Were you aware that credit scores come in 30 distinct levels? Not many people are aware of this fact, and often end up with conflicting information when searching for ways to improve their credit score. The plethora of information available online can often be confusing and even misleading. But don't worry, my name is Joe Mahlow and I have been working in the financial literacy and credit repair industry for over 15 years. I am here to offer you professional advice on the topic of credit scores, with a goal to provide you with enough knowledge to transform your credit score just like the twenty thousand clients I have helped. So, let's delve into this subject.
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
What Constitutes a Good Credit Score
What Credit Score Do You Need to Buy a House?
Determining Your Car Loan Eligibility Based on Credit History
Helpful Tips on How to Improve Your Credit Score
Advice from Joe
Different Types of Credit Scores: Understanding FICO and Vantage Models
Credit scoring models matter when it comes to determining your credit score. The two models mostly in use are the FICO model and the Vantage model. Here’s what you need to know:
FICO Credit Score
The FICO model is the most popular and widely used one with eight different versions (FICO 2 to FICO 10). Understandably, you can get a different credit score depending on the version the lender uses. For instance, mortgage lenders will pull your FICO 5 credit report, while credit card companies use the FICO 8 report. This is because each credit report has a different “weight,†meaning the critical factors for the specific lender have more impact on the credit score than the less important ones, which are why several FICO models exist.
Vantage Credit Score
The Vantage model is a new scoring model competing with FICO and is gaining popularity in some sectors, such as personal loans and auto lending. The Vantage Score is accurate but is not widely used for lending purposes, unlike FICO, which dominates the lending sector. However, the Vantage model can give borrowers a general idea of where their overall credit scores are.
In conclusion, while FICO is the most recognized scoring model today, credit reporting agencies might well shift to the Vantage rapid scoring model due to its ability to provide the best scoring models based on today's standards.
What Constitutes a Good Credit Score
Credit scores are rated on a scale of 350 to 850 for both the FICO and Vantage models. The best score you can achieve is 850 while a score of 350 represents the lowest possible rating. To help improve your scores, it's crucial to understand the different thresholds for a good rating at each stage of your credit journey. Below are some vital score thresholds:
1. 620 or below
If you have a credit score of 620 or below, it’s considered bad credit. This means you might have adverse credit history or possibly high-balance credit card accounts, or even no credit cards at all. To improve your credit scores, make timely payments and ensure ten active revolving credit accounts are open. We recommend Credit Builder Card or OpenSky Credit Card, which are secured credit cards that can help build your credit score. Upon reaching the 620 credit score range, you will qualify for an FHA home mortgage.
2. 640-680
If your score is between 640-680, this is considered fair for good credit. You might have derogatory marks on your credit, open accounts with high balances, and newly opened accounts, which can temporarily drop your credit score. However, if you've recently opened a new account and are in this score range, there is no need to panic. Your credit score will eventually return as this is just a temporary setback.
3. 740+
A credit score of 740 and above is considered "super-prime" and qualifies you for the best interest rates for most loans. If you obtain this credit rating, you belong to the 20% of the population with this score, and it is a significant achievement. To maintain a high credit score, ensure timely payments and keep your revolving credit card accounts paid. You're in great shape!
What Credit Score Do You Need to Buy a House?
The credit score required to buy a house varies based on the type of mortgage loan you are applying for. There are three main types of mortgage loans: conventional loans, FHA loans, and VA loans. Here's what you need to know about each of them:
1. Conventional Loans
Conventional loans are the most popular type of mortgage loans and are typically the best option if you're looking to save money. They don't require you to pay for private mortgage insurance (PMI), which can be an additional cost on top of your down payment or monthly payments. Conventional loans usually have lower down payment requirements and better interest rates than other types of loans. To qualify for a conventional loan, you'll typically need a credit score of at least 640 and a debt-to-income ratio of no more than 43%.
2. FHA Loans
The FHA loan is designed for those with lower credit scores, typically between 580 and 619. While you may still qualify for an FHA loan if your credit score is below 580, you may need to provide a larger down payment. FHA loans require you to have PMI for at least 11 years, which will add to the cost of your mortgage. However, the debt-to-income limit can be as high as 50%, which means you may be able to afford more house. Plus, the down payment requirements for an FHA loan can be as low as 3.5%, although you will usually have a higher interest rate.
