Types of Credit Scores: An Overview
Understanding the different credit scoring models is crucial to managing your credit. There are two primary credit scoring models: FICO and Vantage. Here is what you need to know about each model:
FICO Credit Score
The FICO credit scoring system is the most popular and widely used model in the US. It consists of eight different models, from FICO 2 to FICO 10, which lenders use depending on their requirements. Mortgage lenders mostly use FICO 5, credit card companies primarily use FICO 8, and auto lenders use FICO 2. The different models are necessary because each credit report has a unique "weight," meaning that specific factors have a more significant impact on the score for that lender. Therefore, previous mortgage history will weigh more heavily on a FICO 5 mortgage report, while previous auto history will weigh more heavily on a FICO 2 report. You can view all your different credit scores on www.myfico.com.
Vantage Credit Score
Developed by the three major credit reporting agencies, the Vantage Score was introduced to compete with FICO. Although it is new compared to FICO, some sectors, such as personal loans and auto lending, are using Vantage as a scoring model. While it is accurate, its lack of use in lending means it does not reflect your actual lending score accurately. However, viewing your Vantage score can provide a general idea of your FICO score. In the next 5-10 years, lenders may begin to use the Vantage model more widely.
Understanding the details of the various credit scoring systems is vital to maintaining a good credit score and securing loans.
Qualifying Your Credit Score
Both the FICO and Vantage scoring models are set on a scale of 350 to 850. The upper score limit is for the best score, while the lower score limit is for the worst score you can have. When you're aiming to improve your credit score, you need to estimate where you stand on the journey of building credit. Here are some score thresholds you should know:
1. 620 or below:
If you have a score below 620, you have bad credit. You may have a history of adverse credit or high-balance credit card accounts, or you may be someone who generally doesn't have any credit cards. To improve your credit score, it's essential to make timely payments and have ten active revolving credit accounts open. Consider getting a secured credit card such as the Credit Builder Card or OpenSky Credit Card to build your credit score. Once you cross the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680:
A score in the 640-680 range is considered fair for good credit. It usually means that you've established credit, but you may have some derogatory marks or accounts on your credit reports. You may have high balances on your credit cards that you need to pay down, or you may have recently opened a new account that can temporarily dip your score. If you're in this range, don't panic; your score will eventually return, so try to keep up with your payments and improve your credit mix.
3. 740+:
Any score that exceeds 740 is considered "super-prime" and allows you to get the best interest rates for most loans. If you fall under this category, congrats! You're part of the 20% of the US population with a score that exceeds 740. Continue making timely payments and keeping your revolving credit card accounts paid to remain in great shape.
Qualifying Credit Score for Home Loans
The qualifying credit score for a home loan varies depending on the type of loan being considered. There are three main types of mortgage loans: Conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are widely popular loans and offer the best value to non-veterans who are not entitled to VA loans. They provide lower interest rates, require lower down payments, and do not demand private mortgage insurance. However, conventional loans come with minimum credit score requirements of 640 as well as a maximum debt-to-debt ratio of 43%.
FHA Loans
FHA mortgage loans usually come with lower credit score requirements of between 580 and 619. They require PMI for at least 11 years you purchase, which could impact your budget. However, you can secure an FHA loan with a downpayment as low as 3.5% of the purchase. FHA income limits are usually higher than those for conventional loans.
VA Loan
The VA does not technically set a minimum qualifying credit score, but they look out for any government-owed overdue debts. The VA loan usually comes with the best interest rates for veterans and does not require a down payment. However, you must have served in the military for at least 181 days, served for 90 consecutive days during wartime, or served for six years in the National Guard.
Determining Credit Score for Buying a Car
When it comes to buying a car, your credit history carries more weight than just your credit score. Though a high credit score is essential too, it affects your interest rate less. Lenders assess your creditworthiness by looking at past and present credit records rather than solely credit scores. Those with lower scores face greater reluctance for loan approvals due to the risk associated with extending credit. Even if you have bad credit or repossessions, certain lenders emphasize approving anyone for a car loan by imposing more strict criteria like higher fees and down payments. Often, such lenders may choose the vehicle that has a higher markup to make up for these fees and dealership payment necessary for the loan approval. For buying a car on credit, having equity or down payment offers the most leverage.
Credit Score Range for a New Car
There is no minimum credit score requirement for approval as other factors are also evaluated. Regardless, a credit score above 680 is advised. Interest rate on a loan increase with a lower credit score due to the risk factor. As credit score changes, the interest cost increases or decreases as demonstrated below:
1. A person with a 720 credit score or above pays on average $5,500 interest on a loan.
2. A person with a 680 credit score or above pays on average $6,600 interest on a loan.
3. A person with a 650 credit score or above pays on average $8,100 interest on a loan.
4. A person with a 615 credit score or above pays on average $10,200 interest on a loan.
5. A person with a 580 credit score or above pays on average $13,900 interest on a loan.
6. A person with a credit score of 580 or above pays on average $15,300 interest on a loan.
From this data, it is evident that a higher credit score reduces the amount of interest and positively affects the overall credit score.
Strategies for Improving Your Credit Score
If you desire to increase your credit score, there are several important steps that you can take. First, keep in mind that building good credit takes time. It's a long-term process that requires patience. Acting impulsively or making poor decisions may actually hurt your credit score in the long run. To enhance your credit score, take the following actions:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is an ideal way to improve your credit score. Secured credit cards, such as Open Sky or Credit Builder Card, offer opportunities for approval regardless of your credit score. To improve your credit score, use your credit card to make small purchases like gas and groceries. Pay your balance on time and maintain a balance of $5-$10.
2. Raise your limits:
By requesting a credit limit increase for your credit cards, you can increase your overall credit limits and lower your credit utilization percentage. Avoid using your credit card above 30% of your overall limits by requesting a "Credit Limit Increase" from your credit card company. They will require information like your current income, and they prefer 7-15 months of credit card payment history.
3. Pay down your balances:
Lowering your balances reduces your credit utilization and is one of the simplest ways to improve your credit score. Rather than using your credit cards each month, use them for small purchases. Pay your bill each month and maintain a $1-$5 balance on your credit cards. If necessary, create a payment plan to reduce your balance gradually.
Final Thoughts from Joe
We have all experienced having poor credit at some point in our lives. The good news is that if you are committed to improving your credit situation, you can make significant progress in a short period. Unfortunately, many people with bad credit resign themselves to a lifetime of financial difficulties, thinking that good credit is unattainable. However, a great credit score takes time and effort to develop, but it is possible. By prioritizing your credit and making necessary changes to your spending habits, you can improve your credit score significantly. One way to start is by creating and sticking to a budget. This article aims to enhance your understanding of credit, but if you need assistance with credit repair or guidance, don't hesitate to contact our office at www.asapcreditrepairusa.com.