Were you aware that credit scores comprise of 30 different levels? For many individuals who seek the most suitable credit rating, the results from Google can be bewildering and potentially lead them astray. I am Joe Mahlow and I have spent more than fifteen years working in the realm of financial education and credit restoration. In order to assist you, my aim is to offer honest guidance on a variety of subjects, such as credit scores. Having helped over 20,000 individuals elevate their credit scores, I aspire to provide enough knowledge for you to achieve the same. So, let's begin.
Contents:
Understanding the Different Types of Credit Scores
Understanding Credit Scores
Mortgage Loan Types and Credit Score Requirements for Home Buying
Determining a Good Credit Score to Secure a Car Purchase
Tips for Improving Your Credit Score
Joe's Insights on Credit Improvement
Understanding the Different Types of Credit Scores
Credit scores play an essential role when it comes to getting loans or credit. There are two main credit scoring models: FICO and Vantage. Both models have distinct formulas for calculating credit scores that are vital to understand. Let's dive deeper into these credit scoring models to learn more.
FICO Credit Score
FICO is the most widely used credit scoring model. It has eight different models, ranging from FICO 2 to FICO 10. Depending on the type of credit report that a lender pulls, you may have a different credit score. For example, a mortgage lender may pull your FICO 5, while a credit card company may opt for FICO 8.
Why Are There So Many FICO Scores?
The weight given to different factors in each credit report is what makes the different FICO scores necessary. For instance, if you apply for a mortgage, a good payment history on a previous mortgage will weigh more in your favor score-wise than if you had no previous history or a negative one. The same goes for credit card history, auto history, and so on. The good news is that you can view all your different FICO scores in one place through www.myfico.com.
Vantage Credit Score
The Vantage Score is a newer credit scoring model developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion. Although it's not yet as widely used as FICO, some sectors such as personal loans and auto lending are starting to adopt it. Many credit monitoring websites use Vantage to give free credit reports.
Is the Vantage Score Accurate?
The Vantage Score can give you a "general idea" of your FICO score. However, since FICO is still the most recognized scoring model, the Vantage Score will not accurately reflect your actual lending score. Nonetheless, because the Vantage Score is more up-to-date and relevant than FICO, it's expected to become more widely used in the future.
In conclusion, credit scores matter, and understanding how the different credit scoring models work can help you better assess your financial standing.
Understanding Credit Scores
FICO and Vantage models both have scores that range from 350 to 850. A score of 350 is the worst, and 850 is the best. It's important to comprehend where you stand in your journey to the highest scores. Here are the key score thresholds to know:
1. 620 or below:
This is bad credit. You may have some adverse credit history, high-balance credit card accounts, or no credit cards at all. Making timely payments and having ten active revolving credit accounts will help you improve your credit scores.
2. 640-680:
This is fair for good credit. In this score range, you probably have established credit, but still have some derogatory marks or accounts on your credit report, along with high balances on your credit cards. Newly opened accounts can temporarily drop your scores, but don’t panic, they will go back up.
3. 740 and above:
A score over 740 is considered "super-prime," and is the best score for most loans. Congratulations if you have a 740+ score; you are among the 20% of the US population with this score. Keep up the good work, always pay your accounts on time, and keep your revolving credit cards paid off.
Mortgage Loan Types and Credit Score Requirements for Home Buying
When you are looking to buy a house, the credit score you need to qualify for a mortgage loan depends on the type of loan. Each loan has its own set of federal regulations and government guidelines that may differ. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans. Here are the credit score ranges for each loan type:
1. Conventional Loans
Conventional loans are the most popular loans and are usually the most cost-effective option aside from VA loans. They do not require private mortgage insurance (PMI) and offer lower downpayment requirements and better interest rates. To qualify for a conventional loan, you need a credit score of at least 640 and a debt-to-income ratio below 43%.
2. FHA Loan
FHA loans have lower credit score requirements, which range from 580 to 619. However, lenders have different criteria; therefore, you should look for a lender that offers the best financial option for you. FHA loans require you to keep PMI for at least 11 years and have a higher debt-to-income limit of up to 50%. While downpayment requirements are as low as 3.5% of the purchase, the interest rates are usually higher.
3. VA loan
The VA loan does not have a credit score requirement, but lenders check for past-due debts and previous defaulted loans when pre-qualifying you. To qualify for a VA loan, you need to have served in the military or be a military spouse. These loans typically offer the best interest rates and do not require a down payment, making it an attractive option for veterans.
Determining a Good Credit Score to Secure a Car Purchase
When looking into buying a car, it is crucial to keep in mind that lenders don't base their decision on your credit score alone. While a higher score has its benefits, it plays a lesser role in the approval of your car loan interest rate. Instead, lenders review your credit history to determine the risk involved in lending you money. If you have issues with previous or current loans or have undergone repossession, your chances for loan approval become lower. However, even with a bad credit score or special finance lenders, you may still qualify for a car loan, but with conditions such as a higher down payment or additional fees to protect the dealer's interest. To eliminate this, having equity or a down payment can provide leverage in car purchasing with credit.
Ideal Credit Score for a New Car Purchase
Having no exact credit score to determine car loan approval, factors such as previous and current credit history are essential. But a credit score of 680 or higher is an ideal range when considering a new vehicle. Anything lower than this score may result in higher interest rates due to the increased risk you pose to the lender. A credit score of 720 or higher will pay an average of $5,500 in interest, while a score of 580 or above will pay an average of $13,900 in interest. With this, a higher credit score will lead to more equitable and favorable loan payment terms.
Tips for Improving Your Credit Score
Improving your credit score takes time and effort, but there are steps you can take now to improve it. It requires patience to avoid making bad decisions that could harm your credit further. Here are some steps you can take to improve your credit:
1. Open 3-5 revolving credit accounts:
Opening revolving credit accounts such as credit cards can maximize your credit score as it accounts for 30-35% of your overall credit score. With limited credit or when rebuilding credit, securing a large loan can be a challenge. Therefore, a secured credit card that doesn't focus on your credit score is a great place to start. You can apply for cards from Open Sky or Credit Builder Card, and keep the balance at $5-$10 and pay on time.
2. Increase your credit limits:
Request a credit limit increase from your credit card company to increase overall credit limits and lower credit utilization percentage. Credit card balances exceeding 30% of overall limits can hurt credit scores. You can request an increase online or by calling the card company. It may take 7-15 months of a good payment history for them to consider the request.
3. Pay down your balances:
Low balances and leaving a small $1-$5 balance on cards are better for your credit score. Avoiding high balances and setting aside a percent of your income to pay down debts can be helpful. Credit card spending habits play a significant role in overall credit scores.
Joe's Insights on Credit Improvement
It's common for anyone to have poor credit at some point in their lives. However, taking serious measures and investing time to repair your credit can yield significant results in a short period. Unfortunately, many individuals with a bad credit history feel hopeless and think that they can never achieve a good credit score. The truth is that it requires discipline and commitment to develop a great credit score. Therefore, prioritize your credit, identify bad spending habits, and create a budget plan. Your credit score will reflect your efforts. Our office at www.asapcreditrepairusa.com is always ready to offer guidance and help with your credit score or repair needs. Remember, you can always turn your financial situation around with the right mindset and actions.
Key Points:
- Poor credit is not unusual, but working towards repairing it can lead to significant improvements in a short time
- Individuals with bad credit often feel hopeless, but discipline and commitment are essential in developing a great credit score
- Prioritize your credit, identify bad spending habits, and create a budget plan to get started
- Our office at www.asapcreditrepairusa.com provides guidance and support on credit improvement and repair.