Were you aware that your credit score can be categorized into 30 different levels? Many individuals are unaware of this fact. Although, when searching for information about credit scores, it’s likely you will encounter various opinions and perspectives from Google. It’s important to stay aware that some of this information may be confusing or even misleading, leading you to a dead end. As an esteemed individual in the financial literacy and credit repair field for many years, I am Joe Mahlow, a beacon of trust and wisdom when it comes to these topics. My objective is to provide sound advice based on my extensive experience and knowledge, actionably helping you and others improve credit scores. Over the last fifteen years, I have coached and aided over twenty thousand clients in transforming their credit scores. I aspire to use my expertise to guide and motivate you to achieve the same success. With that, let us dive further into the topic of credit scores.
Contents:
Exploring Different Types of Credit Scores
Determining a Good Credit Score
The Right Credit Score to Secure a Mortgage
Determining the Credit Score Range for Car Buyers
Ways to Improve Your Credit Score
Insights from Joe
Exploring Different Types of Credit Scores
When it comes to calculating your credit score, it is essential to understand the two common credit scoring models - FICO and Vantage. The FICO model, with its eight different versions ranging from FICO 2 to FICO 10, is the most widely used scoring model, impacting your credit score based on your credit report. Depending on the type of credit or loan you're applying for, your lender will pull a specific FICO score report. In contrast, the Vantage score, developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, offers a relatively new scoring model in competition with FICO.
FICO Credit Score
Multiple FICO scores exist because each credit report has a varying level of importance for lenders. For instance, if you apply for a mortgage, your lender will most likely access your FICO 5 score report, while a credit card application will lead to a FICO 8 score report. The FICO score report has different weights depending on the factors critical to the lender. Therefore, a great payment history on a previous mortgage heavily influences the FICO 5 score report compared to having negative or no history. The FICO 2 report is used by auto lenders, and your scores weigh heavily on the previous auto history.
Vantage Credit Score
The Vantage score provides a free copy of your credit report via credit overseeing sites using this scoring model. Although currently less popular compared to FICO, Vantage is gaining acceptance in some sectors, such as personal loans and auto lending. However, Vantage has a reduced accuracy in determining your lending score compared to FICO, which is the most widely recognized scoring model. Instead, the Vantage score provides a general idea of where your overall scores stand.
Final Thoughts
It is only a matter of time before lenders nationwide begin widely implementing the Vantage scoring model's use in the next 5-10 years. While the FICO scoring model is outdated and does not give a clear representation of your credit scores, credit reporting agencies, being major data collectors, possess the data used in providing the best scoring data. If you want a better understanding of your scores based on these two credit scoring models, creating an account on www.myfico.com will give you a visual representation of your different FICO scores.
Determining a Good Credit Score
Credit scores under both Vantage and FICO Models can range from 350 to 850. The lowest credit score is 350, and the highest achievable credit score is 850. It's crucial to recognize where you are in the score range as you attempt to achieve excellent credit scores. Here are some key thresholds to consider as you pursue your target.
1. 620 or lower
Having a credit score of 620 or less is classified as poor credit. A score below this level may indicate a history of negative credit behavior, such as high credit card balances or a lack of credit card use. Further enhancing your credit scores requires making timely payments and having ten active revolving credit accounts. The Credit Builder Card or OpenSky Credit Card are good options for secured credit cards that can help you grow your credit. Once you reach the 620 credit score range, you will be able to apply for an FHA home mortgage.
2. 640-680
Having a score of 640 to 680 is considered a fair rate for excellent credit. Scores in this range usually indicate that you have established credit, but there may be some derogatory marks or accounts on your credit, and you may have high balances on your credit cards that you must pay down. New accounts are another frequent occurrence, which can cause your scores to decrease temporarily. If you've recently opened a new account in this range, don’t be concerned; this is just a temporary decrease in your scores, and your scores will recover.
3. 740+
Having a credit score of 740 or more is "super-prime" and qualifies you for the most favorable interest rates on most loans. Congratulations if you have a credit score of 740 or better because you are part of the 20% of US citizens with excellent credit scores. Keep up the good work by paying all of your obligations on time and maintaining your revolving credit card accounts. Your credit will be in excellent standing shortly!
