It's surprising that there are actually 30 levels of credit scores - did you know that? Often times when searching for the best credit score, it can be overwhelming with contrasting information from various sources. Confusing and misleading data can cause individuals to stray from finding credible solutions. My name is Joe Mahlow, and for 15 years I have been dedicated to the financial literacy and credit repair space. My promise is to furnish you with straightforward advice on various financial topics, like credit scores. My experience has enabled me to assist over 20,000 clients ameliorate their credit scores, and now I hope to provide you with applicable advice to do the same. Let's dive in!
Contents:
Understanding Different Credit Scoring Models
Understanding Good Credit Scores
Optimum Credit Scores to Qualify for Different Types of Mortgage Loans
Determining the Appropriate Credit Score to Purchase a Car
Helpful Tips to Increase Your Credit Score
Joe's Advice on Improving Your Credit Score
Understanding Different Credit Scoring Models
Credit scores are essential when it comes to taking out loans, getting a mortgage, or applying for credit in general. There are two different credit scoring models you should know about: the FICO model and the Vantage model. It's important to understand the differences in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most widely used, consisting of eight different models, ranging from FICO 2 to FICO 10. However, depending on the lender and type of credit you are applying for, you may receive a different credit score based on the FICO report pulled. For example, if you apply for a home mortgage, the mortgage lender will most likely pull your FICO 5 credit report, whereas a credit card application may prompt the lender to pull your FICO 8 credit report. Each FICO model emphasizes different factors based on the lender's priority, such as a useful payment history on previous mortgages for FICO 5.
Vantage Credit Score
In contrast, the Vantage model, developed by the three major credit reporting agencies, is relatively new compared to FICO and is becoming more popular in sectors such as personal loans and auto lending. Although widely used by credit monitoring websites to provide free credit reports, it's not yet relied upon heavily for lending purposes. The Vantage score can still provide a general idea of your overall credit score and serves as a good estimate of your FICO score.
FICO vs. Vantage: Accuracy
The accuracy of the Vantage score is dependent on how and where it's used. Since it's not yet widely used for lending purposes like FICO, it may not be as accurate when calculating your actual lending score. As such, it's crucial to understand the context of where your Vantage score is being used. However, the Vantage model is continuously adapting to provide the best scoring models based on today's standards, and over time, it may become commonly used. Ultimately, credit reporting agencies have access to the most significant collection of credit data, and whether it's FICO or Vantage, they have the upper hand in providing the best credit score data.
Understanding Good Credit Scores
Credit scores are measured by both the FICO and Vantage scoring models on a scale from 350 to 850. A score of 350 is the worst credit score you can have, while 850 is the best. It's important to know where you stand when it comes to achieving the highest credit scores. Here are some vital score thresholds that can help you set goals for your credit improvement journey:
1. 620 or below
This is considered bad credit. If your score falls below this threshold, you most likely have adverse credit history, high-balance credit card accounts, or no credit cards. To improve your credit score, make timely payments, and have at least ten active revolving credit accounts open. Secured credit cards like Credit Builder Card or OpenSky Credit Card can help you build your credit. Once you reach the 620 credit score range, you can start qualifying for an FHA home mortgage.
2. 640-680
This is considered fair for good credit. Scores in this range signify established credit, but you may have some derogatory marks, high credit card balances, or newly opened accounts. Don't worry if you recently opened a new account and your score dropped; this is just a temporary setback.
3. 740+
Any credit score above 740 is considered "super-prime." Congratulations if you belong to the 20% of the US population with this score, as you will enjoy the best interest rates for most loans. Keeping your accounts paid and your revolving credit card accounts in good standing will help you maintain excellent credit.
Optimum Credit Scores to Qualify for Different Types of Mortgage Loans
When it comes to buying a house, the credit score requirement varies according to the type of mortgage loan you opt for. Although federal regulation and government backing make the requirements for most mortgage loans quite similar, there are differences depending on the type of loan. The three most commonly available mortgage loan options are: Conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most sought-after loans and considered the best savings option on par with VA loans. In contrast with other mortgage loans, you are not required to maintain private mortgage insurance with conventional loans, which could otherwise increase your down payment or monthly payment amount. Instead, PMI secures the lender by paying off your loan in case you're unable to make your payment. Conventional loans often necessitate lower down payment and result in better interest rates than other loan options. The typical credit score requirement for obtaining conventional mortgage loans is 640, with a debt-to-debt ratio not exceeding 43%.
