It's interesting to note that you may have around 30 different credit score levels. It's quite typical for individuals to receive a plethora of varying results when searching for the top-rated credit score on Google. Most of the data available can be perplexing and even misleading, causing confusion and leading one down a negative path. I am Joe Mahlow, a veteran in the credit repair and financial literacy niche, and I have been offering advice on various subjects, including credit scores, for more than 15 years. My main aim is to offer honest opinions and practical insights. By applying my knowledge and understanding, I have already succeeded in transforming over 20,000 clients' credit scores, and I'm confident that I can equip you with enough valuable information to experience a similar transformation. Let's dive into this topic!
Contents:
Understanding the Various Types of Credit Scores
Understanding what defines a good credit score
What Credit Score Do You Need to Buy a House?
Determining Your Credit Score for Buying a Car
Tips to Increase Your Credit Score
Insights by Joe on Credit Improvement
Understanding the Various Types of Credit Scores
Credit scores are essential to anyone who wants to apply for loans or lines of credit. Two credit scoring models that you should be familiar with are the FICO model and the Vantage model. These models calculate your credit score differently, making it important to know their differences.
FICO Credit Score
FICO is the most commonly used credit scoring model, consisting of eight different models, ranging from FICO 2 to FICO 10. Your credit score will depend on the FICO report used by the lender you are applying to. For example, a mortgage lender will typically use the FICO 5 report, while a credit card company will pull the FICO 8 report. Each FICO scoring model emphasizes different factors weighted according to their importance. For instance, a FICO 5 mortgage report will weigh previous mortgage history more heavily, while a FICO 8 report will prioritize your credit card history.
Why are there different FICO scores?
Each credit report has a unique emphasis, also referred to as a "weight." For example, your FICO 5 mortgage report will have a significant impact on your payment history for previous mortgages. On the other hand, a FICO 8 report prioritizes your credit card history. Auto lenders use FICO-2 reports, and these scores weigh your auto history more heavily.
It is advisable to sign up for an account with www.myfico.com to get a clear representation of all your different FICO scores.
Vantage Credit Score
The Vantage Score model was developed by the three primary credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. Vantage is a newer model, whereas FICO has been in use since the 1970s. Personal loan providers and auto lending organizations are among the sectors that use the Vantage model, which currently does not dominate the lending sector as FICO does.
Is the Vantage Score accurate?
The Vantage scoring model is accurate, but it is not the widely recognized standard for lending purposes. Therefore, the Vantage score may vary in accuracy from your actual lending score since FICO is currently the most commonly used scoring model. A Vantage score can provide a general idea of your FICO score, making it a useful tool since getting your credit report from a lender is impossible without paying. In the future, the Vantage scoring model could become more popular among lenders. The Vantage model provides up-to-date scoring models based on current standards of creditworthiness. For this reason, it may be more effective at indicating creditworthiness than the FICO scoring model, which many perceive to be outdated. Credit agencies have a vast collection of data that can be used to create better scoring models.
Understanding what defines a good credit score
Credit scores under the FICO and Vantage models are measured out of a range of 350 to 850. The lowest score at 350 marks the poorest credit, and 850 is the best score. It's essential to know how to build up your credit score and to recognize where you stand throughout this endeavor. Consider the following score thresholds:
620 or below -
This is classified as bad credit and means you have a history of adverse credit. To improve your credit, make timely payments and keep ten active revolving credit accounts open. Consider getting a secured credit card, such as the Credit Builder Card or OpenSky Credit Card. Once your score reaches 620, you can begin applying for an FHA home mortgage.
640-680 -
This range is considered fair for good credit. If you have scores in this range, it means you have established credit, but you may have derogatory marks or accounts on your credit. You may also have high balances on your credit cards that you will need to pay down. Newly opened accounts might temporarily drop your scores.
740+ -
A credit score of 740 or higher is regarded as "super-prime" and qualifies you for the best interest rates for most loans. If you have a credit score over 740, congratulations, as you are among 20% of the US population with this score. Keep making timely payments and maintain your revolving credit card accounts, and you will have a healthy credit score.
What Credit Score Do You Need to Buy a House?