3. VA Loans
If you're a veteran, the VA loan is an excellent option for buying a house. There is no specific credit score requirement, but the VA will look at your credit history and any previous defaulted loans or government-owed debts when pre-qualifying you. To be eligible for a VA loan, you need to have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or be the surviving spouse of someone who served in the military and lost their life during active duty. VA loans typically offer the best interest rates and don't usually require a down payment, making them an excellent option for veterans who want to buy a house.
Determining Your Car Loan Eligibility Based on Credit History
When applying for a car loan, your credit history holds more importance than just your credit score. Although a good credit score is crucial, it has a minimal impact on the interest rate you qualify for. Your credit history is the main factor considered in assessing credit risk involved in extending a loan. If you have a history of late payments, repossession, or defaulting on an auto loan, it can affect your eligibility for a car loan. Some lenders, specifically bad credit or special finance lenders, qualify anyone for a car loan regardless of their credit score or history. However, the loan approval comes with certain criteria to meet, such as a higher down payment and additional dealer fees. A dealership may select a vehicle for you based on their markup on the car to cover the fees. To have more leverage when buying a car on credit, you must have some equity or a downpayment.
Credit Score Range for Car Loan Approval
There's no definitive credit score for car loan approval, but a score above 680 is ideal as anything below this score can increase your interest rate. Your credit score influences the amount of interest you pay. As an example, someone with a 720 credit score pays less interest than someone with a 580 credit score. With a higher score, you're eligible for a better interest rate, which affects your credit score positively.
Helpful Tips on How to Improve Your Credit Score
Boosting your credit score can be easily done with a few simple steps that require minimal effort on your part. However, building an excellent credit score is a process that requires patience and time, and it is not an overnight solution. Therefore, patience is essential when building your credit because making impulsive decisions can harm your credit and exacerbate your problems.
Below are some of the things you can do to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit accounts such as credit cards are a great way to maximize your credit score rating. This option is especially useful for those with limited credit or looking to rebuild their credit. Large loans can be difficult to obtain for those just starting, so opening revolving credit accounts gives you a better chance of approval. Secured credit cards that focus less on your credit score like Open Sky or Credit Builder Card are recommended, whereby they prioritize your ability to pay your balance on time, your bankruptcy history in the last two years, and your current income. Since revolving credit accounts make up 30-35% of your overall credit score, this option is an efficient way to build credit quickly. It may take 2-4 months to notice significant increases in your credit score, but it is essential to pay the balance on time and keep it between $5-10 each time you make a payment. It is recommended to use the card for small purchases such as gas or groceries.
2. Raise your Limits!
Requesting a credit limit increase for your credit cards can help increase your overall credit limits, lowering your credit utilization percentage. Most people use their credit cards frequently, and if your balances exceed 30% of your overall limits, it may harm your credit score significantly. Increasing credit limits is a beneficial way to lower your utilization percentage.
To raise your limits, go to your online portal or call your credit card company and request a “Credit Limit Increase.†You will need to provide some information like your current income, and the credit company’s team will decide if they will grant you a credit limit increase. Usually, credit card companies want to see a credit card with 7-15 months of excellent payment history before granting a credit limit increase.
3. Pay Down Your Balances!
Keeping your balance low and close to zero is recommended. You are not obligated to use your credit cards every month. So using them for small purchases and maintaining a $1-5 balance on your credit card when paying your bill every month is recommended. If you have high balances and don’t have enough financial resources to pay off your credit cards entirely, it is crucial to make a payment plan and allocate a percentage of your paycheck until you pay off your credit card balances gradually. It is essential to limit the usage of your credit card because your credit card spending habits play a significant role in your overall credit score. Moreover, credit cards have high-interest rates, and paying large chunks of payments towards interest and not principal could negatively affect your credit score.
Advice from Joe
We've all experienced the frustration of having less-than-ideal credit. However, taking ownership of your credit situation and committing to making changes can lead to significant improvements in your credit score. Many individuals with poor credit fall into a cycle of ongoing credit issues, believing it's impossible to recover. Building a strong credit score takes dedication and a willingness to prioritize credit and spending habits. Starting creating a budget and addressing any negative spending behavior can directly impact your credit score. If you're seeking comprehensive guidance on credit repair, please contact our office at www.asapcreditrepairusa.com. This article provides valuable insights into effectively understanding and managing your credit.