Were you aware that there are 30 individual levels of credit scores? It's a common misconception that finding the best score is a straightforward task. The Google search results can often be overwhelming, potentially misleading, and ultimately lead you in the wrong direction. My name is Joe Mahlow, and I have spent the last fifteen years working in the finance industry and credit repair sphere. My primary aim is to offer you unbiased advice on a range of subjects, including credit scores. Over the years, I've helped more than twenty thousand clients improve their credit ratings, and I hope to provide you with enough knowledge to do the same. Let's dive into it!
Contents:
Understanding Different Credit Scoring Models
Guide to Good Credit Scores
What Credit Score Do I Need To Buy A House?
Determining the Credit Score Range for Buying a Car
Tips for Improving Your Credit Score
Tips from Joe on Improving Your Credit
Understanding Different Credit Scoring Models
Credit scores play a vital role in determining whether you can successfully obtain credit. The two primary scoring models that people should know and understand are the FICO model and the Vantage model. Each has its unique features, which can make it difficult to understand what score you need.
FICO Credit Score
The FICO credit score is the most popular model used to determine credit scores, consisting of eight different FICO models. Each model is tailored to different types of credit. For example, suppose you apply for a mortgage, the lender will most likely pull your FICO 5 credit report, while your FICO 8 report will be accessed if you apply for a credit card. The different models play a crucial role in determining credit scores based on the "weight" given to particular factors, with some factors having more impact than others, and each score might weigh specific factors differently. Therefore, it's essential to understand the differences among the different models. You can visit www.myfico.com and sign up for an account to understand your different credit scores better.
Vantage Credit Score
The Vantage Score is a new scoring model built to compete with the FICO scoring model. Equifax, Experian, and TransUnion, the three major credit reporting agencies, introduced it. The Vantage Score is gaining popularity in some sectors, such as personal loans and auto lending. Although not widely used for lending purposes, it is essential to note that Vantage Scores may not be as accurate as FICO scores when it comes to real lending scores. Instead, you can use it as a general idea of your FICO score. If you are interested in monitoring your credit score regularly, you can use Vantage through credit monitoring websites to get a free copy of your credit reports.
To summarize, while FICO currently dominates the lending sector, it is expected that Vantage Score will be widely used in the next 5-10 years. Therefore, it's crucial to understand both models as they provide the best-scoring models based on today's standards. The credit reporting agencies, such as Equifax, Experian, and TransUnion, have the most significant data available outside social media companies. Hence they can provide the best scoring data to the lender. Therefore, it's vital to keep in mind that having good credit is essential to obtaining the best loans.
Guide to Good Credit Scores
The FICO and Vantage credit scoring models operate on a scale of 350 to 850, with 350 representing the lowest possible credit score and 850 representing the highest. To achieve your credit score goals, it is essential to understand where you fall within this range. Here are some critical thresholds to keep in mind:
620 or below:
This is considered bad credit. Falling below this threshold may result from adverse credit history, high-balance credit card accounts, or nonexistent credit card accounts. The best way to improve your score is to make timely payments and maintain ten active revolving credit accounts. Two recommended options for building credit include the Credit Builder Card and OpenSky Credit Card. Once you reach a credit score of 620, you may begin to qualify for an FHA home mortgage.
640-680:
This range is considered fair for good credit. Scoring within these parameters is a sign of established credit. However, you may also have some derogatory marks or accounts on your credit report, including high balances on credit cards that will need to be paid down. Newly opened accounts can also temporarily reduce your scores, don't panic if you experience such a dip.
740+:
Any credit score exceeding 740 is considered "super-prime" and provides you with the best interest rates for most loans. If you find yourself in this category, congratulations! You are part of the top 20% of the US population with scores that high. Always make timely payments and keep your revolving credit card accounts paid to maintain your excellent credit standing.
What Credit Score Do I Need To Buy A House?
The necessary credit score to buy a house is dependent on the type of mortgage loan you are trying to qualify for. Due to federal regulation and government backing, there are similar or differing requirements and guidelines for most mortgage loans. There are three most common mortgage loan types: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans, which typically give the best "savings" option outside of the VA loan, are the most popular loans. They do not require you to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment. PMI protects the lender in case you stop making payments on your loan. Conventional loans have lower downpayment requirements and better interest rates than other mortgage loans. Conventional mortgage loans require a credit score of 640 and a debt-to-income ratio of no higher than 43%.
