It may come as a surprise, but did you know that there are actually 30 distinct levels for credit scores? Many people are not aware of this fact and may become overwhelmed when searching for the best credit score online. The sheer amount of information found on search engines can be misleading and confusing, which is why I am here to lend a helping hand. My name is Joe Mahlow, and I have extensive experience in financial literacy and credit repair, spanning over 15 years. My aim is to provide authentic advice on various topics, starting with credit scores. I have successfully guided over 20,000 clients in improving their credit scores and I am confident that the information I will share with you will be equally beneficial. Are you ready? Let's delve into the world of credit scores.
Contents:
Different Types of Credit Scores
Understanding Good Credit Scores
Credit Score Requirements for Different Types of Mortgage Loans
The Importance of Credit History in Buying a Car
Ways to Improve Your Credit Score
Joe's Insights on Credit Improvement
Different Types of Credit Scores
Credit scores are crucial determinants of whether or not you'll be eligible for many financial products and services. There are two different credit scoring models that you should know about the FICO model and the Vantage model. It's important to understand how each of these models calculates your credit score.
FICO Credit Score
FICO is by far the most popular and widely used credit scoring model and consists of eight different models (from FICO 2 to FICO 10). You can expect to receive a different credit score depending on which lender pulls your credit report. For example, when you apply for a mortgage, the mortgage lender will most likely pull your FICO 5 report. On the other hand, if you're applying for a credit card, the lender will most likely pull your FICO 8 report.
There are different FICO scores because some factors critical to the lender carry more weight than others when determining your credit score. For example, a FICO 5 mortgage report will be weighted heavily on your mortgage history. In contrast, FICO 8 reports primarily use credit card history to calculate your score. Auto lenders typically pull FICO-2 reports, where your previous auto history weighs heavily in the score calculation.
To get a visual representation of all your FICO scores, you can sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO scoring model. Although it is not yet widely used, it's gaining popularity in some sectors such as personal and auto loans.
While the Vantage Score is accurate, it may not provide an accurate lending score as FICO dominates the lending sector. However, it can still give you a general idea of your credit score. Since the FICO model can be outdated and doesn't offer a clear representation of your credit score, the Vantage model provides better-scoring data based on today's standards.
Remember, credit reporting agencies are significant data collection entities outside social media companies. With the data they collect, they have the power to offer the best possible scoring data.
Understanding Good Credit Scores
Credit scores are measured on a scale of 350 to 850, with 350 indicating the lowest score and 850 being the highest. To attain the highest score possible, it is important to have a clear understanding of where you stand along the way. Here are some key score benchmarks that are important to keep in mind:
1. 620 or below -
This is considered a bad credit score, indicating negative credit history, high-balance credit cards, or the absence of credit card accounts. To improve your credit score, timely payments and ten active revolving credit accounts will be useful. If you are struggling, you should consider the Credit Builder Card or OpenSky Credit Card, as both of them are secure credit cards that can help you build your credit. With a score in the range of 620, you will also be eligible for an FHA home mortgage.
2. 640-680 -
Credit scores in this range are fair for good credit. It means you have established a credit history, but there may be derogatory marks, high balances, or newly opened accounts on your credit. If you recently opened a new account, don't panic because it's just a temporary decline in your credit score.
3. 740 and above -
Any credit score above 740 is considered "super-prime," and it will give you the best interest rates for most loans. Congratulations, if you belong to the 20% of the US population with this score because you're doing an excellent job. Continue making timely payments and keep your revolving credit card accounts paid, and you'll be in great shape!
Credit Score Requirements for Different Types of Mortgage Loans
The credit score requirements that you need to qualify for a mortgage loan depend on the type of loan you are interested in securing. Mortgage loans are typically categorized into three major types: Conventional loans, FHA loans, and VA loans, each with its own requirements and regulations.
1. Conventional Loans
Conventional loans are the most sought-after mortgage loans, commonly known for having the best interest rates. Unlike other loans like the FHA loan, conventional loans do not require you to maintain private mortgage insurance (PMI), a cost that can increase your downpayment or monthly payment. To qualify for a conventional loan, you are required to have a credit score of at least 640, and a debt-to-debt ratio no higher than 43%.
