It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? This fact is often overlooked by individuals who search for the best credit score online. Unfortunately, the abundance of information on the topic can be overwhelming and, at times, even misleading. My name is Joe Mahlow and I am a financial literacy and credit repair expert with over fifteen years of experience in the field. One of my objectives is to provide authentic advice on a variety of topics, one of which is credit scores. With my help, I've successfully helped more than twenty thousand clients improve their credit scores and today, I'm sharing some valuable insights to help you achieve the same. Let's dive in!
Contents:
Understanding Different Credit Scoring Models
Understanding Credit Scores
Qualifying Credit Scores for Mortgage Loans
Determining the Credit Score for Buying a Car
Tips for Improving Your Credit Score
Insights from Joe on Overcoming Bad Credit
Understanding Different Credit Scoring Models
When it comes to credit scores, there are two significant models that you must know about. These models are the FICO and Vantage models, and it is crucial to comprehend their differences in calculating your credit score.
FICO Credit Score
The FICO model is the most popular and widely used credit scoring model with eight different models from FICO 2 to FICO 10. The credit score you receive will depend on the credit report used by your lender. For instance, a mortgage lender will most likely pull your FICO 5 credit report, while a credit card company would pull your FICO 8 credit report.
Variations in FICO scores
Different FICO models exist because each credit report carries different weight. The criteria significant to the lender differ, and as a result, these factors will influence your credit score differently. For example, on a FICO 5 mortgage report, previous mortgage payment history carries greater weight than no history or negative history. The same goes for other FICO models, dependent on the type of lender. For instance, FICO 8 is primarily used by credit card companies.
Obtaining your FICO scores
To see all your different credit scores, sign up for an account with www.myfico.com.
Vantage Credit Score
Equifax, Experian, and TransUnion developed Vantage Score as a new scoring model to compete with FICO. Although FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending.
Accurate Vantage Scores
While the Vantage Score is accurate, it is not widely used for lending purposes, and hence it may not be accurate in that regard. Therefore, to get the best idea of your scores, use your Vantage score as an approximation of your FICO score, as FICO is the most recognized and frequently used scoring model.
Future of Credit Scoring Models
I believe that in the next five to ten years, lenders nationwide will widely use the Vantage scoring model since it provides the most reliable scoring models based on today's standards. FICO, in my view, is outdated and does not offer a clear representation of credit scores. Credit reporting agencies possess enormous amounts of data, giving them the upper hand in providing the best scoring data available.
Understanding Credit Scores
Credit scores measure a person's creditworthiness, with the FICO and Vantage models both using a scale of 350 to 850. A score of 350 represents the lowest credit score, while 850 is the best possible score. To achieve the highest possible credit score, it is important to understand where you currently stand, and to that end, we will provide you with some essential score thresholds.
620 or below
A score of 620 or below is considered poor credit. Therefore, if your rating is below this threshold, you likely have an unfavorable credit history or high-balance credit card accounts, or no credit cards at all. Making timely payments and having at least ten active revolving credit accounts are the best ways to improve your credit score. We recommend opening a Credit Builder Card or OpenSky Credit Card, as these cards are secured and will assist you in building your credit. Once you reach a credit score of 620, you may qualify for an FHA mortgage.
640-680
Having a score within this range is regarded as fair for good credit. It implies that you have established credit, but you may have some derogatory marks or accounts on your record. You may also have some high credit card balances that you need to pay off. It is common to observe temporary drops in your scores following the opening of a new account. If you fall into this range after opening a new account, don't worry; it's only temporary.
740+
A credit score of 740 or higher is thought to be "super-prime." Having a score in this range will enable you to secure the best interest rates for most loans. Having a score above 740 puts you in the top 20% of the US population. Congratulations on your achievement thus far, keep paying your accounts on time, and ensure that your revolving credit card accounts are paid. You will be in excellent shape!
Qualifying Credit Scores for Mortgage Loans
The minimum credit score required to qualify for a mortgage loan depends on the type of loan you're looking for. Federal regulations and government backing dictate the conditions and rules for most mortgage loan options, which are grouped into three categories: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional mortgages are the most popular loan option, and they usually offer the best immediate savings, excluding the VA loan. Since conventional loans do not require private mortgage insurance (PMI), they come with lower downpayment requirements and offer better interest rates than other loans. To qualify, you'll need a credit score of at least 640 and a debt-to-income ratio no higher than 43%.
