It may come as a surprise to many, but there exist 30 distinct levels of credit scores. Despite being aware of this fact, it is common for people to struggle with the task of identifying the best credit score as a simple Google search can lead to a barrage of conflicting and confusing information. This problem is further compounded by many misleading sources that can steer individuals down a precarious path. My name is Joe Mahlow and I have been immersed in the financial literacy and credit repair space for the last 15 years. My objective is to provide you with unadulterated advice on a range of pertinent issues, such as credit scores. Having assisted over twenty thousand clients in restructuring their credit scores, I am confident that I can offer you adequate information to enable you to achieve the same. So let us delve into the subject matter.
Contents:
Understanding the Different Types of Credit Scores
Understanding Credit Scores
Credit Score Requirements for Different Mortgage Loan Types
Importance of Credit History in Car Financing
Ways to Improve Your Credit Score
Tips from Joe on Improving Your Credit Score
Understanding the Different Types of Credit Scores
To comprehend credit scores better, you need to know about two popular scoring models: FICO and Vantage. Knowing these models is significant because it helps you understand how they compute your credit scores.
FICO Credit Score
FICO is the most widely used scoring model, with eight different types, from FICO 2 to FICO 10. Each model may generate a different credit score from your credit report, but it depends on the lender and the purchase you make. Thus, if you apply for a home loan, the mortgage lender will most likely check your FICO 5 credit report, while a credit card application typically prompts a FICO 8 report.
Why are there many FICO scores?
Different types of credit reports may have diverse effects on your credit score. Thus, lenders use various FICO types to determine which factors weigh heavily on your score. For instance, mortgage lenders use FICO 5 scores to gauge your previous mortgage history, while credit card companies primarily use FICO 8 for previous credit card history. By signing up with myfico.com, you can see all your FICO scores.
Vantage Credit Score
The Vantage Score is a newer scoring model designed by Equifax, Experian, and TransUnion. Although not as widely used as FICO, Vantage's credit reports are free to access on several credit monitoring websites. Some sectors like personal loans and auto lending are beginning to use Vantage as a scoring model.
Accuracy of the Vantage Score
While the Vantage Score is accurate, its accuracy for lending purposes is limited since it is not widely used. FICO is still the standard scoring model used in most lending-related situations. However, using your Vantage score can give you a general idea of your FICO score. With the Vantage Scoring model's growing popularity, it's likely that lenders will use it more in the next 5-10 years. Though some view the FICO scoring model as outdated, credit reporting agencies have the best data, making their scoring data valuable and reliable.
Understanding Credit Scores
Credit scores are calculated by both the FICO and Vantage models, on a scale of 350 to 850. A score of 350 is the worst possible credit score, while 850 is the best. If you want to achieve the best score, it's imperative to know where you stand and, to make this easier, here are some vital score thresholds to aim for:
1. 620 or below
Having a credit score of 620 or below is terrible. It suggests that you may have adverse credit history, high-balance credit card accounts, or no credit cards at all. The best way to improve your scores is to pay your bills on time and have ten open revolving credit accounts. Credit Builder Card or OpenSky Credit Card can be a great place to start if you're looking for secured credit cards that can help you build your credit. Once you reach the score range of 620, you can qualify for an FHA home mortgage.
2. 640-680
If your credit score falls within the range of 640-680, your credit is considered fair for good. Although you have established credit, your profile may have some derogatory marks or accounts on your credit, and you may have some high balances on your credit cards that need to be paid down. Additionally, newly opened accounts can temporarily lower your scores. However, don’t panic if you have recently opened a new account because this is just a temporary drop in your scores, and they will return.
3. 740+
Any credit score over 740 is classified as "super-prime" and grants you the best interest rates for most loans. You're among the 20% of the US population if you have a score of 740 or above. Congratulations on your achievement! Remember to always pay your bills on time and keep your revolving credit card accounts paid to stay in excellent shape.
Credit Score Requirements for Different Mortgage Loan Types
To qualify for a mortgage loan, the type of loan you choose will determine the credit score requirements. There are three popular loan types in the market, namely, conventional loans, FHA loans, and VA loans. All mortgage loans have different requirements and guidelines, and they may vary due to federal regulations and government backing.
