It may surprise you to learn that your credit score can actually be categorized into 30 different levels. Most people who are searching for information on credit scores are often overwhelmed with the vast amount of conflicting advice found on Google. This can lead to confusion and uncertainty about what steps to take in order to improve their credit score. My name is Joe Mahlow, and I have been working in the financial literacy and credit repair industry for over fifteen years. It is my mission to provide you with accurate and reliable information on topics such as credit scores. With my expertise, I have been able to assist more than twenty thousand clients in successfully improving their credit scores. My goal is to empower you with the knowledge and resources needed to do the same. So, let’s dive into the topic of credit scores and get started!
Contents:
Understanding the Various Credit Scoring Models
Understanding What Consists a Good Credit Score
What Credit Score Is Needed to Buy a House?
Factors That Determine Car Loan Eligibility
Tips to Boost Your Credit Score
Tips from Joe on Improving Your Credit Score
Understanding the Various Credit Scoring Models
Different credit scoring models exist, and it's essential to comprehend their differences and how they calculate credit scores. The two main models include the FICO and Vantage scoring models. The FICO model is the most widely used, with eight different models, FICO 2 to 10, with each yielding a different credit score based on the credit report used. When applying for credit, lenders pull various FICO models, such as FICO 5 for a mortgage or FICO 8 for a credit card. Each report has a different "weight," and the critical factors to the lender will have a more significant impact on the credit score. The Vantage score was developed by the three major credit reporting agencies to compete with the FICO model. Although it's accurate, it's not widely used for lending purposes, making the FICO score more recognized. Nonetheless, it's a good idea for acquiring a general idea of one's FICO score. Credit monitoring websites use the Vantage score to provide a free copy of the credit reports. As lending standards change, the Vantage model might become more widely used by lenders. However, FICO still dominates the lending sector. It's also important to visit myfico.com to get a better visual representation of one's various FICO scores.
Understanding What Consists a Good Credit Score
Credit scores can range from 350 to 850 in both the FICO and Vantage models. Ideally, having 850 credit score would be the best, whereas having a 350 credit score would be considered the absolute worst. In your pursuit of achieving a higher credit score, it's crucial to understand where you stand on the scoring spectrum. Therefore, below are some credit score benchmarks to consider:
1. 620 or Below
A score of 620 or less falls into the bad credit group; you might have encountered some adverse credit history, high-balance credit card accounts, or no credit card at all. Making prompt payments and having ten active revolving credit accounts is the most effective way to enhance your credit score. Using the secure Credit Builder Card or OpenSky Credit Card can help you develop your credit. If your score falls in this category, you can start qualifying for an FHA home mortgage.
2. 640-680
Scores within this range are deemed fair for good credit. It usually means that you've established credit, although you might have some derogatory marks, high credit card balances, or newly opened accounts, causing a temporary drop in your scores. Fortunately, as you pay down your balances, your scores will improve and eventually stabilize.
3. 740+
Scoring over 740 is considered "super-prime," with the most favorable interest rates granted for most loans. It's an impressive feat since scoring 740 puts you in the top 20% of the population. Kudos to you! Paying accounts on time and maintaining well-balanced revolving credit card accounts is essential in keeping your score in this range.
What Credit Score Is Needed to Buy a House?
Knowing the appropriate credit score needed to purchase a home largely depends on the type of mortgage loan you are seeking, as each loan type has different requirements and guidelines. Here is an overview of the three most common mortgage loan types and their associated criteria:
1. Conventional Loans
- Typically the most preferred loan type outside of VA loans
- No requirement to maintain private mortgage insurance (PMI)
- Requires a minimum credit score of 640
- Debt-to-debt ratio must not exceed 43%
2. FHA Loans
- Designed for those with lower credit scores between 580 and 619
- Requires PMI for at least 11 years
- Allows for debt-to-income limits of up to 50%
- Downpayment requirements can be as low as 3.5%
3. VA Loans
- No specific credit score requirement, but pre-qualification includes a check for previous defaulted loans and government-owed past-due debts
- Typically for those who have served in the military or have a spouse who lost their life during active duty
- Offers the best interest rates available
- Does not usually require a down payment
Remember to shop around for lenders to find the loan program with the best financial options for you.
