< p >It might surprise you to learn that the credit scoring system actually encompasses 30 different levels of scores. However, many people are not aware of this fact and may be misled by the conflicting information that they find on Google when trying to determine what constitutes a "good" credit score. This can be a frustrating and confusing process that can lead someone down a wrong path. My name is Joe Mahlow, and I have spent more than 15 years working in the fields of financial literacy and credit repair. My aim is to offer straightforward advice on a range of topics, including credit scores. Thanks to my work, I have successfully helped more than 20,000 clients improve their credit scores, and now I would like to pass on information that might help you achieve the same level of success. So let's delve into this important topic and uncover its hidden secrets. < /p >
Contents:
Overview of Different Credit Scoring Models
Qualities of a Good Credit Score
What is the Required Credit Score for Buying a House?
Determining a Good Credit Score for Car Purchases
Tips to Improve Your Credit Score
Advice from Joe
Overview of Different Credit Scoring Models
When it comes to credit scores, there are two primary models to be aware of: FICO and Vantage. Understanding how each model calculates your credit score is significant because lenders use credit scores to determine your creditworthiness.
FICO Credit Score
FICO is the most commonly used credit scoring model. However, many versions of FICO make it challenging to determine the credit score a lender will pull. The FICO models range from FICO 2 to FICO 10, and mortgage lenders generally pull a FICO 5 credit report. In contrast, credit card companies use the FICO 8 report, and auto lenders typically pull FICO-2 reports. Each FICO model weighs different credit factors based on the report that the lender pulls.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. The Vantage Score is relatively new compared to FICO and is frequently provided by credit monitoring websites. Although the Vantage Score is not widely used for lending purposes, it can give you a general idea of your credit score.
Accuracy of Vantage Score
The Vantage Score is accurate, but its accuracy depends on the context in which you use it. Since the Vantage Score is not the most recognized credit scoring model, it may not reflect your FICO score. However, it can provide insight into your overall credit scores. It is worth noting that the Vantage scoring model is gaining popularity in some lending sectors, such as personal loans and auto lending, and may become more widely used in the future.
Conclusion
While the FICO model is the most commonly used credit scoring model, the Vantage model is gaining ground. It is always best to be aware of both FICO and Vantage scoring models to have a better understanding of your creditworthiness. You can sign up for a myFICO account to get a visual representation of all your credit scores.
Qualities of a Good Credit Score
A good credit score can be measured using scores from either the FICO or Vantage models, which range from 350 to 850. The higher the score, the better your credit standing. Here are some essential score thresholds to know as you work towards better credit:
1. 620 or below
This is the worst credit score to have, indicating bad credit. You might have adverse credit history, high-balance credit card accounts, or no credit cards at all. It's crucial to improve your credit scores by making timely payments and having ten active revolving credit accounts. Consider secured credit cards like the Credit Builder or OpenSky credit card to build your credit. Once you reach the 620 credit score range, you can start qualifying for an FHA home mortgage.
2. 640-680
This score range is considered fair for good credit. You may have established credit, but with delinquent marks, accounts, and high credit card balances. You may also experience temporary score drops if you recently opened a new account.
3. 740+
Any credit score over 740 is considered "super-prime" and will lead to the best interest rates for most loans. If your score falls within this range, congratulations! You’re part of the 20% of the US population with this score. Maintain your good credit by paying your accounts on time and keeping your revolving credit card accounts paid.
What is the Required Credit Score for Buying a House?
The minimum credit score necessary to qualify for a mortgage loan varies depending on the type of loan you seek. Government-backed mortgage loans, such as conventional loans, FHA loans, and VA loans, are subject to federal regulations and eligibility guidelines that may differ. Here's what you need to know about each type of loan:
1. Conventional Loans
Conventional loans are the most popular option due to their low interest rates and low down payment requirements. Typically, a credit score of 640 or higher is required, and a debt-to-income ratio of no higher than 43%. Unlike other loans, conventional loans don't require you to pay for private mortgage insurance (PMI), which can increase your down payment or monthly payment.
