It's a little-known fact that 30 different credit score levels exist. Unfortunately, Google's search results can yield confusing and misleading information when you're trying to determine the best score. But don't fret! My name is Joe Mahlow and I've spent over 15 years in the financial literacy and credit repair industry. My aim is to provide you with honest advice on various topics, including credit scores. Over the years, I've successfully helped over 20,000 clients boost their scores and I'm confident that the following information will do the same for you. So buckle up, and let's dive in!
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding credit scores
What is the ideal Credit Score to Qualify for a Mortgage?
Determining Creditworthiness for Buying a Car
How to Improve Your Credit Score: Tips and Tricks
Tips from Joe on How to Improve Your Credit Score
Different Types of Credit Scores: FICO and Vantage
Credit scores are essential for making financial decisions, but how they are calculated can be confusing. There are two primary credit scoring models: FICO and Vantage. Both models analyze various components of your credit history to generate your credit score. Here's a breakdown of each model and why multiple scores exist:
FICO Credit Score Model
The FICO model is the most widely used credit score model. With eight different FICO scoring models, your credit score can vary based on your credit report. Each model utilizes a different scoring methodology based on the lender's credit needs. For example, mortgage lenders typically use the FICO 5 score, while credit card companies use the FICO 8 score.
Why So Many FICO Scores?
Each FICO score weighs the different factors in your credit report differently. For instance, a FICO 5 mortgage report favors previous mortgage history, while a FICO 8 report emphasizes previous credit card history. Therefore, your credit score varies based on what is most important to the lender.
Vantage Credit Score Model
The Vantage Score model is a newer scoring model and was developed as an alternative to FICO. Although it is not widely used for lending purposes, it is gaining popularity in personal loans and auto lending. Credit monitoring websites typically use Vantage to provide you with a free copy of your credit report.
The Accuracy of Vantage Scores
While Vantage scores are generally accurate, they may not be as reliable as FICO scores when applying for a loan. Vantage scores provide a general idea of where your credit scores stand, but your FICO score is the one that lenders use to make decisions. The use of Vantage may increase in the next 5-10 years, but FICO currently dominates the lending sector.
Understanding credit scores
Under the FICO and Vantage models, credit scores are rated on a scale of 350 to 850. A score of 350 is the lowest, and 850 is the highest rating. When aiming for the best credit rating, it is essential to determine where you stand in the rankings. The following vital score thresholds will help you with this:
620 or below:
This is considered bad credit, indicating that adverse credit history, significant credit card balances, or no credit cards are present. To improve credit scores, timely payments and ten active revolving credit accounts are recommended. The Credit Builder Card or OpenSky Credit Card can help to build credit. Once your credit score reaches the 620 range, you can begin qualifying for an FHA home mortgage.
640-680:
Scores in this range are considered fair for good credit. It typically means that credit has been established but with derogatory marks, high balances on credit cards, or newly opened accounts that temporarily drop your credit scores.
740+:
A credit score above 740 is considered "super-prime," and provides the best interest rates for most loans. If you have this credit score, congratulations, you’re among only 20% of the US population with this score, so keep up the good work. Always pay your accounts on time, and keep your revolving credit card accounts paid off, you will be in great shape!
What is the ideal Credit Score to Qualify for a Mortgage?
To determine the credit score required to qualify for a mortgage, the type of loan you are seeking must first be considered. Mortgage loans differ due to government regulation and backing, specifically conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular mortgage type, and their credit score requirement is typically 640 while the debt-to-income ratio cannot exceed 43%. Private mortgage insurance (PMI) is not necessary, resulting in lower down payment requirements and better interest rates than other loan options.
FHA Loans
Comparatively, FHA loans cater to borrowers with a credit score range of 580-619, with higher debt limits of up to 50% and a lower down payment requirement of at least 3.5%. Although the FHA loan charges PMI for at least 11 years, borrowers with a low income level may obtain this type of loan.
VA Loans
On the other hand, VA loans do not have a specific credit score requirement, but the pre-qualification process checks for previously defaulted loans and government-owed past-due debts. A borrower must have served in the US military for a specific period to qualify for a VA loan. Nonetheless, the VA loan has the lowest interest rates and does not require a down payment, making it a perfect loan option for veterans.
