It may come as a surprise to you that there are actually thirty different levels of credit scores out there. With so much information available online, it's easy to get confused about what the best credit score really is. Unfortunately, some of the information provided can be quite misleading, which is why I want to offer you my expertise. My name is Joe Mahlow, and I've spent the last fifteen years working in the financial literacy and credit repair industry. My aim is to provide you with honest advice about credit scores and various related topics. Having helped over twenty thousand clients to date, I'm confident that I can offer you the guidance and support needed to transform your credit score. So, let's dive into the topic and get started!
Contents:
Understanding Different Credit Scoring Models
Understanding what constitutes a good credit score
What Credit Score Do You Need to Buy a House?
Understanding Credit Scores When Buying a Car
Tips for Increasing Your Credit Score
Insights from Joe
Understanding Different Credit Scoring Models
Credit scores are important metrics used by lenders to assess your creditworthiness. There are two primary credit scoring models: FICO and Vantage. Both scoring models play a crucial role, but there are significant differences between the two, especially in calculating your credit score.
FICO Credit Score
FICO is the most widely used credit score model, with eight different models ranging from FICO 2 to FICO 10. Depending on the type of credit you're applying for, lenders will pull different FICO reports. Mortgage lenders will probably request for your FICO 5 credit score to assess your credit profile, while credit card companies will likely use FICO 8 score. Each FICO score model has a different "weight," meaning that each lender weighs critical factors differently. For instance, a FICO 5 mortgage report emphasizes the payment history of your previous mortgage. By contrast, a FICO 8 score focuses more on your credit card history.
Vantage Credit Score
The three major credit reporting agencies (Equifax, Experian, and TransUnion) developed the Vantage score model to compete with the FICO model. Although Vantage score is relatively new compared to FICO, credit monitoring sites provide a free copy of your credit reports through this model. Although Vantage is not commonly used for lending purposes, it is gaining popularity in some areas, such as personal loans and auto lending.
Accuracy of Vantage Score
The Vantage score is accurate, but it's not widely used for lending purposes, rendering it incapable of providing your actual lending score. However, it is accurate as a general idea of your credit score and provides the best idea of where your overall scores stand. In the future, lenders will probably start using the Vantage scoring model because of its ability to provide the best scoring models based on today's standards. Compared to FICO, Vantage is likely to provide a clear representation of credit scores. Remember, credit reporting agencies are the most significant data collection agencies, which is why they have the upper hand in providing the best scoring data.
Understanding what constitutes a good credit score
A credit score falls between 350 and 850 for both FICO and Vantage models. The highest score you can achieve is 850, while the lowest is 350. To achieve a higher score, it is crucial to track your progress, in which this article offers some essential score markers.
1. 620 or below
Scores under 620 represent poor credit. You may have high-balance accounts or no credit cards at all. Maintaining ten open revolving credit accounts and paying on time can help improve the score. Secured credit cards like OpenSky could also aid in building credit. Reaching 620 may qualify you for an FHA home mortgage.
2. 640-680
Scores in this range indicate fair to good credit. Though derogatory marks may exist, several open accounts and newly opened accounts that may cause a temporary dip in scores suggest better established credit history. Paying down significant high-limit cards could help improve scores.
3. 740+
A score above 740 is considered excellent. Such "super-prime" scores guarantee the best interest rates on most loans. Scoring above 740 puts you in the top 20% of the US population. Payments on accounts and maintaining revolving credit cards up-to-date keeps the score in good standing. Congratulations on being part of the elite!
What Credit Score Do You Need to Buy a House?
To determine the appropriate credit score needed to qualify for a mortgage loan, you need to consider the loan type. Federal regulations and government backing ensure that most mortgage loans' guidelines and requirements are similar but may differ. There are three primary types of mortgage loans: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular loans and usually the best loan option if you are not qualified for a VA loan. With conventional loans, you will not have to maintain private mortgage insurance (PMI), an additional cost that can raise your downpayment or monthly payment; PMI protects the lender in case of non-payment. These loans often require lower downpayment and have better interest rates than other mortgage loans. Typically, conventional mortgage loans require a credit score of at least 640 and a debt-to-debt ratio not higher than 43%.
