It may surprise you to learn that there are actually 30 different levels of credit scores. Despite this, many people who search for information on improving their credit score are often left confused and frustrated due to the overwhelming amount of information available online. Not only can it be difficult to know which sources to trust, but it's also common to come across misleading information that can drag you down a rabbit hole of confusion. As someone who has worked in the financial literacy and credit repair industry for over fifteen years, I'm here to provide you with honest advice on improving your credit score. My name is Joe Mahlow, and I've helped more than twenty thousand clients achieve better credit scores. In this article, I hope to give you the tools and knowledge necessary to do the same for yourself. Let's dive in.
Contents:
What are the Various Kinds of Credit Scores
Understanding Credit Score Ranges
Guidelines for Credit Scores to Obtain a Mortgage Loan
Credit Score Requirements for Car Loans
Tips to Boost Your Credit Score
Final Thoughts from Joe on Improving Your Credit Score
What are the Various Kinds of Credit Scores?
To properly understand your credit score, you must be familiar with two kinds of credit scoring models: the FICO model and the Vantage model. It is crucial to recognize the differences between these models when calculating your credit score.
FICO Scores
The FICO credit scoring model is extensively used and the most popular. It has eight different versions, ranging from FICO 2 to FICO 10. Different lenders use varying FICO reports, depending on the type of credit you seek. For instance, mortgage lenders typically use FICO 5 reports, while credit card companies usually use FICO 8 reports.
Why are there multiple FICO scores?
Each FICO report has a different weight assigned to it. Lenders will place more importance on factors critical to them, which contributes to a higher score. For example, if you have an excellent payment history on a previous mortgage, it will weigh more in your favor score-wise than if you had no history or negative history. The same applies to different FICO scoring models. Auto lenders commonly pull Fico-2 reports, and your previous auto history carries the most weight in this case.
If you are interested in viewing your various FICO scores simultaneously, register for an account at www.myfico.com.
Vantage Scores
The Vantage Score model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. Credit monitoring websites frequently offer Vantage scores for free to give you an idea of your credit reports. Though FICO is still the dominant scoring model, Vantage is gaining popularity in some sectors such as personal loans and auto lending.
Is the Vantage Score reliable?
Even though the Vantage Score is accurate, its accuracy may vary depending on the context. Since it is not widely used in lending, it may not provide an accurate lending score. To be precise, a credit score is as accurate as your ability to obtain credit. The Vantage scoring model may not be accurate since FICO is the primary scoring model. However, it can be used as a general idea of your FICO score. The Vantage scoring model provides a good estimate of where your overall scores are.
It is believed that the Vantage scoring model will be widely accepted within 5-10 years due to its ability to provide more current scoring models. The FICO scoring model, according to experts, is outmoded and does not give an accurate representation of credit scores. The credit reporting agencies hold the most significant data, and they have the upper hand in providing the best scoring models.
Understanding Credit Score Ranges
Credit scores are determined by two models, FICO and Vantage, which range from 350 to 850. A score of 350 indicates the worst credit score, while a score of 850 is considered excellent. It's important to know where you stand when building your scores, and to help clarify this, here are some vital score thresholds:
1. 620 or below
A score of 620 is considered bad credit, resulting from adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your scores, payment must be made on time, and ten active revolving credit accounts need to be opened. Consider applying for a Credit Builder Card or OpenSky Credit Card, the most secure credit card that will help build your credit score. Once your score reaches 620, you can start qualifying for an FHA home mortgage.
2. 640-680
Scoring between 640-680 is considered fair and indicates established credit. However, derogatory marks or accounts on your credit may have a negative effect, as well as high balances on credit cards. A drop in scores may occur if you have recently opened a new account, don’t worry, this is just temporary.
3. 740+
A score over 740 is considered super prime and will give you the best interest rates on loans. Congratulations if your score is over 740 because you belong to the 20% of the US population with the highest score. Always pay your accounts on time, keep your revolving credit card accounts paid, and you will be in excellent shape!