Determining Creditworthiness for Buying a Car
Your credit history, rather than just your credit score, is the primary factor in determining your eligibility for a car loan. While a high credit score is essential, it influences the interest rate less than a borrower's credit history. Lenders examine your past and existing credit histories to assess the risk associated with offering you credit. Your loan application may be rejected if you've missed a previous or current auto loan or had a repossession. Dependable lenders will qualify almost anyone for a car loan, even if they have a repossession. However, the approval has specific requirements that you must comply with, such as a higher down payment and additional dealership fees. If you have bad credit, the dealership will choose the vehicle for you, which has a higher markup to cover the lenders' fee. Finally, to ensure that you have the most purchasing leverage, it's necessary to have equity or a down payment.
Ideal Credit Scores for New Cars
There is no specific credit score to determine loan approval, but a credit score over 680 is preferable. A score lower than this will increase the interest rate charged because of the additional risk. The following example illustrates how much interest you would have to pay based on your credit score:
For a loan, someone with a 720 credit score or higher will pay an average of $5,500 in interest.
For a loan, someone with a 680 credit score or higher will pay an average of $6,600.
For a loan, someone with a 650 credit score or higher will pay an average of $8,100.
For a loan, someone with a 615 credit score or higher will pay, on average, $10,200 in interest.
For a loan, someone with a 580 credit score or higher will pay, on average, $13,900 in interest.
For a loan, someone with a credit score of 580 or higher will pay, on average, $15,300.
This data shows that the higher your credit score, the lower the interest rate you will be charged, ultimately affecting your overall credit score.
How to Improve Your Credit Score: Tips and Tricks
Improving your credit score takes time and effort, and it won't happen overnight. The key is to remain patient and avoid making poor decisions that can negatively impact your credit. Here are some steps you can take right now to improve your credit score:
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Open several revolving credit accounts:
Revolving credit, such as credit cards, can help increase your credit score. For individuals with limited or damaged credit, obtaining a large loan can be challenging. A secured credit card, such as Open Sky or Credit Builder Card, can provide you with a better chance of approval. Revolving credit accounts make up 30-35% of your credit score, making it one of the best options to improve your credit score quickly. Paying your balance on time and keeping it within $5-$10 is essential; you should use the card mainly for small purchases such as gas or groceries.
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Raise your credit card limits:
Requesting an increase in your credit limit can improve your credit score by lowering your credit utilization percentage. Most credit card companies will have you fill out some necessary information to determine whether a credit limit increase is warranted. You need to have an excellent payment history for at least 7-15 months before requesting a credit limit increase.
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Pay down your balances:
Maintaining a low balance on your credit cards is advisable as it has a significant impact on your credit score. Avoid using your credit cards frequently, instead use it for small purchases. Pay only $1-$5 monthly on your credit card and plan your finances to pay off the balances in full each month. If you have high balances and can't pay them off right away, allocate a certain percentage of your paycheck each month towards paying it down until your balance is zero. Finally, it's crucial to limit your credit card usage as much as possible.
Tips from Joe on How to Improve Your Credit Score
Many of us have experienced the frustration of having less than perfect credit. However, if you are dedicated to improving your credit situation and willing to invest time and effort into yourself and your finances, you will be pleasantly surprised with the quick turnaround you can achieve in your credit score. It's all too common for people with bad credit to feel hopeless and trapped in a vicious cycle of financial instability. But developing a great credit score requires dedication and commitment, and those who give it their all will ultimately succeed. Begin by setting up a budget and identifying and addressing any negative spending habits; making improvements in these areas will have a direct impact on your credit score. This article provides valuable insights into understanding credit. If you require guidance or assistance with credit repair, don't hesitate to contact our office today at www.asapcreditrepairusa.com.
Key Points:
Taking credit seriously and investing time and effort will result in positive changes to your credit score.
Creating and sticking to a budget is a crucial first step in achieving better credit.
Improvement in spending habits is directly proportional to improvements in credit scores.
Do not feel helpless if faced with bad credit; dedication and commitment to repairing it are essential for success.