It may surprise you to learn that credit scores come in a whopping 30 different levels! It's not uncommon for people searching for information on the best credit score to feel overwhelmed and even misled by the abundance of information available on Google. As someone with over fifteen years of experience in the financial literacy and credit repair field, I've seen firsthand how confusing and frustrating this can be. My name is Joe Mahlow, and I'm committed to giving you straightforward advice on important topics like credit scores. Over the years, I've helped more than twenty thousand clients transform their credit scores, and I'm eager to share information that can help you achieve the same success. So, let's dive right in!
Contents:
Different Types of Credit Scores Explained
Credit Score Ranges and what they mean for you
What Credit Score Do You Need to Buy a House?
Determining the Appropriate Credit Score to Purchase a Vehicle
Simple Steps to Improve Your Credit Score
Insights by Joe on Credit Improvement
Different Types of Credit Scores Explained
When it comes to credit scores, it's essential to understand the different types of credit scoring models. There are two primary credit scoring models: FICO and Vantage. Each model calculates your credit score differently, and it's important to be aware of how the scoring works to stay informed about your own credit status.
FICO Credit Score
The FICO credit scoring model is the most commonly used credit scoring model. FICO has eight different models ranging from FICO 2 to FICO 10. Each model can yield a different credit score based on your credit report. Different lenders use specific FICO reports, such as FICO 5 for mortgage lenders, FICO 8 for credit card companies, and FICO-2 for auto lenders, among others. The FICO scoring models differ because each one places different emphasis on the critical credit factors required by the specific lender.
Why So Many FICO Scores?
The different FICO scoring models exist because each credit report has a unique weighting formula. This means that vital factors that lenders require have more weight in the calculation, and therefore periods of good or bad payment history in the same category can have a significant impact on an individual's score. For example, a long history of successful mortgage payments will have a more substantial impact on a FICO 5 score calculation than a variable credit card payment history. To get a clear picture of your different FICO scores, visit www.myfico.com and sign up for an account.
Vantage Credit Score
The Vantage scoring model was created by Equifax, Experian, and TransUnion to compete with the FICO scoring model. Although the FICO model has been in use since the seventies, the Vantage model is gaining popularity in certain sectors, such as personal loans and auto lending. Different credit monitoring websites offer Vantage scores to consumers seeking their credit reports for free.
Is the Vantage Score Accurate?
The Vantage score provides a general idea of a person's credit score, and it's generally accurate. However, since it's less widely used for lending purposes, it may not accurately reflect an individual's exact lending score. For a more accurate picture of your credit score, it's best to use FICO scores. Nonetheless, with more and more lenders using Vantage model scores, its accuracy is improving. Ultimately, credit reporting agencies have the most significant stake in providing the most accurate and reliable scoring data.
Credit Score Ranges and what they mean for you
Credit scores are important indicators of your financial health. They are usually represented by numbers ranging from 350 to 850 and are measured by both FICO and Vantage models. To help you understand where you stand in terms of credit score and goals to aspire to, we’ve listed some thresholds here:
1. 620 or below:
This range is considered bad credit. You probably have a history of adverse credit, including high-balance credit cards or no credit cards at all. The best way to improve your score is through timely payments and ten active revolving credit accounts. Credit Builder Card or OpenSky Credit Card can help you in this regard by building your credit. When 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. If your score is in this range, it means you have an established credit history, but you may have some derogatory marks or accounts on your credit report, and high credit card balances. The good news is that newly opened accounts can cause only temporary drops in your score.
3. 740 and up:
Any credit score over 740 is considered "super-prime" and puts you among the top 20% of the US population. Congratulations on achieving this milestone! You will get the most attractive interest rates on loans with a score like this. Keep your revolving credit card accounts paid and always pay your accounts on time.
What Credit Score Do You Need to Buy a House?
If you are planning to purchase a home, the credit score you need may vary depending on the type of mortgage loan you apply for. The mortgage loan guidelines and requirements are subject to federal regulation and government backing. The three most prevalent types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular loans and one of the best choices, second only to VA loans. It is important to note that conventional loans do not require private mortgage insurance (PMI), which can increase your downpayment and monthly costs. With lower downpayment requirements and better interest rates compared to other mortgage loans, conventional mortgage loans usually have a typical credit score requirement of 640 and a debt-to-income ratio limit of 43%.
