Were you aware that credit scores are not just one universal number, but rather a system of 30 different levels? The process of searching for the optimal credit score online can be overwhelming as the plethora of conflicting information can often create confusion, or worse, deceptive tactics. I am Joe Mahlow and I have over 15 years of experience in the financial literacy and credit repair industry. My objective is to guide you with unfiltered advice on an array of topics, such as credit scores. Having successfully assisted over 20,000 clients with raising their credit scores, I am optimistic that the information I provide will enable you to achieve the same outcome. So, without further delay, let's delve into the world of credit scores.
Contents:
Different Types of Credit Scores
Understanding Credit Scores
Determining a Suitable Credit Score to Acquire a Mortgage Loan
Determining the Best Credit Score for a Car Loan
Tips for Improving Your Credit Score
Insights by Joe on Improving Your Credit Score
Different Types of Credit Scores
You will encounter two types of credit scoring models: the FICO model and the Vantage model. Understanding these models is essential, particularly when it comes to the variations in credit score calculation.
FICO Credit Score
The FICO credit scoring model is the most widely used scoring system, with eight different models in use from FICO 2 to FICO 10. Each FICO model produces a unique credit score dependent on the credit report. This could be complicated, so let me explain further to help you better understand why there are numerous FICO models.
When applying for credit, lenders pull different FICO reports. For instance, a mortgage lender will most likely request your FICO 5 credit report, while credit card companies primarily use the FICO 8 report. This variation is because each credit report carries a different weight for factors critical to the lender. Previous mortgage history carries more weight for a FICO 5 mortgage report, credit card history for a FICO 8 report, and auto credit history for a FICO-2 report.
Vantage Credit Score
The three major credit reporting agencies, Equifax, Experian, and TransUnion, developed the Vantage Score to compete with FICO. Vantage is a new scoring model compared to FICO, which has been in use since the 1970s. While FICO currently dominates the banking industry, the Vantage model is gaining traction in sectors such as personal loans and auto lending.
Is the Vantage Score Accurate?
Vantage score accuracy varies depending on context. The Vantage score is not widely used for lending purposes, so it will not match your lending score accuracy-wise. Vantage score is more of a good "general idea" of your FICO score. It is best used to give a rough idea of your overall scores in the absence of your FICO score.
The FICO scoring model is archaic and does not provide clear credit score representation. Credit reporting agencies have vast data resources, and the Vantage scoring model provides better scoring models based on current standards. Lenders are expected to adopt the Vantage scoring model widely in the next 5-10 years.
If you desire to get a visual representation of your different FICO scores, sign up on www.myfico.com to see all your distinct credit scores. Credit monitoring websites across the United States provide Vantage score for free credit reports.
Understanding Credit Scores
Credit scores range from 350 to 850 for both the FICO and Vantage credit models. A score of 350 is the worst credit score, while 850 is the best score. To help you understand where you stand as you work towards building your credit scores, we will discuss some important score thresholds.
1. 620 or Below
With a score of 620 or below, you have bad credit that may be caused by negative credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, focus on making timely payments and having ten active revolving credit accounts. Consider applying for a secured Credit Builder Card or OpenSky Credit Card, which can help you build your credit. Once you reach the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680
In this range, a credit score is considered fair for good credit. You have established credit, but there may be derogatory marks or accounts on your credit, high balances on your credit cards, or newly opened accounts that can temporarily lower your scores. If you have recently opened a new account, don't panic; your scores will return.
3. 740+
A credit score over 740 is considered "super-prime," and puts you in the top 20% of the US population. If you have this score, congratulations! You will receive the best interest rates for most loans. Keep up the great work by making timely payments and maintaining paid revolving credit card accounts.
Determining a Suitable Credit Score to Acquire a Mortgage Loan
To decide whether you meet the credit score requirements for acquiring a mortgage loan, you need first to identify the type of mortgage you are interested in. Mortgage loans are similar, but distinct, since they have different guidelines and regulatory requirements due to government backing. This article elaborates on the three most common mortgage types: conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans are the most widely used and are generally beneficial savings loan alternatives to VA loans. Unlike other loans, conventional mortgages do not require you to maintain private mortgage insurance (PMI) that could increase down-payment or monthly cost. This additional fee covers the lender in case of payment default. They also offer lower down-payment and better interest rates than other mortgages. A typical credit score requirement for a conventional mortgage is 640, and debt-to-income ratio cannot exceed 43%.
