It may surprise you to learn that there are actually 30 different levels of credit scores. Despite this fact, many individuals remain unaware of the wide range of credit score options available to them. When seeking to find the best credit score, individuals may find themselves inundated with information from various sources, with some of this information being misleading or difficult to understand. As someone who has spent over fifteen years working in financial literacy and credit repair, I am eager to provide you with honest and straightforward advice on this topic. My name is Joe Mahlow and I have already helped thousands of clients improve their credit scores. Now, my goal is to equip you with the knowledge and tools necessary to do the same. So, let's delve into the world of credit scores.
Contents:
Different Types of Credit Scores
Qualifying for Loans Based on Credit Scores
What is the required credit score to qualify for different mortgage loans?
Determining the Credit Score Range for Car Financing
Tips for Improving Your Credit Score
Joe's Advice on Credit Improvement
Different Types of Credit Scores
To understand your credit score, you need to know the two different credit scoring models used: the FICO model and the Vantage model. Both models evaluate your creditworthiness, but there are differences in how they are calculated.
FICO Credit Score
The most commonly used credit scoring model is the FICO model, which provides eight models ranging from FICO 2 to FICO 10. Lenders use different FICO scores depending on the type of credit you apply for. For example, FICO 5 is usually pulled for mortgage applications, and FICO 8 is usually used for credit card applications. This range of FICO scores may seem confusing, but each model considers different factors in the credit report, giving a weight to them, which makes some reports more significant than others. Factors considered also depend on the type of loan being applied for, which is why the calculations vary.
Vantage Credit Score
The Vantage model was developed by Equifax, Experian, and TransUnion in competition with the FICO model. Although the Vantage model is still not widely used for lending purposes, credit monitoring websites may use it to provide you with a free copy of your credit reports. While the Vantage score is typically less precise than the FICO score, it can give you a general idea of your creditworthiness and your FICO score.
Comparing FICO and Vantage Scores
While Vantage scores may give a general idea of your credit scores, FICO scores are more widely recognized and utilized by lenders. The accuracy of Vantage scores can vary, making it a less reliable scoring model for lending purposes. Despite that, the Vantage model is becoming more popular in certain sectors, such as personal loans and auto financing. It is possible that the Vantage model may replace the FICO model in the future, as data collection agencies such as credit reporting agencies will keep evolving.
Qualifying for Loans Based on Credit Scores
Credit scores determined through FICO and Vantage models can grade from 350 to 850. A score of 350 reflects the worst possible credit status, while a score of 850 denotes the best. While building a credit score, it is crucial to familiarize yourself with score thresholds. Here are some significant thresholds that will help you understand where you stand during the credit-building journey:
1. Scores of 620 or below:
This signifies a poor credit score with a history of adverse credit. It could be due to high-balance credit card accounts or a lack of credit card accounts. You can improve your rating by having ten active revolving credit accounts, timely payments, or considering the Credit Builder Card or OpenSky Credit Card, both being secured credit card options. A 620 credit score range will become eligible for an FHA home mortgage.
2. Scores of 640-680:
This credit score range indicates fair or good credit. Although it suggests established credit, derogatory accounts, high credit card balances, and newly opened accounts may have affected the score. A newly opened account can lead to a temporary dip in credit scores, and it is not a cause of concern.
3. Scores of 740+:
Scores over 740 are classified as "super-prime" and qualify for the best interest rates for most loans, signifying excellent credit. Around 20% of the US population falls under this bracket. Maintaining good credit habits, paying accounts on time, and keeping revolving credit card accounts paid will keep you in great shape. Congratulations if you have a score over 740!
What is the required credit score to qualify for different mortgage loans?
The minimum credit score you need to acquire a mortgage loan varies based on the type of loan you are applying for. There are three common mortgage loans: conventional, FHA, and VA. Here's what you need to know about each of these loan types:
1. Conventional Loans:
These are the most popular loans and also the best savings option outside of the VA loan. With a conventional loan, you don’t have to pay private mortgage insurance (PMI), which is an additional cost that can increase your down payment or monthly payment. The credit score requirement for a conventional mortgage loan is typically around 640, and the debt-to-debt ratio should not be higher than 43%. Conventional loans require lower down payments and offer better interest rates than other mortgage loans.
