It may come as a surprise to many, but credit scores have 30 different levels. While searching for the best credit score, people often find themselves inundated with various answers from Google. Unfortunately, much of the information available can not only be confusing, but also misleading and may cause individuals to go down an unpleasant rabbit hole. I am Joe Mahlow, a financial literacy and credit repair expert with over fifteen years of experience. My main aim is to provide uncompromising advice on vital topics relating to credit scores, such as this one. Having helped over twenty thousand clients improve their credit scores, I am confident that I can offer you the same level of guidance. So, without further ado, let us dive into the topic at hand.
Contents:
Different Credit Scoring Models: FICO and Vantage
Understanding Credit Scores: A Guide to Good Credit
What Credit Score is Needed to Buy a House?
Determining the Right Credit Score for Purchasing a Car
Tips on Increasing your Credit Score
Advice from Joe: How to Improve Your Credit Score
Different Credit Scoring Models: FICO and Vantage
Two models are used for credit scoring, the FICO and Vantage scores. Understanding their differences is important since each model uses a different method of calculating scores. The FICO model is the most widely used credit scoring model, with eight different models from FICO 2 to FICO 10. Credit reports carry different weights depending on the lender, and each report has a different impact on a credit score.
Example:
For Mortgage Applications:
The mortgage lender will most likely pull your Fico 5 credit report.
For Credit Cards:
They will most likely pull your Fico 8 credit report.
Vantage Score, on the other hand, is a new scoring model compared to the FICO model, which has been in use since the seventies. Credit monitoring websites use Vantage for evaluation purposes such as giving you a free copy of your credit reports. While FICO has the most influence in the lending sector, Vantage is fast gaining popularity as a scoring model in some sectors. However, since Vantage score is not widely used for lending purposes, it may not be as accurate as FICO, which is the most recognized scoring model. Nonetheless, the Vantage scoring model is a good “general idea†of the FICO score. Nevertheless, credit reporting agencies are data collection agencies and have the upper hand in acquiring the most reliable scoring data available.
Understanding Credit Scores: A Guide to Good Credit
Credit scores are essential when it comes to financial stability. Both the FICO and Vantage models range from 350 to 850. 350 is the worst score, while 850 means a perfect score. Below are the vital score ranges you need to understand to make informed decisions.
620 or below:
Considered a bad credit score, if you fall below this threshold, you probably have an adverse credit history, high-balance credit accounts, or no credit cards at all. You can improve your scores by paying your bills on time and opening ten active revolving credit accounts. The Credit Builder Card or OpenSky Credit Card are recommended credit cards as they can help you build your credit. Achieving a 620 credit score will grant qualification for an FHA home mortgage.
640-680:
If you have a score within this range, you are considered to have fair or good credit. Although you may have established credit, you might have derogatory marks or accounts on your credit score. You may also have high balances on your credit cards, but it's crucial to start paying them down. When you open new accounts, it could drop your scores temporarily, but they will soon recover.
740+:
Credit scores higher than 740 are considered super-prime, and they grant you the best interest rates for most loans. Congratulations if you have a score above 740; you are among the top 20% of the US population. Keep up the good work, continue paying your bills on time, and pay off your revolving credit card accounts to stay in great financial shape.
What Credit Score is Needed to Buy a House?
The credit score required to purchase a home depends on the mortgage loan you're applying for. As per government regulations and backing, most mortgage loans' requirements and guidelines are either similar or vary in small ways. The three most popular mortgage loan types include conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most prevalent mortgages, usually offering the best savings option after VA loans. They don't require you to maintain private mortgage insurance (PMI), which may increase your downpayment or monthly payment. PMI protects the lender in case you stop making payments. These loans usually have lower downpayment requirements and better interest rates. In general, you will need a credit score of at least 640 and a debt-to-debt ratio of no more than 43% to qualify.
