It's time to demystify the world of credit scores and reveal a little-known fact: there are actually 30 different levels of credit scores. Many people search for the best credit score online, only to be bombarded with conflicting information that is often confusing and misleading. As someone who has worked in financial literacy and credit repair for over 15 years, I want to provide you with honest and straightforward advice on this important topic. My name is Joe Mahlow and I have already helped more than 20,000 clients to transform their credit scores. Now it's your turn! Join me as we dive deep into the world of credit scores and discover the critical information you need to know.
Contents:
Different Credit Scoring Models You Should Know
Determining a Good Credit Score
Determining an Ideal Credit Score to Acquire a Mortgage Loan
Determining the Ideal Credit Score for Buying a Car
Ways to Increase Your Credit Score
Joe's Advice on Improving Your Credit
Different Credit Scoring Models You Should Know
Understanding credit scores is vital when it comes to credit applications. There are two commonly known credit scoring models, namely, the FICO and the Vantage model, that you should be familiar with as they have different methods of calculating credit scores.
FICO Credit Score
FICO is the most popular and widely used credit scoring model, with eight different FICO models ranging from FICO 2 to FICO 10. The score you receive from FICO varies depending on your credit report, which may cause confusion. However, understanding the differences in FICO models is important.
Different lenders pull varying FICO reports based on the type of credit you are applying for. For example, a mortgage lender most likely pulls your FICO 5 credit report, whereas credit card companies use the FICO 8 report. The weight of each credit report varies, meaning that factors critical to the lender have a more significant impact on your credit score.
Vantage Credit Score
Developed by the three major credit reporting agencies - Equifax, Experian, and TransUnion - the Vantage Score is a new credit scoring model intended to compete with FICO. While FICO has been used since the seventies, Vantage is gaining popularity in certain sectors such as personal loans and auto lending.
Although the Vantage Score is accurate, it is not widely used for lending purposes. Therefore it may not be accurate when indicating your actual lending score. However, it provides a general idea of your FICO score, the most recognized scoring model.
In conclusion, the FICO scoring model is well-established, with its varying models. Whereas, the Vantage scoring model is relatively new but gaining popularity. Credit reporting agencies are the most significant data collectors, and Vantage's ability to provide the best scoring data based on today's standards could likely make it the go-to source for lenders in the future.
Determining a Good Credit Score
Scores within the FICO and Vantage models range from 350 to 850, where 350 marks the lowest credit score and 850 marks the highest. It is crucial to know where you stand throughout the process of building your credit, so let me provide you with some key score criteria to help you achieve your ultimate goal.
Thresholds for Good Credit
620 or below:
Scores within this range are considered bad credit, and it is highly likely that you have a negative credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, make sure to pay your bills on time and keep ten active revolving credit accounts open. The Credit Builder Card or OpenSky Credit Card can help you build your credit since they are both secured credit cards. Once you reach the 620 credit score range, you can qualify for an FHA home mortgage.
640-680:
This score range is considered fair. Scores in this range indicate that you have established credit, but you may have some derogatory marks or accounts on your credit, and you may have some high balances on your credit cards that you will need to pay down. If you have recently opened a new account, don't worry; this will cause only a temporary drop in your scores.
740+:
A credit score over 740 is considered "super-prime" and will provide you with the best interest rates for most loans. If you have a score above 740, congratulations! You are in the top 20% of the US population with this score. Always pay your accounts on time and manage your revolving credit card accounts, and you will be in excellent shape.
Determining an Ideal Credit Score to Acquire a Mortgage Loan
The credit score requirement to acquire a mortgage loan depends on the type of loan that you are considering. While the federal regulation and government support have made the requirements and guidelines for most mortgage loans to be similar, there are still distinct differences. The most commonly utilized mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most prevalent, alongside being the best-saving loan alternative outside of VA loans. With no private mortgage insurance (PMI) required, downpayment or monthly payment costs can be reduced. This insurance is a safety net for lenders when loan payments are delinquent. Conventional loan credit scores should be at least 640 and present a debt-to-debt ratio not exceeding 43%. The downpayment requirements on this loan type are usually lower, accompanied by better interest rates.