2. FHA Loans
FHA loans are designed for borrowers with lower credit scores, typically between 580 and 619. These loans require that you pay PMI for at least 11 years, which can be an additional cost to keep in mind. If you have a lower income, however, the higher debt-to-income limit of up to 50% may allow you to purchase more expensive homes. Down payment requirements are only 3.5% of the purchase price, but interest rates are often higher than conventional loans.
3. VA Loans
VA loans are intended for veterans or military personnel and do not require a minimum credit score. Instead, eligibility is determined based on previous defaulted loans and government-owed debts. This loan type typically offers the best interest rates and doesn't usually require a down payment, making it an excellent option for eligible borrowers.
Determining a Good Credit Score for Car Purchases
When considering purchasing a car, your credit history holds a more significant impact on loan qualifications than a credit score. Although a higher credit score is important, the interest rate you qualify for is based on your credit history. Creditors review your previous and current credit history to determine risk when extending credit. Credit issues such as late payments, repossession, and defaulted loans can affect one's loan approval. While some lenders may accept poor credit scores, additional fees and a higher down payment may be required, and the dealership may have to pay a fee to lessen the risk from possible defaulting. Subsequently, having equity or a down payment puts one in a favorable position when buying a car on credit.
Credit Score Range for New Vehicles
An exact credit score that guarantees loan approval does not exist. A credit score above 680 is ideal, but anything below this score can increase the interest rate due to the potential risk posed by the borrower. An example of how interest rates are affected by credit scores includes:
1. A borrower with a credit score of 720 or above will pay on average $5,500 in interest on a car loan.
2. A borrower with a credit score of 680 or above will pay on average $6,600 in interest on a car loan.
3. A borrower with a credit score of 650 or above will pay on average $8,100 in interest on a car loan.
4. A borrower with a credit score of 615 or above will pay on average $10,200 in interest on a car loan.
5. A borrower with a credit score of 580 or above will pay on average $13,900 in interest on a car loan.
6. A borrower with a credit score of 579 or lower will pay on average $15,300 in interest on a car loan.
From the data, it is crucial to understand that the higher the credit score, the less interest one pays and the more favorable the overall credit score becomes.
Tips to Improve Your Credit Score
Boosting your credit score requires patience and commitment. While the process takes time, the effort you put in now can pay off in the long run. Here are some tips to help you improve your score:
1. Open 3-5 revolving credit accounts:
Revolving credit such as credit cards is a great way to improve your credit score. It's easier to get approval for a credit card than a large loan, especially if you have limited credit or are rebuilding. Start with credit cards like Open Sky or Credit Builder Card, which focus more on your ability to repay on time than on your credit score. Revolving credit makes up 30-35% of your overall score, and responsible use can help you build your score up quickly. Remember to keep a balance of $5-10 and pay on time. Use your card for small purchases like gas or groceries.
2. Raise your limits:
Request a credit limit increase for your credit cards. This can increase your overall credit limits and lower your credit utilization percentage. Utilizing more than 30% of your overall limit can negatively impact your credit score. To increase your limits, call your credit card company and request a "Credit Limit Increase". You will need to provide some information, including your current income, for their credit team to decide if an increase is possible.
3. Pay down your balances:
It is crucial to keep your balance low and close to zero. Use your credit cards sparingly for small purchases and leave a $1-5 balance each month. If you have high balances, make a plan to pay down your credit card each month with a percentage of your paycheck. Avoid running up your balance again after you've paid it down. Credit card usage plays a significant role in your overall credit score, so make sure you limit it.
Advice from Joe
We have all experienced less than ideal credit at one point in our lives. However, if you are committed to improving your credit situation and take the necessary steps to work on yourself and your credit, you will witness a significant improvement in your credit score in a short amount of time. Many people with bad credit often feel like they are trapped in an endless cycle of credit issues and are unable to restore their credit. Achieving a great credit score requires significant effort, but prioritizing your credit and being mindful of your spending habits will lead to success. Begin by creating a budget and identifying and fixing any harmful spending tendencies you may have, as this will positively impact your credit score. This piece provides you with valuable insights into credit. If you need credit counseling or credit repair services, do not hesitate to contact my office today at www.asapcreditrepairusa.com.