It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Many people are unaware of this fact and are often misled when searching for information on the best credit score. The vast amount of information available on search engines like Google can be overwhelming and confusing, causing you to fall into a dark rabbit hole. My name is Joe Mahlow, and I am an experienced financial literacy and credit repair professional with over 15 years of experience. My mission is to provide you with truthful advice on various topics, such as credit scores. Having already helped more than 20,000 clients improve their credit scores, I am confident that I can provide you with sufficient information to do the same. So, let's dive into the details.
Contents:
Different Types of Credit Scores: FICO vs. Vantage
Understanding Good Credit Scores
What is a good credit score for purchasing a home?
What Determines Your Car Loan Eligibility?
Ways to Improve Your Credit Score
Insights by Joe: On Improving Your Credit Score
Different Types of Credit Scores: FICO vs. Vantage
When it comes to calculating your credit score, there are two popular methods: the FICO model and the Vantage model. Understanding their differences can help you stay on top of your credit and avoid surprises.
1. FICO Credit Score
The FICO credit scoring model is widely used by lenders. However, there are eight different FICO models, from FICO 2 to FICO 10, which can lead to different credit scores depending on the report used. Mortgage lenders typically pull the Fico 5 credit report, while credit card companies usually use the FICO 8 report. The reason for multiple FICO scores is that each credit report has a different "weight" that reflects the importance of different factors, such as mortgage or credit card payment history.
2. Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies to compete with FICO. Although it is gaining popularity in some sectors, such as personal loans and auto lending, it is not widely used for lending purposes and may not reflect your actual lending score accurately. Instead, it provides a general overview of your credit standing.
Overall, while FICO currently dominates the lending sector, Vantage may become more widespread in the future, reflecting the evolving standards of credit reporting initiatives. Regardless of which model you use, monitoring your credit score regularly is a wise financial habit.
Understanding Good Credit Scores
Credit scores are determined using both FICO and Vantage models, with scores ranging from 350 to 850. To achieve the highest credit scores, you need to understand where you stand and set achievable goals. Here are the vital score thresholds to guide you:
1. 620 or below:
This is considered bad credit and indicates adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve credit scores, make timely payments and keep ten active revolving credit accounts. Using secured credit cards like the Credit Builder Card or OpenSky Credit Card can also help. Once you reach the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680:
This is considered fair for good credit. It indicates established credit, with some derogatory marks, high balances on credit cards, or newly opened accounts that can lower scores temporarily. However, new accounts will eventually improve scores.
3. 740 or above:
Any score over 740 is considered "super-prime" and qualifies you for the best possible interest rates. If you have a credit score of 740 or above, you're part of the 20% of the US population with an excellent score. Maintain regular payment timings and pay your revolving credit card accounts to stay in good standing.
What is a good credit score for purchasing a home?
The credit score requirements vary by the type of mortgage loan you seek. Regulations and guidelines for most mortgage loans tend to be similar but may differ due to government backing. The most common mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans:
Conventional loans are mostly preferred outside of VA loans. It is a popular choice, as it does not require you to have private mortgage insurance (PMI). PMI can increase your downpayment or monthly payment and is a protective measure for the lender in case the borrower fails to make payments on the loan. Conventional loans offer lower downpayment requirements and better interest rates than other loan options. A good credit score requirement for conventional mortgage loans is 640 with a debt-to-debt ratio no higher than 43%.
2. FHA Loan:
FHA mortgage loans are offered to those with lower credit scores, usually between 580 and 619. If you meet the credit score limits, it is advisable to shop around for different lenders to find the best loan program that suits your budget. FHA loans require you to maintain PMI for at least 11 years, which is another factor to consider. You can qualify for this loan with a higher debt-to-income limit of up to 50%. A lower income won't hinder you from purchasing a home as long as you meet the requirements. The downpayment required for an FHA loan is only 3.5% of the purchase price. However, the loan's interest rates may be higher than conventional loans.
3. VA Loan:
VA loan doesn't have a credit score requirement, but lenders will require you to provide information about past-due debts and previous defaulted loans. To qualify for this loan, you must have served in the United States Military for at least 181 days, 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse was in the military and lost their lives during active duty. The VA loan offers the best interest rates available, and you don't need a downpayment to qualify for this loan.
