It's interesting to know that there are approximately 30 different credit score levels, but most people are unaware of this fact. When you search for the best credit score, you may likely come across various conflicting answers on Google. Not only is this information confusing, but it can also be misleading and lead to unnecessary stress. My name is Sarah, and my expertise lies within financial literacy and credit repair for more than 15 years. I aim to give you honest guidance on various topics relating to credit scores. Over the years, I've managed to help over twenty thousand clients improve their credit scores, and I'm hopeful to provide you with adequate information to do the same. Let's delve in.
Contents:
Understanding Different Credit Scoring Models
Determination of a Good Credit Score
Credit score requirements for different mortgage loans
Credit Score and History in Car Loans
Tips on Boosting Your Credit Score
Joe's Insights on Rebuilding Your Credit
Understanding Different Credit Scoring Models
There are two primary credit scoring models: FICO and Vantage. These models are important to understand because they can calculate your credit score differently. Here's what you need to know about each model:
1. FICO Credit Score
- The FICO credit scoring model is widely used, with eight different FICO models available.
- Different FICO models may provide varying credit scores depending on your credit report.
- The factors used in calculating your score will depend on the type of lender you use. For example, a mortgage lender will likely pull your FICO 5 credit report, while a credit card company may use FICO 8.
- Each FICO score has a different "weight" based on the factors critical to the lender.
2. Vantage Credit Score
- Vantage is a new scoring model recently developed by the three major credit reporting agencies - Equifax, Experian, and TransUnion.
- Some credit monitoring websites also use Vantage to provide a free copy of your credit reports.
- While not widely used for lending purposes, the Vantage Score can still provide a good general idea of your FICO score.
- The Vantage Score can be particularly useful for personal loans and auto lending.
- The Vantage Score is expected to increase in popularity in the next 5-10 years because it provides the best scoring models based on current standards.
In conclusion, as credit reporting agencies have the most comprehensive collection of data, their scoring models can provide the most accurate scores. As such, it can be beneficial to understand both FICO and Vantage scoring models to gain a complete understanding of your creditworthiness.
Determination of a Good Credit Score
Credit scores range from 350 to 850 for both the FICO and Vantage models. A score of 850 implies excellent credit, whereas a rating of 350 represents poor credit. Maintaining the highest credit score entails understanding the journey to get there. Here are some vital score thresholds to help you with that:
1. 620 or below:
A score in this range indicates bad credit and may result from high-balance credit card accounts, derogatory marks, or no credit cards at all. To improve your credit scores, make timely payments and have ten active revolving credit accounts open. You may also consider using the Credit Builder Card or OpenSky Credit Card, which are secured credit cards to facilitate credit building. Upon reaching the 620 credit score threshold, you can start qualifying for an FHA home mortgage.
2. 640-680:
Scores in this range are considered fair for good credit. They indicate established credit but bear some negative accounts or derogatory marks. You may also have high balances on your credit cards to pay down. Newly opened accounts may also cause a temporary drop in your scores. However, this is no cause for alarm as your scores will eventually return.
3. 740+:
A credit score exceeding 740 is considered "super-prime" and guarantees the best interest rates for most loans. Such a score places you in the top 20% of the US population. A score in this range reflects responsible management of accounts and payment of credit card balances. Keep up the excellent work!
Credit score requirements for different mortgage loans
The credit score you need to qualify for a mortgage loan would highly depend on the type of loan you are applying for. Majority of mortgage loans have similar requirements and guidelines, while others differ. There are three common types of mortgage loans: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most well-liked and an excellent savings option apart from the VA loan. With Conventional loans, you do not need to have Private Mortgage Insurance (PMI), which can increase your monthly payment and downpayment. PMI is to protect the lender if you stop making payments on your loan. Conventional loans usually have better interest rates and lower downpayment requirements compared to other mortgage loans. Typically, you will have to keep your credit score at 640, and your debt-to-debt ratio should not go beyond 43%.
2. FHA Loan
This mortgage loan is designed for a low credit score, which starts from 580 to 619, and all loan programs have unique criteria. If you meet the credit score limits, please shop around different lenders for the best financial option for you. At least 11 years of PMI is needed for FHA loans, which is an added cost to your mortgage, and you should consider it if you're on a budget. FHA has a more generous debt-to-income limit of 50%, permitting you to own more homes than with a conventional mortgage loan if you have a lower income. If you require a smaller downpayment, the minimum is 3.5% of the purchase price, although you'll typically have a higher interest rate.