2. FHA Loan
The minimum credit score for FHA loans ranges from 580 to 619. Each lending institution has different loan programs that differ from the others. Therefore, if you fall within the credit score limit, it is advisable to seek different lenders and find an option that suits your financial preferences. You will have to keep PMI for at least 11 years while on the FHA loan, therefore, assess if it is an added expense in your monthly or housing budget. FHA loans have higher debt-to-income limits of up to 50%, making it possible to purchase more homes. The down payment requirements for the FHA loan can be as low as 3.5%, enabling you to acquire a mortgage with less money out of your pockets, although the interest rate might be higher.
3. VA Loan
The Department of Veteran Affairs (VA) does not have specific credit score requirements but examines potential borrower's payment history, and any past-due debt owed to the government. You must have served at least 181 days in the military, been in active duty for 90 days during wartime, served six years with the National Guard, or your spouse served in the military and died in active duty. The VA loan usually has the lowest interest rates and may not need a down payment. VA loans offer excellent benefits to veterans and their families.
Determining the Best Credit Score for a Car Loan
When it comes to financing a car purchase, your credit history carries more weight than just your credit score. While a high credit score is advantageous, it is not the only factor used to determine the interest rate you qualify for. Lenders analyze your credit history to assess the risk of extending credit. For instance, if you have a history of late payments or repossession, getting approved for a car loan will be more challenging than someone without these issues. However, bad credit or subprime lenders can approve loans even for those with previous credit mishaps. But, to reduce their risk, they require higher down payments and additional fees. Dealerships also charge a fee to cover this risk, which means they prefer selling cars with a higher markup to qualifying buyers or those offering a down payment. Lastly, having equity or a down payment provides you with purchasing leverage.
Best Credit Scores for Car Loans
While a precise credit score is not a guarantee for approval, credit scores above 680 are ideal. Any score below that threshold increases the interest rate charged to offset the risk to the lender. To illustrate, a credit score of 720 can lower the amount of interest payments by $1,100 compared to someone with a score of 680, who would pay almost two thousand dollars more in interest. If your score is 650, you will pay $2,600 more in interest, while someone with 580 or below will be charged an extra $8,800 in interest payments. Therefore, the higher your credit score, the less interest you will pay over the term of your car loan.
Tips for Improving Your Credit Score
Improving your credit score is essential and can be done with little effort if you follow these steps. Keep in mind that building good credit takes time and requires patience to avoid making irrational and bad decisions that can make your problems worse.
To improve your credit score, try doing the following:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is a great way to help maximize your credit score, especially if you have limited credit or are rebuilding your credit. A secured credit card like Open Sky or Credit Builder Card can help get you started. Revolving credit makes up 30–35% of your credit score, so make sure to pay the balance on time and keep it between $5 to $10 per payment.
2. Raise your limits
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. This can be done online or by calling your credit card company. They will typically ask for your current income, and a credit limit increase is usually granted with excellent payment history on a credit card for 7-15 months.
3. Pay down your balances
Keeping your balance low and close to zero is essential to improve your credit score. Use your credit cards for small purchases and leave a $1–5 balance on them. If you currently have high balances, make a plan to pay them down, and limit your credit card usage as it plays a massive role in your overall credit score. Additionally, credit card rates are high, and most payments will go towards interest and not principal.
Insights by Joe on Improving Your Credit Score
It's common for many of us to face issues with our credit score at some point in our lives. However, taking your credit situation seriously and dedicating time and effort to work on improving it can lead to remarkable changes in a short span. Often, people with bad credit get trapped in a cycle that they believe they can't break out of. It takes effort to create a remarkable credit score; those who give priority to their credit and spending habits are the ones who will succeed. Begin by creating a budget and fixing any negative spending patterns to reflect positively on your credit score. This article is aimed at providing you with a better understanding of credit. If you are seeking guidance or credit repair services, head over to www.asapcreditrepairusa.com today.