In conclusion, each loan type has its requirements and eligibility criteria. Weighing the benefits and downsides of each loan type is necessary before choosing one that offers the best financial options for you.
What Determines Your Car Loan Eligibility?
When applying for a car loan, your credit history is the most crucial factor that determines what you qualify for. While having a high credit score is important, it doesn't necessarily play a significant role in the interest rate you qualify for. Your credit reports from the past and present are taken into account to gauge the risk involved in extending credit to you. A poor credit history, such as previous auto loan defaults or repossession, can make it difficult to get approved for a loan, whereas the worst credit or special finance lenders usually qualify anyone for a car loan, but with additional criteria. The dealership that extends such loans will charge extra fees to manage the risk of defaulting. When buying a vehicle on credit, having equity or a down payment can give you more leverage.
What Credit Score Do You Need to Buy a New Car?
There's no universal credit score that guarantees loan approval, but having a credit score above 680 is ideal. Your credit score determines the interest rate you're likely to pay on a car loan and how much risk you pose to the lender. A credit score of 720 or above will attract an average interest rate of $5,500, while anything lower than 680 can increase the interest rate charged. The data shows that the higher your credit score, the lower the interest rate you'll pay, which can influence your overall credit score.
Ways to Improve Your Credit Score
Developing a good credit score requires dedication and is not an immediate fix. Being patient is crucial since recklessness can hinder progress. Nevertheless, there are several steps you can undertake to boost your credit score effortlessly. Here is how:
1. Open Multiple Credit Card Accounts
Revolving credit is an effective way to increase credit scores, especially for those with limited credit history or seeking to rebuild it. While obtaining a big loan may require a great deal of work to build credit, securing a credit card offers the best chance of approval. Secured credit cards like Open Sky or Credit Builder Card consider your ability to make on-time payments rather than your creditworthiness. Revolving credit accounts for about 30-35% of your total credit score, making it the most expeditious option to build credit scores. It may take approximately 2-4 months for increases to manifest on your credit scores. However, it is crucial to make timely payments and keep your balance between $5-$10 each time you make a payment. Using your card for minor purchases, such as gas or simple groceries, is advisable.
2. Increase Your Credit Limits
Active revolving credit card accounts give you the option to quickly request an increase in credit limits for your credit cards. Elevating your credit limits can lower your credit utilization percentage and increase credit limits. Maintaining a credit card balance exceeding 30% of the entire limit can adversely affect your credit scores. Raising your credit limits reduces your utilization percentage.
How to Increase Your Limits
Each credit card company has its unique process, but a request for a “Credit Limit Increase†is typically required. Credit card companies usually look for 7-15 months of excellent payment history before approving such requests.
3. Reduce Your Balances
Maintaining low balances or balances close to zero is paramount. With credit cards, you are not obligated to use them every month. Minor purchases can be charged to your card, but for significant transactions, it is advisable to use alternative payment channels. It is also advisable to leave a balance of $1-$5 on your credit cards each month. In case you have a high balance and cannot pay your credit cards, it is advisable to develop a plan and set aside a percentage of your paycheck to pay down the debt gradually. Consistent credit card spending habits play a significant role in determining your overall credit score. Thus, it is best to limit your credit card usage. Additionally, credit card rates are often high, and most payments made toward these balances predominantly go towards settling interest rather than the principal amount.
Insights by Joe: On Improving Your Credit Score
Many of us have experienced the challenges of having poor credit. However, taking your credit standing seriously and working hard on improving it can bring huge positive changes to your score in a short period. Oftentimes, individuals with bad credit feel as though it's a lifelong problem that cannot be solved. But in truth, it requires a lot of effort and dedication to achieve a good credit score and those that prioritize their credit and spending habits will eventually succeed. Key ways to start improving your credit include creating a budget and addressing bad spending habits. These changes will be reflected in your improved credit score. For further guidance and help with credit repair, reach out to my office today at www.asapcreditrepairusa.com.