3. VA loan
Although there is no formal credit score prerequisite for the VA Loan, they assess whether you have defaulted loans in the past and any government-owed past-due debts when you pre-qualify. You must have either served a minimum of 181 days in the United States Military, served 90 consecutive days during wartime, served six years with the National Guard, or lost your spouse whilst in active service. The VA loan offers excellent interest rates and typically does not call for a downpayment, making it an appealing option. It's perfect for giving back to our veterans.
Credit Score and History in Car Loans
When you plan on purchasing a vehicle, your credit score is not the sole factor that contributes to your qualification, but your credit history plays a major role. A high credit score is important, but it's not the only determiner of the interest rate you get. When you opt for a car loan, lenders assess the risk involved with the extension of credit by reviewing your current and past credit history. As an example, if you had difficulties paying your previous or current auto loan or had a repossession, getting approval for a loan would be difficult. Although special finance lenders will approve anyone for a loan, they have added specific criteria to the loan, such as high down payments and extra dealership fees to make up for the risk. Dealership fees are charged to lessen the likelihood of a loan default, which means you may end up with the vehicle they select for you because they have a higher markup on it. Finally, to purchase a vehicle with credit, you need to have equity or be prepared to make a down payment.
Perfect Credit Score for a New Car Loan
There is no one credit score that guarantees approval, and your credit score is not the sole determining factor. The credit score can approve a borrower with a score of over 680 with a lower risk factor, while scores below that will experience more difficulties securing a loan. The amount of interest charged changes by $1,500 as the credit score drops ten points. Therefore, someone with a low credit score would pay a considerably higher interest rate than someone with an excellent score. This is illustrated precisely in the following table:
- Someone with a 720+ credit score will pay an average of $5,500 in interest on a loan.
- Someone with a 680+ credit score will pay an average of $6,600 in interest on a loan.
- Someone with a 650+ credit score will pay an average of $8,100 in interest on a loan.
- Someone with a 615+ credit score will pay an average of $10,200 in interest on a loan.
- Someone with a 580+ credit score will pay an average of $13,900 in interest on a loan.
- Someone with a credit score of 580 and above will pay an average of $15,300 in interest on a loan.
Thus, having a higher credit score significantly decreases the total interest you will pay, influencing your overall credit score.
Tips on Boosting Your Credit Score
Improving your credit score requires patience as it takes time to build a good credit score. Making irrational and impulsive decisions with your credit will only worsen the problem. However, there are several steps you can take right now to make a positive impact. Here are some tips:
1. Open 3-5 revolving credit accounts
Revolving credit is an excellent option to maximize your credit scores. It may take a lot of work to build credit by obtaining a large loan, so instead, start with secured credit cards like Open Sky or Credit Builder Card which focus on your ability to pay the card on time, such as not having a bankruptcy history in the last two years and a current income. Revolving credit makes up 30 – 35% of the overall credit score, and it is the best option to help build credit scores quickly. Remember to pay your balance on time and limit the use of your card to small purchases.
2. Raise your limits
You can quickly request a credit limit increase for your credit cards to help increase your overall credit limits and lower the credit utilization percentage. Make sure to check with your credit card company to have your limits raised. They typically want to see an excellent payment history on a credit card before considering a credit limit increase.
3. Pay down your balances
Keeping your balance low and close to zero is essential. Use your credit cards only for small purchases, and leave about a $1 - $5 balance on your credit cards. If you currently have high balances, make a plan to pay down your credit card debt. Avoid running up balances again by reducing credit card usage. Remember, credit card spending habits play a significant role in your overall credit score, so minimize credit card usage as much as possible.
Joe's Insights on Rebuilding Your Credit
We've all experienced having less-than-desirable credit scores. However, taking your credit situation seriously and dedicating sufficient effort and time to improving it can result in quick and significant changes to your credit report. Many individuals with bad credit become trapped in the cycle of credit problems and think that achieving good credit again is an insurmountable task. Building a remarkable credit score requires conscientious efforts and prioritizing your creditworthiness, but those who focus on their spending habits and credit management skills will thrive. Begin your journey towards credit rehabilitation by creating a budget that helps you address your poor financial habits. Your credit score will improve as you develop responsible spending habits. For in-depth guidance and assistance with credit repair, please don't hesitate to visit www.asapcreditrepairusa.com.