The credit score required to buy a house varies depending on the type of mortgage loan you are seeking. Mortgage loans are regulated by federal guidelines and backed by the government. This means that most loans have similar, if not identical, requirements and rules. There are three common types of mortgage loans: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and usually offer the best savings option apart from the VA loan. These loans do not require private mortgage insurance (PMI), which can be an additional cost that increases your downpayment or monthly payment. PMI protects the lender in case you default on your loan. Conventional loans have lower downpayment requirements and better interest rates compared to other mortgage loans. To qualify for a conventional loan, you need a credit score of 640 and a debt-to-income ratio of no higher than 43%.
FHA Loans
The FHA mortgage loan is designed for those with lower credit scores, usually between 580 and 619. However, every loan program has different requirements. Therefore, you must shop around to find the best financial option for you if you are within the credit score limits. FHA loans require PMI for at least 11 years, which can add to your mortgage cost and may be an important factor, especially if you're on a limited budget. This type of loan has a higher debt-to-income limit of up to 50%, making it possible to purchase more homes if you have a lower income. FHA loans require a minimum down payment of 3.5%, making it easier to obtain a mortgage without much capital. However, the interest rates are generally higher.
VA Loans
There is no official credit score requirement for a VA loan. However, lenders will consider any government-owned past-due debts and prequalify you based on any previous defaulted loans. Furthermore, you must have served in the military for a specified period to be eligible for this loan. The VA loan generally has the best interest rates available, and a down payment is usually not required. Veterans are often grateful for the VA loan as it truly honors their service to the country.
Determining Your Credit Score for Buying a Car
When looking to purchase a car, your credit history reigns supreme in determining loan eligibility compared to your credit score. A higher credit score does play a part in securing an interest rate, but the risk assessment of the extension of credit is based on past and current credit history. In such cases, a person having a repossession or a record of late payments on an auto loan faces a tougher time securing a loan than someone with a clean history. Certain lenders will extend credit to people with poor or inadequate credit history, but they will charge higher fees and demand a larger down payment to cover the risk of default. The lender may also impose fees on dealerships to approve the loan. Having equity or making a down payment helps improve your leverage when going for a vehicle loan.
Credit Score Range for New Vehicle
A specific credit score doesn't guarantee loan approval since many factors, including those mentioned above, influence the decision. However, a credit score of 680 or more is ideal, and anything lower can increase the interest rate due to higher risk. The interest rate can vary depending on the credit score. For instance, a credit score of 720 or more attracts an average interest rate of $5,500, whereas a credit score of 615 or above can lead to an average interest rate of $10,200. The data shows that a higher credit score corresponds to lower interest rates, which ultimately impacts your overall credit score.
Tips to Increase Your Credit Score
Raising your credit score takes time, effort, and patience. Improving your credit score will not happen overnight, so you must remain calm and rational to make good decisions that can improve your credit score. Here are some things you can do right now to improve your credit:
1. Open 3-5 Revolving Credit Accounts
Revolve credit makes up a significant portion of your overall credit score, so it's essential to have it in good standing. Start with a secured credit card such as Open Sky or Credit Builder Card, which doesn't focus on your credit score but rather your ability to make timely payments. Remember always to pay the balance on time and limit the use of the card to small purchases such as gas or groceries.
2. Raise Your Limits
A credit limit increase can decrease your credit utilization percentage if utilized correctly. Contact your credit card company to request a credit limit increase, which often requires excellent payment history and verification of your income.
3. Pay Down Your Balances
It's critical to keep your balance low and close to zero and not to spend time and finances to pay down a credit card only to run the balance back up. Limit your credit card usage, opt to pay small purchases, and leave a $1-$5 balance on your credit card. If you have high balances, it's best to make a game plan to pay them down with a portion of your paycheck each month to ultimately stop using them and avoid interest rates.
Insights by Joe on Credit Improvement
Improving credit can seem daunting for consumers who are grappling with subpar credit. However, it is possible to revive your credit score by dedicating your time and effort to your credit health. Unfortunately, many people trapped in this vicious cycle of bad credit often lose hope in rebuilding their credit. But building a solid credit score requires hard work and determination. Therefore, those who focus their energy on enhancing their credit health by developing healthy spending habits and practicing budgeting can triumph over their credit challenges. This article aims to enrich your knowledge of credit. If you desire further guidance or support with credit repair, please feel free to reach me at www.asapcreditrepairusa.com.
Key Takeaways:
- Resuscitate your credit by prioritizing your credit health
- Develop a budget and work towards modifying bad spending habits
- Building a good credit score entails hard work and determination