2. FHA Loans
FHA loan borrowers typically have credit scores within a range of 580 to 619. However, loan programs are different, and shopping around for lenders that are suitable for your credit score is important. PMI is mandatory on FHA loans for at least 11 years, adding to the mortgage's cost. Buyers can purchase more homes with this loan type than conventional loans if their debt-to-income ratio does not exceed 50%. Moreover, the downpayment requirements are as low as 3.5% of the purchase, making it a suitable option for those with comparatively lesser savings but with higher interest rates.
3. VA Loans
If you've served in the United States Military or lost a spouse in the course of active duty, the VA loan can be the best financial option to consider. The VA loan does not have a credit score requirement, but instead, any defaulted loans and past-due debts owed to the government are considered when pre-qualifying. This loan type usually offers the best interest rates and does not require a down payment, making it a great way to give back to our veterans.
Determining the Ideal Credit Score for Buying a Car
When purchasing a car, your credit history holds more weight than your credit score in determining your eligibility for a loan. While a higher credit score can be an advantage, its role in the interest rate is less significant. Lenders assess your credit history to evaluate the risk involved in extending credit. Having a record of defaulted payments or repossession can affect your chances of being approved for a loan. Some lenders approve car loans for individuals with poor credit but with stricter criteria, such as higher down payments and extra fees charged by dealerships.
An equity or down payment can boost your bargaining power when buying a car.
Although there is no specific credit score required for approval, a score above 680 is considered ideal. A poor credit score can increase your interest rate and risk. The interest rates for a car loan fluctuate with each score range. For instance, a credit score of 720 or higher incurs an average interest of $5,500, while a score of 580 or below results in an average of $15,300 in interest. The information shows that higher credit scores equate to less interest, which affects your credit score positively.
Ways to Increase Your Credit Score
There are several actions you can take today with minimal effort to enhance your credit score. You should keep in mind that building a good credit score is a gradual process and not an overnight task. Therefore, you need to exercise patience since impulsive credit decisions often worsen your situation.
Below are some strategies to improve your credit:
1. Open 3-5 revolving credit accounts
Revolutionary credit is an ideal option to maximize your credit score. Especially if you have little credit or want to rebuild your credit, obtaining a large loan can be challenging. For maximum approval chances, you should start with a secured credit card, such as OpenSky or Credit Builder Card, which focuses more on your payment ability and not your credit score. Revolving credit accounts make up 30-35% of your overall credit score and are the best option to increase credit scores. Ensure you pay your balance on time and keep it between $5-10, making small purchases like gas and simple groceries.
2. Increase your limits
If you are an active revolving credit card account holder, you can request a credit limit increase to lower your credit utilization percentage and increase your credit limit. You can do this online or call your credit card company to initiate the request. The company reviews your credit history before deciding on your request. You need to have an excellent payment history of 7-15 months.
3. Pay down your balances
Maintaining a low credit card balance or zero is crucial. You do not have to use your credit cards every month, and it is recommended to use them for minimal expenses. Leave about $1- $5 balance on your credit cards, and if you cannot pay off high balances, create a payment plan. Ensure you limit your credit card usage as it significantly affects your credit score.
Joe's Advice on Improving Your Credit
We've all experienced having less-than-ideal credit at some point. However, if you are committed to improving your credit situation and put in the necessary time and effort, you will see significant changes to your credit score in a relatively short time period. Unfortunately, many individuals with poor credit find themselves stuck in a cycle of credit problems and feel hopeless about turning things around. It's important to realize that achieving a great credit score requires hard work, commitment, and a focus on spending habits. To get started, consider developing a budget and addressing any harmful spending patterns. This will have a direct impact on improving your credit score. For more information on understanding credit or receiving credit repair assistance, check out our office's website at www.asapcreditrepairusa.com. Remember, it is possible to rebuild your credit and take control of your financial future.