FHA Loan
If you are struggling with a low credit score, you may qualify for the FHA mortgage loan program. FHA loans typically require lower credit scores, ranging from 580 to 619. Remember that different lenders offer different terms and conditions, so it is essential to shop around for the best financial solution that suits your requirements. Additionally, the downpayment requirements on an FHA loan are nominal, starting at 3.5% of the purchase price. However, you will need to maintain PMI for at least 11 years and could have higher interest rates.
VA Loan
If you have ever served in the United States military or are a spouse of a deceased veteran, you may qualify for a VA loan. Unlike other mortgage loans, VA loans do not require a minimum credit score; however, lenders will consider your credit history and previous defaulted loans and government-owed past-due debts. Additionally, VA loans usually have no downpayment requirements and offer lower interest rates, making them an excellent option for veterans.
Determining the Appropriate Credit Score to Purchase a Vehicle
When it comes to buying a car, your credit history proves to be the primary factor in what you qualify for rather than your credit score alone. While having a good credit score is essential, it impacts the interest rate less than your credit history. When applying for a car loan, lenders will examine your past and present credit histories to evaluate the risk involved with extending credit. For example, someone with a history of late payments on a car loan or repossession will encounter more difficulty when attempting to get approved for a loan than someone with a spotless credit history. While bad credit or special finance lenders generally approve anyone, they usually require specific criteria to be met, such as a higher down payment and additional dealership fees to reduce the lender's risk. Notably, dealerships will have to pay fees to mitigate the possibility of defaulting on the loan. Consequently, the dealer may offer you a select few vehicles that will bear more costly price tags to offset these fees. In summary, having equity or a down payment offers you the most bargaining power when purchasing a vehicle on credit.
Credit Score Range for a New Vehicle
Although there is no specific credit score that guarantees loan approval, a score above 680 is practical. With anything below this limit, the lender may increase the interest rate to account for the danger you pose. The various credit score ranges have different average interest rates, with the rate increasing as the credit score decreases:
- With a 720 credit score or higher, interest is typically around $5,500 on a loan.
- With a 680 credit score or higher, interest is usually about $6,600 on a loan.
- With a 650 credit score or higher, interest is typically $8,100 on a loan.
- With a 615 credit score or higher, interest is around $10,200 on a loan.
- With a 580 credit score or higher, interest comes to $13,900 on average on a loan.
- With a credit score below 580, interest is usually $15,300 on a loan.
This data highlights that a high credit score decreases interest rates, ultimately impacting your overall credit score.
Simple Steps to Boost Your Credit Score
Improving your credit score is a process that requires patience and dedication. To achieve this, you must take certain vital steps that will help improve your credit score with little effort. Here are some of the things you can do now to enhance your credit score:
1. Open three to five revolving credit accounts
Revolving credit allows you to maximize your credit scores and increase your chances of approval, especially if you have limited credit. You can start with secured credit cards, such as Open Sky or Credit Builder Card, which focus on your ability to pay the card on time. Keep your balance between $5 and $10 each time you make a payment, limit your use to small purchases like gas or simple groceries and pay the balance on time. Credit cards make up 30-35% of your overall credit score, and timely payments can show increases in your score within 2-4 months.
2. Raise your limits
Requesting a credit limit increase on your revolving credit cards can help lower your credit utilization percentage and increase your overall credit limits. Most credit card companies allow you to apply online or by making a call. The company will verify your current income and payment history before granting a credit limit increase.
3. Pay down your balances
Keeping your balance close to zero is critical to improving your credit score. If you have high balances, make a game plan to pay them down an "x" percentage of your paycheck each month and ultimately stop using your credit cards. High rates on credit cards can lead to your payments going towards interest and not principal, so it's essential to limit your credit card usage.
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Insights by Joe on Credit Improvement
We've all been in situations where our credit score wasn't up to par. However, it's crucial to take responsibility for your credit situation and dedicate time and effort towards improving it. Many individuals with bad credit feel hopeless, believing that they will never have a good credit score. But, creating a great credit score demands effort and determination, and individuals that prioritize their credit and spending habits will eventually succeed. Start by formulating a budget and tackling any bad spending patterns to see positive changes reflected on your credit score. This article aims to enhance your comprehension of credit. For credit repair assistance and guidance, don't hesitate to contact our office today at www.asapcreditrepairusa.com.
Key takeaways:
- Taking responsibility for your credit situation is essential.
- Prioritizing credit and spending habits is key to maintaining a good credit score.
- Creating a budget and fixing bad spending patterns can positively impact your credit score.