FHA Loans
FHA loans mostly cater to buyers with lower credit scores, usually between 580 and 619. However, it's important to remember that loan programs vary, and when you're within the credit score limit, you should checkout different lenders to find the best financial option that works for you. This loan option will require you to retain PMI for at least 11 years, which would be an added mortgage cost if you're trying to budget. Compared to conventional loans, FHA loans permit a higher debt-to-income limit of up to 50%, enabling you to purchase more houses if you have a lower income. Finally, FHA loans necessitate a down payment of as low as 3.5% of the purchase amount, letting you acquire a mortgage with less cash out of your pocket than with a conventional loan, albeit at higher interest rates.
VA Loans
There are no fixed credit score requirements for accessing a VA loan, but lenders often investigate past defaulted loans and government-owed past-due debts during your pre-qualification. In order to qualify for VA loans, you must have been serving in the United States' military for at least 181 days, served 90 consecutive days during wartime, spent 6 years with the National Guard, or your spouse was in the military and lost their lives serving in active duty. This type of loan often has the best interest rates available and does not usually require a down payment. VA loans specifically cater to veterans, and as an assistant, I feel it's an excellent way to give back to our servicemen.
Determining the Appropriate Credit Score to Purchase a Car
When in the market for a new vehicle, it is your credit history and not just your credit score that is the most vital factor to consider. Even though a high credit score is essential, the interest rate that you are eligible for is determined less by it. In this regard, previous and current credit history come into play when vetting your competence to pay the loan. Late loan payment history and repossession negatively impact your chance of loan approval. However, lenders specializing in special finance would still qualify anyone for a loan, even with previous repossessions. Nevertheless, additional requirements must be fulfilled, such as a higher down payment and fees to the dealership. A credit score over 680 is recommended for a new car, and lower scores may result in higher interest rates and a higher risk for lenders.
The following information, based on various credit scores, illustrates how interest rates can affect loan payments:
1. If your credit score is 720 or above, you will pay an average of $5,500 in interest on a loan.
2. If your credit score is 680 or higher, you will pay an average of $6,600 in interest on a loan.
3. If your credit score is 650 or higher, you will pay an average of $8,100 in interest on a loan.
4. If your credit score is 615 or higher, you will pay an average of $10,200 in interest on a loan.
5. If your credit score is 580 or higher, you will pay an average of $13,900 in interest on a loan.
6. A credit score of 580 or higher results in an average interest payment of $15,300 on a loan.
This data shows that high credit scores result in lower interest rates, and low credit scores can lead to high interest rates, which negatively affect your credit rating. Lastly, having a down payment or equity in a vehicle will strengthen your bargaining power on credit purchases.
Helpful Tips to Increase Your Credit Score
Improving your credit score requires time and dedication. It may take a while, but there are some things you can do right now to help get started. Here are some valuable tips to increase your credit score:
1. Open 3-5 Revolving Credit Accounts:
Revolving credit, such as credit cards, can help you maximize your credit score. It's one of the best options, especially for individuals with limited credit history or those looking to rebuild their credit. It's easier to obtain approval for a credit card than a large loan. Starting with a secured credit card like Open Sky or Credit Builder Card can help you focus on your ability to pay rather than your credit score. Revolving credit makes up 30-35% of your credit score and can help build it quickly. To ensure positive results, pay your balance on time and keep it at $5-$10, and limit its use to small purchases.
2. Raise Your Limits:
Requesting a credit limit increase can help increase your overall credit limits and lower your credit utilization percentage. This is important, as exceeding 30% of your credit card balances can damage your credit score.
3. Pay Down Your Balances:
Keeping your credit card balance low and close to zero is critical. Use your cards for small purchases and leave around $1-$5 balance when paying bills. If you currently have high balances, make a plan to pay them down and create a spending limit to avoid accumulating more debt. Spend only what is necessary and avoid running up balances. Remember, credit card spending habits play a massive role in your credit score, so use them wisely. Additionally, the rates on credit cards are high, and most of your payments will go towards interest rather than principal.
Improving your credit score takes time, patience, and good habits. These tips are a great place to start and can help you take the first step towards financial stability.
Joe's Advice on Improving Your Credit Score
Let's face it, at some point in our lives, most of us have had less than-perfect credit. However, if you are committed to improving your credit score, it is definitely achievable within a short period of time. Many people with bad credit feel like it is impossible to regain a good credit score, but this is simply not true. With the right mindset, effort, and focus on your spending habits, you can make remarkable progress. As a first step, create a budget and address any bad spending habits; this will have a positive impact on your credit score. Don't get sucked into a cycle of poor credit; prioritize your credit and you will reap the benefits. If you need further guidance or assistance in repairing your credit, contact my office at www.asapcreditrepairusa.com.
Key takeaways:
- Improving your credit score is possible with commitment and effort
- Start by creating a budget and addressing negative spending habits
- Prioritize your credit for long-term benefits.