Factors That Determine Car Loan Eligibility
When it comes to qualifying for a car loan, your credit history is more crucial than your credit score. Although having a high credit score is advantageous, it's not the sole determinant of the interest rate you qualify for. Lenders scrutinize your past and present credit histories to assess the likelihood of you defaulting on the loan. Those with poor credit or a repossessed vehicle face more significant challenges in obtaining a car loan. While some dealerships may still extend loans to such individuals, they add specific criteria, such as additional fees and higher down payments, to minimize the risk of default. In addition, they may limit the vehicles approved for purchase to those with higher markup to cover the risks involved. Therefore, having a down payment or equity is crucial when seeking a car loan.
Loan Approval Based on Credit Score
While there's no set credit score to guarantee loan approval, scores over 680 are desirable. Anything below this score will attract higher interest rates due to the risk you pose to the lender. The table below illustrates how the interest rate on a car loan increases as the credit score decreases:
Credit Score of 720 or above will pay, on average, $5,500 in interest on a loan.
Credit Score of 680 or above will pay, on average, $6,600 in interest on a loan.
Credit Score of 650 or above will pay, on average, $8,100 in interest on a loan.
Credit Score of 615 or above will pay, on average, $10,200 in interest on a loan.
Credit Score of 580 or above will pay, on average, $13,900 in interest on a loan.
Credit Score of 580 or above will pay, on average, $15,300 in interest on a loan.
From the statistics, it's evident that having a high credit score reduces the total interest paid on a car loan.
Tips to Boost Your Credit Score
Building your credit score is not an easy task, but it can be done with patience and the right steps. While it takes time, there are some simple things you can do right now to improve it. Follow these important steps for increasing your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit, such as credit cards, can help you boost your credit scores quickly. It may be challenging to build credit by taking out large loans, but getting approved for a secured credit card like OpenSky or Credit Builder Card can give you a better chance. Revolving credit makes up 30-35% of your overall credit score. Make sure to pay your balance on time and keep it low, preferably at $5-10, and limit card use to small purchases.
2. Request a Credit Limit Increase
Calling your credit card company and requesting a credit limit increase can lower your utilization percentage, which will ultimately raise your credit score. Different credit card companies have different processes, but they will likely want to see several months of excellent payment history before approving your request.
3. Pay Down Your Balances
Maintaining a low balance and staying close to paying it off is essential to your credit score. It is not imperative to use your credit cards every month. Instead, limit them to small purchases, and try to avoid carrying a high balance. If you currently have a high balance and cannot pay it off immediately, make a plan to pay it off gradually. By limiting your credit card usage, you can work towards improving your overall score. Remember, most of your past payments will go towards the interest rather than principal, so it is essential to reduce your credit card usage.
Tips from Joe on Improving Your Credit Score
We have all encountered a less than stellar credit situation at some point. However, taking your credit status seriously and committing to self-improvement can result in significant improvements to your credit score in no time. Many individuals plagued with poor credit tend to think it impossible to achieve a good credit score again and fall into a cycle of credit complications. The truth is that it requires hard work to develop an excellent credit score, and individuals with a credit priority mindset and better spending habits are the ones who ultimately succeed. Kickstart the credit improvement journey by creating a budget and identifying negative spending habits that affect your credit score. Reach out to my office at www.asapcreditrepairusa.com for guidance or credit repair assistance. Remember, understanding credit is key.
Key takeaways:
- Commit to self-improvement for a better credit score.
- Having poor credit doesn't mean it's impossible to improve.
- Better spending habits will reflect positively on your credit score.
- Reach out to professionals for guidance on credit repair or enhancement.