Conventional Loans
Conventional loans are the most popular and the most cost-effective option for homeownership, except for VA loans. Unlike other mortgage loans, conventional loans do not require you to maintain private mortgage insurance (PMI), which increases the downpayment or monthly payment. Normally, conventional mortgages need a credit score of at least 640 and a debt-to-debt ratio no higher than 43%.
FHA Loan
Federal Housing Administration (FHA) loans are primarily for borrowers with lower credit scores, typically between 580 and 619. These loans are backed by the government, and borrowers will have to pay mortgage insurance premiums (MIPs) for at least 11 years. FHA loans usually have a higher debt-to-income ratio of up to 50%, permitting homebuyers with low income to purchase more homes. Additionally, FHA loans have a lower downpayment requirement of 3.5%, which means you can get into a mortgage with less money out of pocket but with higher interest rates.
VA Loan
VA loans are the ideal mortgage option for military veterans and active service members, with the best interest rates and no down payment requirement. Although VA loans do not have a tight credit score requirement, they check for defaulted loans and government-owed past-due debts when pre-qualifying you. To be eligible for a VA loan, you must have served at least 181 days in the armed forces or 90 consecutive days during wartime. Furthermore, National Guard members who served for six years or any spouse whose military spouse died during active duty is also eligible for a VA loan.
Importance of Credit History in Car Financing
When it comes to buying a car, your credit score alone is not the only deciding factor in determining your loan approval. Your credit history plays a vital role in this process. Though a high credit score is beneficial, it has a minor role in the interest rate you may qualify for.
To illustrate further, car loan providers scrutinize your past and current credit histories to discern the risk involved in extending credit. Individuals who have defaulted, been late on prior loans or had a repossession would face more difficulties in securing a loan than those who have a reliable credit history. However, bad credit or special finance lenders may still grant loans to anyone, even those with a history of repossession, but with added criteria, you need to fulfill, such as a higher down payment and dealership fees. Dealerships may charge for their assistance as well to cover the loan risk. If you want the best bargaining position, having equity or a down payment is recommended.
There is no specific credit score range that guarantees approval since various factors come into play. However, the ideal credit score for a new vehicle is over 680. Anything lower than this score may increase the interest rate you have to pay because of your perceived risk to the lender.
To further understand how different credit scores can impact interest rates, consider this example:
A score of 720 or above pays an average of $5,500 in loan interest.
A score of 680 or above pays an average of $6,600 in loan interest.
A score of 650 or above pays an average of $8,100 in loan interest.
A score of 615 or above pays an average of $10,200 in loan interest.
A score of 580 or above pays an average of $13,900 in loan interest.
A score of 580 or above pays an average of $15,300 in loan interest.
Thus, it can be seen that higher credit scores lead to lower interest rates, thereby affecting your overall credit score positively.
Ways to Improve Your Credit Score
If you want to increase your credit score, you need to be patient and understand that it will take some time to build credit. Making irrational and hasty decisions with your credit can do more harm than good. But there are several things you can do right now to improve your credit, such as:
1. Get several revolving credit accounts:
Revolving credit—such as credit cards—is a good option to help you increase your credit score. To get approval, it is recommended that you start with a secured credit card that doesn't emphasize your credit score but focuses more on your ability to pay the card on time.
2. Request a credit limit increase:
Having active revolving credit cards allows you to request a credit limit increase for your credit cards, which can help increase your overall credit limits and lower your credit utilization percentage.
3. Pay down your balances:
Keeping your balance close to zero is critical and will help your overall credit score. If you have high balances, make a game plan to pay them down and ultimately stop using them.
By following these tips, you can improve your credit score over time and increase your chances of getting approved for loans, credit cards, and other credit-related services.
Tips from Joe on Improving Your Credit Score
It's not uncommon to have a less-than-perfect credit score, but taking your credit situation seriously and putting in the time and effort to work on it can lead to significant improvements. Unfortunately, many people with bad credit get stuck in a cycle of credit issues and feel like having good credit is impossible. However, developing a great credit score requires effort and attention to spending habits. Starting with creating a budget and fixing bad spending habits can quickly improve your credit score. If you're struggling with your credit and need guidance or assistance with credit repair, contact my office today at www.asapcreditrepairusa.com.
Key points:
1. Serious effort and attention can lead to significant improvements in credit scores.
2. Developing a great credit score takes time and prioritization.
3. Fixing bad spending habits and creating a budget can quickly improve credit scores.