Guidelines for Credit Scores to Obtain a Mortgage Loan
The credit score requirement to purchase a house varies depending on the type of mortgage loan you are applying for. The requirements and guidelines for most mortgage loans are quite similar but can differ slightly due to federal regulations and government backing. Here's a breakdown of the three most common types of mortgage loans and their credit score requirements:
1. Conventional Loans
Conventional loans are the most popular loans outside of VA loans. They have a credit score requirement of 640, a debt-to-debt ratio no higher than 43%, and do not require private mortgage insurance (PMI). With lower downpayment requirements and better interest rates than other loans, conventional loans offer great savings options.
2. FHA Loan
An FHA loan is an option if you have a lower credit score, typically between 580 and 619. This loan requires you to keep PMI for a minimum of 11 years. It typically has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes if you have a lower income. The downpayment requirements on an FHA loan are as low as 3.5%, but you'll likely have a higher interest rate.
3. VA loan
A VA loan doesn't have specific credit score requirements but pre-qualifies applicants based on previous defaulted loans and any government-owed, past-due debts. To be eligible, you must have served in the United States Military for at least 181 days or meet other criteria. The VA loan typically has the best interest rates and does not require a down payment. It's an excellent option for our veterans.
Credit Score Requirements for Car Loans
When it comes to buying a car on credit, your credit history holds more weight than just your credit score. While a high credit score is beneficial, lenders pay closer attention to your previous and current credit histories to determine your risk level. Late payments, repossessions, and other credit issues could make it harder to secure a loan. Special finance lenders may still approve you for a car loan despite previous repossessions, but extra criteria will be added to lower their risk. Even dealerships may have to pay fees to approve you for a loan, which can affect the type of vehicle you'll be approved for. To increase your chances of approval and better loan terms, having equity or a down payment is essential.
Credit Score Range for New Car Loans
An exact credit score that can guarantee loan approval doesn't exist as lenders consider various factors, including credit scores. However, a score over 680 is ideal for securing a better interest rate. Anything below 680 can lead to higher interest rates due to increased risk. The following data compares the average interest rates for various credit scores for car loans:
1. 720 credit score or above - $5,500 interest
2. 680 credit score or above - $6,600 interest
3. 650 credit score or above - $8,100 interest
4. 615 credit score or above - $10,200 interest
5. 580 credit score or above - $13,900 interest
6. Below 580 credit score - $15,300 interest
As shown, a higher credit score leads to lower interest rates and ultimately affects your credit score positively.
Tips to Boost Your Credit Score
Raising your credit score is not an overnight process, but there are some crucial steps you can take to improve your credit right away. Building your credit score takes time, so it is essential to be patient and make rational decisions. Here are some tips to improve your credit:
1. Open 3-5 revolving credit accounts (credit cards):
Revolving credit, particularly credit cards, can help maximize your credit scores and increase your chance of approval. For beginners or those wanting to rebuild their credit, start with a secured credit card that doesn't focus on your credit score. Pay attention to paying the balance on time and keeping it between $5-10 each time you make a payment.
2. Raise your limits:
If you have active revolving credit card accounts, request a credit limit increase to help decrease your credit utilization percentage. You can usually do this online or by calling your credit card companies.
3. Pay down your balances:
Maintaining a low balance or paying your credit card balances down is crucial for boosting your credit score. Limit your usage to small purchases, and leave a balance of about $1-5 when you pay your bill. If you have a high balance, make a plan to pay it down with an "x" percentage of your paycheck and ultimately stop using your credit card.
Remember, your credit card spending habits play a significant role in your overall credit score. By following these steps, you can boost your credit score and improve your financial situation.
Final Thoughts from Joe on Improving Your Credit Score
We've all experienced having less-than-ideal credit at some point. However, if you're serious about improving your credit situation, it's essential to put in time and effort to work on yourself and your credit. Although it may seem impossible, most people stuck in bad credit situations can break the never-ending cycle and see significant changes in their credit scores relatively quickly. Developing a strong credit score takes considerable effort and requires individuals to prioritize their credit and focus on their spending habits. Start by creating a budget and addressing any poor spending habits; this will directly reflect on your credit score. If you're seeking guidance on credit repair, check out www.asapcreditrepairusa.com to learn more. This article provides helpful insights into understanding credit.