It's easy to assume that there is just one type of credit score out there, but did you know that there are actually 30 different levels? With so much information available on Google, searching for the best credit score can be a daunting task. Unfortunately, much of the information you may come across can lead you down the wrong path. As someone who has been working in financial literacy and credit repair for over fifteen years, my mission is to provide you with honest and straightforward advice on a range of topics - including credit scores. Having already helped over 20,000 clients improve their credit scores, I hope to empower you with the knowledge to do the same. So, without further ado, let's dive into the world of credit scores.
Contents:
Understanding Different Types of Credit Scores
Understanding credit scores: What's considered a good credit score?
Determining the Ideal Credit Score for Buying a House
Guidelines for buying a car and how credit score affects the process
Tips for Boosting Your Credit Score
Joe's Advice on Improving Your Credit Score
Understanding Different Types of Credit Scores
Credit scores are essential metrics that lenders use to determine your creditworthiness. There are two types of credit scoring models: FICO and Vantage. To understand the differences between them, let’s discuss each model in detail.
FICO Credit Score
The FICO credit scoring model is the most widely used and popular. It has eight different models, ranging from FICO 2 to FICO 10. Each FICO model will give you a different credit score depending on your credit report. For example, if you apply for a mortgage, your lender will typically pull your FICO 5 report, whereas if you apply for a credit card, they will use your FICO 8 report.
Why So Many FICO Scores?
The various FICO reports exist because each credit report has a different "weight." In other words, factors critical to the lender will have a more significant impact on a credit score than less important ones. For example, if you apply for a mortgage, your previous mortgage history will weigh more on your FICO 5 report than if you had no history or negative history. All FICO scoring models work this way, including credit cards and auto lending.
To get a better understanding of your various FICO scores, sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO scoring model. Vantage is a new model compared to FICO which has been in use since the 1970s. While FICO dominates the lending sector, Vantage is becoming increasingly popular for personal loans and auto lending. Credit monitoring websites often use Vantage, providing a free copy of your credit report in return.
Is the Vantage Score Accurate?
The Vantage Score is accurate, insofar as it provides a general idea of your FICO score. However, since it’s not widely used for lending purposes, it may not be accurate when it comes to your actual lending score. For a true FICO score, you'll need to pay for it or have a lender pull your credit report. Nevertheless, the Vantage scoring model provides a good idea of where your overall scores are.
Given the credit reporting agencies' significant role in providing the best scoring data, it's possible that lenders will rely heavily on the Vantage scoring model in the future, given the model's ability to provide the best scoring metrics for today’s standards. In contrast, the FICO model is outdated and doesn’t give the user a clear representation of their credit scores.
Understanding credit scores: What's considered a good credit score?
Both the FICO and Vantage scoring models range from 350 to 850. A score of 350 is the worst credit score and 850 is the best score you can achieve. To set your goals to have the highest scores, it’s essential to know where you stand. Below are some vital score thresholds:
620 or below:
This is considered a bad credit score. If your score is in this range, you may have some adverse credit history, high-balance credit card accounts or no credit cards. Timely payments and active revolving credit accounts can help improve your score. Consider the Credit Builder Card or OpenSky Credit Card to build your credit. If your credit score is 620 or above, you can qualify for an FHA home mortgage.
640-680:
Scores ranging from 640 to 680 are considered fair to good credit. You have established credit, but you may have derogatory marks or accounts and high credit card balances that need to be paid down. Also, opening a new account can cause a temporary drop in your score.
740+:
A credit score of 740 or higher is considered "super-prime." You are part of the top 20% of the US population with this score and will likely receive the best interest rates for most loans. Consistently pay your accounts on time and keep your revolving credit card accounts paid. Congratulations on achieving this score- keep up the great work!
Determining the Ideal Credit Score for Buying a House
Your ideal credit score for a mortgage loan varies depending on the kind of loan you are applying for due to federal regulation and government backing. Typically, there are three loan types: conventional, FHA, and VA loans, each with different requirements and guidelines.
Conventional Loans
Conventional loans are well-liked by borrowers due to their lower downpayment requirements and interest rates. Unlike VA loans, they do not require you to hold PMI, which can increase monthly payments. A credit score of at least 640 and a maximum debt-to-debt ratio of 43% are typically necessary for approval.