FHA Loans
If you have a credit score between 580 and 619, you may qualify for an FHA mortgage loan. However, don't assume that all loan programs are the same, as each lender may offer different financial options. FHA loans typically require PMI for at least 11 years, which can increase the cost of your mortgage. However, they have a higher debt-to-income limit of up to 50% and a lower downpayment requirement, which means you can buy more homes with a lower income.
VA Loans
VA loans do not have a minimum credit score requirement, but loan issuers examine any defaulted loans and owed debts before pre-qualifying you. To be eligible, you need to have served in the US Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or had a military spouse who lost their life during active duty. The VA loan has the best interest rates available and typically does not require a down payment, making it the perfect home buying option for veterans.
Determining the Credit Score for Buying a Car
Your credit history, rather than your credit score, plays a crucial role in determining the loan you qualify for when buying a car. Although a higher credit score is important, it has a lesser impact on the interest rate you can avail. Lenders look at your past and current credit history to evaluate the risk factor associated with extending credit. Thus, if you have been late on a previous or current car loan or have a repossession, you may face difficulty getting approved for a loan. However, some subprime lenders might qualify you for a loan but with specific conditions, such as a higher down payment and additional fees. To minimize the risk of defaulting, dealerships have to pay a fee to approve the loan. Hence, they may select a vehicle with a higher markup to cover the fee. Lastly, to strengthen your position to avail credit and buy a car, it's best to have equity or a down payment.
Credit Score Range for a New Car
An exact credit score that determines approval for a car loan does not exist because various factors come into play. However, a credit score above 680 is deemed ideal. A score below 680 raises the interest rate on the loan due to your risk factor. The interest you pay on a loan varies depending on your credit score, as shown in the following example:
1. Credit score 720 or above: $5,500 in interest on a loan, on average
2. Credit score 680 or above: $6,600 in interest on a loan, on average
3. Credit score 650 or above: $8,100 in interest on a loan, on average
4. Credit score 615 or above: $10,200 in interest on a loan, on average
5. Credit score 580 or above: $13,900 in interest on a loan, on average
6. Credit score below 580: $15,300 in interest on a loan, on average
This data shows that a high credit score reduces your interest rate and subsequently lowers the amount of interest you pay, which directly affects your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time and patience. Making irrational decisions or neglecting your credit can only worsen the problem. Here are some ways to help increase your credit score:
1. Open 3-5 revolving credit accounts
Revolving credit, such as credit cards, is easier to obtain and can quickly improve your credit score. Start with a secured credit card that focuses on your ability to pay on time rather than your credit score. Use the card for small purchases, and make sure to pay your balance on time and keep it at $5-10.
2. Request a credit limit increase
Requesting a credit limit increase can help increase your overall credit limits and lower your credit utilization percentage. You can do this online or by calling your credit card company. They will typically want to see at least 7-15 months of excellent payment history on your credit card.
3. Keep your balances low
Keeping a low balance on your credit card is crucial. Use your credit card for small purchases and leave a $1-5 balance on it each month. If you have a high balance, make a plan to pay it down gradually over time.
Remember, your credit card usage plays a significant role in your overall credit score, so it's essential to limit your spending. By following these tips and being patient, you can improve your credit score over time.
Insights from Joe on Overcoming Bad Credit
We have all been in a situation where our credit was less than ideal. However, if you make a serious commitment to improving your credit situation and invest time and effort in yourself, you can see significant improvement in your score. Unfortunately, many individuals with poor credit tend to remain trapped in a vicious cycle and often feel helpless in the face of having good credit once again. Nevertheless, developing a good credit score demands serious effort. Those who prioritize their credit and focus on their spending habits are the ones who will achieve success. Begin by creating a budget and addressing your bad spending habits - the results will directly reflect on your credit score. This article serves as a resource to help enhance your understanding of credit. If seeking guidance or credit repair is on your mind, do not hesitate to contact us at www.asapcreditrepairusa.com.