2. FHA Loans
FHA loans are your best bet if you have a lower credit score, typically ranging from 580 to 619. If your credit score falls within this range, it's best to shop around for different lenders to find the best financial deal. Along with a lower credit score requirement, FHA loans have a higher debt-to-income limit of up to 50%, enabling you to purchase more homes than with a conventional loan if you have a lower income. However, you will need to maintain PMI for at least 11 years, making it important to consider whether you can factor the added cost into your mortgage budget. Also, FHA loans require a down payment of at least 3.5% of the purchase, which typically has a higher interest rate.
3. VA Loans
The VA loan is a special type of loan available for people who served the country in the military for at least 181 days, lost their spouse during active duty, or served six years with the National Guard. While there isn't a specific credit score requirement, VA lenders are keen on ensuring that the loan applicant does not have any defaulted loans and that all past-due government debts are cleared before processing the loan. The VA loan has the best interest rates available and does not require a down payment, making it an ideal mortgage option for veterans.
The Importance of Credit History in Buying a Car
When applying for a car loan, your credit history plays a more significant role in determining your eligibility than your credit score. While a higher credit score is beneficial, it does not necessarily guarantee a lower interest rate. Lenders assess your credit history to determine the risk involved in extending credit, taking into account any late payments or previous defaults on auto loans. For individuals with a poor credit history, special finance lenders may still approve car loans, but may require higher down payments and additional fees to reduce risk. Dealerships may also have to pay fees to approve loans, leading to the selection of vehicles with higher markups to cover these costs. Ultimately, having equity or a downpayment is the best leverage when buying a vehicle on credit.
Regarding credit scores
While there is no exact score for loan approval, a credit score above 680 is generally ideal. A lower score may result in a higher interest rate charged to offset the risk. The interest rate varies depending on the score, with individuals with higher credit scores paying less interest. For instance, a person with a score of 720 or above pays on average $5,500 in interest, while someone with a score of 580 or above pays an average of $15,300 in interest. It is evident that maintaining a high credit score is crucial in reducing interest rates, thereby impacting overall credit score.
Ways to Improve Your Credit Score
Improving your credit score requires effort and patience. You must realize that building a good credit score takes time and is not a quick fix. Without patience, irrational decisions can be made, exacerbating your credit issues. The following are some things you can do to improve your credit score right now:
1. Open 3-5 Revolving Credit Accounts
Revolving credit is an excellent choice to help maximize your credit score and increase your chances of approval, especially for those with limited or poor credit. A secured credit card, such as Open Sky or Credit Builder Card, is an excellent option until you build up your credit score. Maintaining a low balance, paying it on time, and using the card only for small purchases will help to build your credit score quickly and effectively.
2. Raise Your Limits
If you have active revolving credit card accounts, requesting a credit limit increase can help increase your overall credit limits, resulting in a lower credit utilization percentage. To request a credit limit increase, you can typically do it online through your online portal or by calling your credit card company. Ensure that you have an excellent payment history before requesting a credit limit increase; this could take around 7-15 months.
3. Pay Down Your Balances
Keeping your credit card balance low by only using the card for small purchases and paying it off monthly will help your credit score improve. If you currently have high balances and cannot pay your credit card off, make a plan to pay it down each month using a portion of your paycheck. Consistent and timely payments will help to improve your credit score and limit your usage of credit cards, minimizing high-interest rates.
Joe's Insights on Credit Improvement
At some point, everyone faces the challenge of having subpar credit. Nevertheless, if you approach your credit predicament with seriousness and devote time and effort to enhance your credit status, you will quickly notice a significant improvement in your credit rating. Many individuals who have poor credit get trapped in a cycle of credit problems and deem rebounding from it impossible. There is no shortcut to developing a great credit score; those who put their credit first and address their spending habits will eventually achieve their desired outcome. You can commence by making a budget and rectifying your problematic spending patterns, which will consequently impact your credit score positively. This write-up aims to enhance your comprehension of credit and its workings. If you seek credit guidance or assistance with credit restoration, visit our website, www.asapcreditrepairusa.com, today.
- Having bad credit is a common problem that everyone goes through.
- Improving credit score requires taking it seriously and dedicated effort on one's part.
- Many people with poor credit believe that having good credit again is impossible.
- Taking a proactive approach is the key to achieving great credit.
- Creating a budget and working towards fixing spending habits helps improve credit scores.
- For credit guidance or repair, visit www.asapcreditrepairusa.com.