FHA Loan
FHA loans work best for individuals with lower credit scores, typically between 580 and 619. Remember, each loan program has its individual requirements, so shop around for lenders that best adhere to your financial needs. Your FHA loan will require PMI for at least 11 years, which may augment your mortgage cost. With a higher 50% debt-to-income limit, you can purchase more homes than with a conventional mortgage, allowing you to meet your homeownership goal. The downpayment requirement can be as low as 3.5% of the purchase price, making it an excellent choice if you're on a tight budget; however, you will typically receive a higher interest rate.
VA Loan
VA loans do not have a specific credit score requirement, but they tend to pre-qualify individuals by checking for past defaulted loans and government debt collection history. You must have been a part of the US Military for at least 181 days, 90 consecutive days during wartime, 6 years with the National Guard, or your spouse serving in the military who lost their lives during active duty. The VA loan has the best interest rates available and usually does not require a downpayment. It is an excellent option to support our veterans.
Determining the Right Credit Score for Purchasing a Car
The history of your credit is the most important factor in qualifying for a car loan, and not only your credit score. While a good credit score is important, it doesn't play a significant role in the interest rate you'll be eligible for. When seeking a car loan, a financial institution typically checks your credit history both past and present, including reviewing your previous auto loan. Falling behind on previous loans or repossession could affect your eligibility for a loan when purchasing a vehicle. Special finance lenders or lenders working with people with bad credit tend to qualify nearly anyone for a car loan. However, these lenders generally impose certain requirements as part of the approval process, such as a higher down payment or extra dealership fees to help mitigate risks. Additionally, to buy a car on credit, you'll have to consider having either equity or a down payment.
Credit Score Range for New Cars
While there's no fixed credit score for determining your eligibility for a loan, you'll typically need a score of over 680 to enjoy favorable interest rates. If your credit score falls below 680, you might have to pay a higher interest percentage since you represent more risk to the lender. For example, individuals with a credit score of 720 or above on average pay $5,500 in loan interest, while those with scores below 580 on average pay interest totaling $15,300. Consequently, a high credit score reduces the amount of interest you are likely to pay, which affects your overall credit score.
Tips on Increasing your Credit Score
Building a good credit score takes time and effort. To achieve this, you must have patience. Instant results often lead to irrational and bad decisions regarding your credit, which can make your problems worse. Here are some simple steps you can take to improve your credit score:
Open 3 to 5 Revolving Credit Accounts
Increase Your Credit Limits
Keep Your Balance Low and Close to Zero
If you have limited credit or are looking to rebuild your credit, opening multiple revolving credit accounts is one of the best options to maximize your credit score. A secured credit card like OpenSky or Credit Builder Card, which focuses more on your ability to pay on time rather than your credit score can be a good start. Maintaining revolving credit can quickly improve your credit score.
Requesting a credit limit increase can boost your overall credit limits, lowering your credit utilization percentage. To do this, follow your credit card company's process, which may require filling some information such as your current income. Most credit card companies require 7-15 months of a good payment history before granting the increase.
Keeping your credit balance low and using your credit card for small purchases can help build an excellent payment history. It is essential to leave a small balance of $1-$5 each month and avoid running the balance back up to ensure that most of your payments go towards the principal and not the interest.
By following these tips, you can improve your credit score over time and achieve financial goals like getting a new house or a loan.
Advice from Joe: How to Improve Your Credit Score
We have all been there and experienced a less than perfect credit score. However, with dedication and effort, you can quickly see significant improvements. Unfortunately, many individuals with bad credit feel trapped in an endless cycle of financial struggles. They believe having a good credit score is out of reach. Developing a great credit score requires a lot of work, but those who prioritize their credit and spending habits will ultimately succeed. Start by creating a budget and eliminating any negative spending behaviors, and you will see improvements in your credit score. We hope this article has helped you understand credit, and if you require further guidance or credit repair, please don't hesitate to contact our office at www.asapcreditrepairusa.com.
Key Takeaways:
With effort and dedication, you can see significant improvements in your credit score.
Don't fall into a cycle of bad credit, focus on your spending habits, and prioritize a budget.
Reach out to our office for further guidance and credit repair assistance at www.asapcreditrepairusa.com.