2. FHA Loan:
The FHA mortgage loan is suitable for people with credit scores typically between 580 and 619. FHA loans require PMI for a minimum duration of 11 years, which can prove to be an added cost. These loans offer a debt-to-income limit of up to 50%, which could help you purchase a house despite a lower income. The down payment requirement for FHA loans is as low as 3.5%, but the interest rates are typically higher.
3. VA Loan:
The VA Loan doesn't have a specific credit score requirement, but your credit history will be considered when pre-qualifying you. To qualify for this loan, you must have served in the US Military for at least 181 days, 90 consecutive days during wartime, or six years with the National Guard. Your spouse's death during active duty can also qualify you for this loan. VA loans usually offer the best interest rates and don't require a down payment. It's a great option for veterans.
Determining the Credit Score Range for Car Financing
When it comes to purchasing a vehicle, your credit history bears more weight than your credit score, though the latter is important too. While a high credit score is advantageous, it influences the interest rate you will receive less than your credit history. Loan providers assess the risk of extending credit by examining your current and past credit histories when you apply for a car loan. If you have defaulted on a previous car loan or had late payments, securing a loan becomes more difficult. A loan can still be approved by subprime lenders who extend credit to anyone with poor credit. However, they might require you to satisfy specific requirements like paying a higher down payment and dealership fees. In some cases, dealerships will charge extra fees to lower risk and endorse your loan, choosing the vehicle that generates the highest markup to cover these fees. Lastly, having equity or a down payment can give you the most bargaining power when purchasing a car on credit.
Credit Score Guidelines for Financing a New Car
The credit score required for approval cannot be determined exactly because many factors are taken into account other than the credit score itself. An ideal credit score range for new-car financing, however, is above 680. A score below that may increase your interest rate because you pose a higher risk to the lender. Consider the following statistics that show the difference in interest rates depending on the credit score range:
Someone with a credit score of 720 or above pays an average of $5,500 in interest for a loan.
Someone with a credit score of 680 or above pays an average of $6,600 in interest for a loan.
Someone with a credit score of 650 or above pays an average of $8,100 in interest for a loan.
Someone with a credit score of 615 or above pays an average of $10,200 in interest for a loan.
Someone with a credit score of 580 or above pays an average of $13,900 in interest for a loan.
Someone with a credit score below 580 pays an average of $15,300 in interest for a loan.
The data shows that the higher your credit score, the lower your interest rate will be which can have a significant impact on your overall credit score.
Tips for Improving Your Credit Score
Building a good credit score requires effort and patience, as it does not happen overnight. To improve your credit score, consider the following steps:
1. Open 3-5 revolving credit accounts:
Revolving credit is an excellent option to maximize your credit score quickly. A secured credit card like Open Sky or Credit Builder Card can help individuals with limited credit history or those looking to rebuild their credit. Revolving credit makes up a significant portion of your overall credit score, so it's essential to pay balances on time and limit spending to small purchases.
2. Request a credit limit increase:
Request a credit limit increase if you have active revolving credit accounts. This step can increase your overall credit limits and reduce your credit utilization percentage, one of the factors that harm credit scores the most. To request a limit increase, contact your credit card company and provide your current income information.
3. Pay down your balances:
Keeping your balance low and close to zero is crucial in improving your credit score. If you cannot pay off high balances, make a game plan to pay down the balance and ultimately stop using credit cards. High-interest rates and payments that go towards interests and not the principal can make it challenging to pay off balances while maintaining a good credit score.
Joe's Advice on Credit Improvement
Let's face it, we have all experienced poor credit at some point in our lives. However, taking your current credit situation seriously and committing to working on yourself and your credit can make a world of difference in the speed at which your credit score improves. Many individuals with bad credit become trapped in a cycle of credit issues, believing that good credit is unattainable. But, developing a strong credit score is possible with dedicated effort and prioritization. Begin by creating a budget and addressing any harmful spending habits you may have - this will directly impact your credit score. As you work towards improving your credit, don't hesitate to seek guidance and support from a professional. If you are in need of credit repair services, please visit www.asapcreditrepairusa.com for assistance.
Key takeaways:
- Taking your credit situation seriously and putting in the effort can lead to quick improvements in your score.
- Developing a good credit score requires hard work and prioritization.
- Start by creating a budget and addressing any negative spending habits.
- Seek guidance from a professional if you need assistance with credit repair.