FHA Loan
The FHA mortgage loan targets lower credit scores, usually between 580 and 619. Since all loan programs are diverse, it advisable to scout around for different lenders who will provide the best financial option for you. FHA loans typically require you to maintain PMI for at least 11 years, which could be an extra cost and something to consider, mainly if you are working on a budget. This loan type has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan if you have a lower income. Lastly, the down payment requirement for an FHA loan is as low as 3.5% of the purchase, making it possible to get a mortgage for less cash out of pocket than a conventional loan, but you might typically have a higher interest rate.
VA loan
Although there's technically no credit score requirement with the VA Loan, they scrutinize you for previous defaulted loans and any past-due debts owed to the government while pre-qualifying you. Serving in the United States Military for at least 181 days, serving 90 consecutive days during wartime, serving six years with the National Guard, or having your spouse in the military and losing their lives during active duty are the primary criteria for a VA loan. The VA loan offers the best available interest rates and, typically, does not require a down payment. The VA Loan is fantastic, as it is a perfect way to appreciate our veterans.
Determining the Credit Score Range for Buying a Car
The credit score is not the only aspect taken into consideration when buying a car, your credit history also plays a vital role. While a high credit score is crucial, it has a lesser impact on the interest rate that qualifies you for the loan. The credit history of your past and current loans determines the risk involved in extending credit to you. Having previous or current credit issues will make it challenging for approval. Special finance lenders qualify anyone for a car loan, adding specific criteria such as a higher down payment, extra fees, and vehicle selection to reduce the risk of default. When purchasing a vehicle on credit, having equity, or a down payment is more advantageous.
The Qualifying Credit Score Range for a New Vehicle
Having a credit score of 680 or higher is ideal when purchasing a car on credit; anything lower may increase your interest rate due to the risk you pose to lenders. The interest rates charged on a car loan are based on your credit score. The higher the credit score range, the less interest you pay, affecting your overall credit score. For instance, someone with a credit score of 720 or above, on average, pays $5,500 in interest on a car loan, compared to someone with a score of 580 or above, who pays $15,300, on average.
Tips for Improving Your Credit Score
Improving your credit score requires patience and effort, as it does not happen overnight. However, there are several things you can do to help increase your credit score with little effort. Here are some useful tips:
1. Open 3-5 Revolving Credit Accounts:
Opening a secured credit card is an excellent option for someone with limited credit or looking to rebuild their credit. Revolving credit makes up 30-35% of your overall credit score and is the best option to quickly build credit scores. Make sure you pay your balance on time and limit the use of the card to small purchases like gas or simple groceries.
2. Raise Your Limits:
You can request a credit limit increase for your credit cards to help increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase." Each credit card company has different processes; make sure you have a good payment history before applying for this.
3. Pay Down Your Balances:
Keeping your balance low and close to zero is critical. If you have high balances, make a game plan to take an "x" percentage of your paycheck each month to pay the credit card down. Limit your credit card usage and avoid running the balance back up. Always leave a $1-5 balance on your credit cards when paying your bill each month.
- Open 3-5 Revolving Credit Accounts: Opening a secured credit card is an excellent option for someone with limited credit or looking to rebuild their credit. Revolving credit makes up 30-35% of your overall credit score and is the best option to quickly build credit scores. Make sure you pay your balance on time and limit the use of the card to small purchases like gas or simple groceries.
- Raise Your Limits: You can request a credit limit increase for your credit cards to help increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase." Each credit card company has different processes; make sure you have a good payment history before applying for this.
- Pay Down Your Balances: Keeping your balance low and close to zero is critical. If you have high balances, make a game plan to take an "x" percentage of your paycheck each month to pay the credit card down. Limit your credit card usage and avoid running the balance back up. Always leave a $1-5 balance on your credit cards when paying your bill each month.
Improving your credit score is a long-term process that requires commitment and patience. But by following these tips, you can achieve a better score over time.
Tips from Joe on Improving Your Credit
Having bad credit can be a relatable experience for many of us. However, there is a solution to improve your credit score. Taking action to work on your credit can lead to significant and rapid changes. The bad credit cycle can be broken and those who prioritize their efforts towards building great credit will triumph. Start small by creating a budget and working towards correcting any bad spending habits. These changes will ultimately reflect positively on your credit score. This article serves as a guide to better understand credit and its significance in our financial lives. For credit guidance or credit repair assistance, don't hesitate to contact my office at www.asapcreditrepairusa.com.