2. FHA Loan
FHA mortgage loans are ideal for individuals with lower credit scores, usually between 580 and 619. Costs may vary between lenders regarding rates, fees, and services; therefore, it's imperative to shop around for the best financial option available. PMI is mandatory for FHA loans for at least 11 years, an additional cost worth considering if you're on a budget. FHA loans also allow a higher debt-to-income ratio limit of up to 50%, enabling you to buy more homes, especially if you have low income. You may qualify for a mortgage with a low downpayment of 3.5% of the purchase price, but you will often have a higher interest rate.
3. VA loan
A credit score requirement is not technically applicable to VA loans. They look for past defaulted loans and any government-owed past-due debts during the pre-qualification process. To qualify for a VA loan, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse was in active service and lost their life. VA loans typically have the best interest rates and usually do not require a down payment, making it an excellent option for veterans.
Understanding Credit Scores When Buying a Car
When looking to purchase a car, a common misconception is that your credit score is the determining factor in what you qualify for. However, it is actually your credit history that has the most influence. While a higher credit score is still important, it has less impact on the interest rate you are approved for. Lenders will take into account your previous and current credit histories to assess the risk involved with extending credit. This means that those with a history of late payments or repossession will have a harder time getting approved for a loan than those without.
Even those with poor credit or who require special financing can usually still be approved for a loan, but with specific requirements such as a higher down payment and additional fees to cover the risk of defaulting. It's not uncommon for dealerships to charge a fee to cover this risk; in some cases, they may even limit the vehicles to which you are approved. Having equity or a down payment can give you more leverage when purchasing a car on credit.
While there's no exact credit score to guarantee approval, a score over 680 is ideal. Anything below this score will likely result in higher interest rates due to the risk you pose to the lender. The difference in interest rates based on credit score can have a significant impact on the total amount paid in interest over the life of the loan. For example, someone with a credit score over 720 may pay an average of $5,500 in interest, while someone with a score of 580 or below may pay over $15,000 in interest. It's clear that having a higher credit score can save you a significant amount of money in the long run.
Tips for Increasing Your Credit Score
Building a good credit score takes time and requires patience to avoid making hasty and rash credit decisions that can worsen your problems. However, there are specific actions you can take today to help improve your credit:
1. Open 3-5 revolving credit accounts:
Revolving credit such as credit cards is an excellent option to maximize your credit score. It gives you the best chance of approval and is particularly helpful for individuals with limited credit or those looking to rebuild their credit. You may start by opening secured credit cards that focus on your ability to pay on time, such as Open Sky or Credit Builder Card. Revolving credit contributes 30-35% to your credit score and is an efficient option to build credit scores quickly. Ensure you pay your balance on time and limit the use of the card to small purchases like gas or groceries.
2. Raise your limits:
If you have active revolving credit accounts, you can request a credit limit increase to lower your credit utilization percentage. Contact your credit card company and request a ‘Credit Limit Increase’, fill out some information such as your current income, and wait for the credit team to decide. Before agreeing to increase your limit, most companies want to see 7-15 months of excellent payment history on a credit card.
3. Pay down your balances:
Keeping your credit card balance low and close to zero is crucial, so avoid running up expensive balances and pay off your balance each month. You can use your credit card for small purchases and leave a $1-5 balance on your cards when paying off your bill. If you have high balances and lack financial wherewithal to pay your credit cards off, make a plan to tackle a percentage of your paycheck each month to pay off your credit card and ultimately stop using them. Your credit card usage habits play a significant role in your overall credit score, so be mindful of their use. Additionally, high credit card rates mean that most of your payments will go towards interest rather than principal.
Insights from Joe
Let's face it, many of us have experienced a rough patch with our credit score. However, it's crucial to acknowledge your credit situation and dedicate time and effort towards improving it. Don't fall victim to the cycle of bad credit; a positive credit score is achievable! Although it takes hard work, individuals who prioritize their credit and spending habits will reap the rewards. A good starting point is to create a budget and eliminate any unfavorable spending habits, resulting in a boost to your credit score. Learn more about credit with this article. If you require assistance with your credit score or need credit repair services, don't hesitate to contact my office at www.asapcreditrepairusa.com.