The Right Credit Score to Secure a Mortgage
There are different credit score requirements necessary to qualify for the various types of mortgage loans. Most mortgage loans have comparable requirements and guidelines dictated by federal regulations and government-backing. Below are the most sought-after mortgage loans that you can consider:
1. Conventional Loans:
Conventional loans, aside from VA loans, are the easiest on savings. They do not require you to obtain private mortgage insurance (PMI) which can increase your monthly payment or down payment. PMI is insurance that safeguards the lender in the event you stop making payments. The credit score requirement for this type of loan is typically 640, and the debt-to-debt ratio must not exceed 43%.
2. FHA Loan:
FHA mortgage loans require a lower credit score between 580 to 619, making it favorable for those with less-than-desirable credit ratings. However, the downside is that you will need to maintain PMI for a minimum of 11 years, which can become costly. With a higher debt-to-income ratio limit that can be as much as 50%, you could buy more homes than you'd be able to with a conventional loan if your earnings are low. Lastly, the minimum downpayment required for an FHA loan is only 3.5%.
3. VA loan:
The VA loan does not technically have a credit score requirement. However, they will examine your defaulted loans and government-owed past-due debts when pre-qualifying you. To qualify, you must have served a minimum of 181 days in the US Military, served 90 consecutive days during wartime, served in the National Guard for a minimum of 6 years, or your spouse must have lost their lives while on active duty. The VA loan usually has the most desirable interest rates and does not typically require a down payment. It's a perfect way of giving back to our veterans.
Determining the Credit Score Range for Car Buyers
When considering purchasing a car, your credit history plays a crucial role in determining your eligibility, rather than just your credit score. Although having a high credit score is important, it is only a contributing factor to the interest rate you qualify for. To evaluate your creditworthiness, potential lenders review your credit histories, including your current and previous auto loans. Having a history of delinquency or repossession makes getting approved for a car loan challenging, but not impossible, even for high-risk borrowers. Special finance lenders, for instance, may overlook poor credit scores but impose extra conditions, such as higher down payments and dealership fees, on loan approvals. Surprisingly, the dealership may need to pay the fee to help reduce the risk of default and grant you approval. Equity or a down payment remains vital when purchasing a financed vehicle.
Credit scores are not the sole determining factor, but a score above 680 is ideal. Lower scores pose higher risks for the lender, leading to increased interest rates for buyers.
For instance, higher credit score individuals with scores of 720 and above usually pay $5,500 in interest on average. Meanwhile, those with scores of 580 pay up to $15,300 in interest, according to recent data. Thus, the higher credit score you have, the lower interest rates you will pay, positively impacting overall credit reports.
Ways to Improve Your Credit Score
To enhance your credit score, there are several steps you can take with minimal effort. Building a good credit score takes time, so you must exercise patience, avoid irrational decisions, and be consistent in your efforts. Here are some things you can do right now to improve your credit:
1. Open 3-5 Revolving Credit Accounts:
Revolving credit is an excellent option for boosting your credit scores. Start with a secured credit card such as Open Sky or Credit Builder Card, which focus more on payment history than credit scores. Revolving credit makes up 30-35% of your overall credit score, and with it, you can increase your chance of approval and build credit scores quickly.
2. Raise Your Limits:
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. You can do this online through your online portal or by calling your credit card company and requesting a "Credit Limit Increase" after 7-15 months of excellent payment history.
3. Pay Down Your Balances:
Keeping your balance low and close to zero is important since outstanding balances can affect your credit score the most. Make small purchases on your credit card and leave about a $1-5 balance on them when paying your bill each month. Develop a game plan to pay down your balance if you have high balances and cannot pay them off immediately. Limit your credit card usage and avoid running up balances again since credit card spending habits play a massive role in your overall credit score.
Insights from Joe
We've all faced the challenges associated with poor credit. However, if you are committed to improving your creditworthiness, it is possible to substantially improve your credit score in a relatively short period. Many people with a history of bad credit become discouraged and resigned to a lifetime of financial struggles, but with effort and commitment, anyone can build a strong credit foundation. It takes dedication and discipline to establish a great credit score, but by taking steps like developing a budget and addressing any problematic spending habits, you will see progress reflected in your credit score. This article aims to provide a comprehensive understanding of credit. Whether you need guidance on how to boost your credit score or require credit repair services, don't hesitate to reach out to my office by visiting www.asapcreditrepairusa.com.
Points to remember:
Building good credit takes time and effort.
Don't give up, even if you've had bad credit in the past.
Establishing good credit requires prioritizing your credit and working on your spending habits.
Creating a budget is an effective way to get started.
The article helps improve your understanding of credit.
Contact Joe's office at www.asapcreditrepairusa.com if you need assistance with credit repair.