FHA Loans
FHA loans are a good alternative for those with lower credit scores, typically from 580 to 619. These loans usually require you to maintain PMI for a minimum of 11 years, which can be an extra expense. However, an FHA loan’s debt-to-income limit can be as high as 50%, enabling you to buy more homes with lower incomes. Although the downpayment requirement on this loan type is only 3.5% of the purchase, you should expect to pay a higher interest rate than conventional loans.
VA Loan
Although there isn't a particular credit score required for VA loans, you need to demonstrate responsible credit behavior by showing no previous defaulted loans or government-owed past-due debts. Furthermore, you must meet certain qualifications, such as an honorable discharge or service in the U.S. military for at least 181 days. The VA loan generally has the most favorable rates and typically does not require a downpayment. It is a wonderful way to give back to our veterans who have served our country.
Guidelines for buying a car and how credit score affects the process
When purchasing a new car, your credit history has a greater impact on your eligibility for a loan than your credit score. While having a high credit score is beneficial, lenders consider your previous and current credit history to assess risk before extending a loan. Those with past issues, such as late payments, repossession, or other credit problems, may struggle to secure a loan. However, lenders specializing in subprime loans can approve loans at higher rates and with alternative criteria, such as larger down payments and fees. The dealer may also have to pay a fee to secure the loan. In general, having equity or a down payment increases your leverage when buying a car on credit.
Credit score range for new vehicle loans
There is no magic number for a credit score to guarantee approval, but a score above 680 is desirable to keep interest rates low. Scores below 680 could result in higher interest rates, depending on other factors such as credit risk. The following table shows how credit scores affect interest rates for a car loan:
Those with a credit score of 720 or above will pay an average interest of $5,500 on a loan.
Those with a credit score of 680 or above will pay an average interest of $6,600 on a loan.
Those with a credit score of 650 or above will pay an average interest of $8,100 on a loan.
Those with a credit score of 615 or above will pay an average interest of $10,200 on a loan.
Those with a credit score of 580 or above will pay an average interest of $13,900 on a loan.
Those with a credit score of 579 or below will pay an average interest of $15,300 on a loan.
As demonstrated, credit score can drastically impact interest rate and overall credit health.
Tips for Boosting Your Credit Score
If you're looking to raise your credit score, there are several straightforward steps you can take to achieve your goal. However, it's important to understand that building a strong credit history takes time and requires patience. Trying to rush the process can lead to bad decisions that hurt your credit score further. Here are some things you can do right now to improve your credit:
Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, provides an excellent opportunity to increase your credit score. Opening a secured credit card is a good option for those with limited credit or trying to rebuild their credit. Focus on cards that look for proof of income and a history of timely payments, such as Open Sky or Credit Builder Card. Revolving credit accounts make up 30-35% of your credit score, making them essential to building your credit score.
Request a credit limit increase:
If you have active credit card accounts, requesting a credit limit increase can help improve your credit utilization percentage. Most individuals exceed 30% of their overall limits on their credit cards, which hurts their credit. Calling your credit card company and requesting a credit limit increase is easy, and most credit card companies will want to see a history of excellent payments before agreeing to a credit limit increase.
Pay down your balances:
To maintain a good credit score, it is essential to keep your balances low and close to zero. Try to limit your credit card usage, and leave a $1-$5 balance each month. If you cannot pay your balances off, create a game plan to gradually pay down your debt. The worst decision is to pay your credit card, only to run your balance back up, as this hurts your credit score. Remember, your credit card spending habits can significantly impact your overall credit score.
Joe's Advice on Improving Your Credit Score
Having less-than-ideal credit is not uncommon and can feel overwhelming. However, taking your credit situation seriously and dedicating time and effort to improving it can lead to significant improvements in your credit score. Unfortunately, many individuals with poor credit fall into a cycle of consistently struggling with credit issues, believing that having good credit is unattainable. Achieving a good credit score requires hard work and dedication to prioritizing your credit and spending habits. Kickstart your journey by creating a practical budget and focusing on correcting any bad spending habits you may have. Your credit score will improve as a result of these changes. For further guidance on credit repair or assistance in improving your credit score, do not hesitate to contact us at www.asapcreditrepairusa.com.
Key Takeaways:
- With effort and dedication, you can improve your credit score quickly.
- Do not give up hope on having good credit despite past issues.
- Creating a budget and tackling bad spending habits is essential to improving your credit score.
- Contact www.asapcreditrepairusa.com for professional help with credit repair or improving your credit score.