Fun fact: Did you know that there are actually 30 levels of credit scores? It's not widely known, but searching for the best credit score on Google can often lead to confusing and even misleading information. My name is Joe Mahlow, and I'm a financial literacy and credit repair expert with over 15 years of experience. My goal is to provide unfiltered advice on various topics, including credit scores. Having helped over 20,000 clients improve their credit scores, I want to equip you with the knowledge to do the same. So, let's dive in!
Contents:
Comprehending Credit Scores: A Guide to Different Scoring Models
Understanding Credit Scores
What Credit Score is Preferred to Purchase a Home?
Importance of Credit History When Buying a Car
Assisting You in Raising Your Credit Score
Key Insights from Joe: How to Improve Your Credit Score
Comprehending Credit Scores: A Guide to Different Scoring Models
Understanding credit scores is crucial, but with different scoring systems available, it can be a daunting task. The two prominent models in use are FICO and Vantage, which differ in how they calculate the score.
FICO Credit Score
The most common credit score model, FICO, has various scoring systems ranging from FICO 2 to FICO 10. The type of FICO report to be pulled depends on the type of credit you apply for. Lenders prefer to use the most relevant report to your application for better accuracy in assessing your creditworthiness. For example, mortgage lenders usually use FICO 5, taking into account your mortgage repayment history, while credit card companies primarily consider FICO 8, reflecting your previous credit card history.
Why the Multiple FICO Scores?
The different FICO scoring systems consider different factors that affect a borrower's creditworthiness. Each report has a specific weight placed on the relevant factors, which are critical to the lender. For instance, a credit card company may lay more weight on your credit card history, while an auto lender will place weight on your previous auto history.
To access your different FICO reports, get a myfico.com account.
Vantage Credit Score
Introduced to compete with FICO by Equifax, Experian, and TransUnion, the Vantage Score is relatively new compared to FICO. Although FICO dominates the lending sector, Vantage is gaining traction in personal loans and auto lending. Credit monitoring websites commonly use Vantage to provide you a free copy of your credit report.
Accuracy of Vantage Score
The Vantage Score is accurate in assessing one's creditworthiness, albeit not commonly used for lending purposes. It is challenging to know your FICO score without paying for it or having a lender pull your credit report. Nonetheless, Vantage is a useful guide to give you an approximate idea of where you stand. Credit scores solely depend on your ability to obtain a loan, and FICO remains the most recognized scoring model. However, lenders may widely use the Vantage scoring model in the next five to ten years as data collection agencies provide the best scoring data.
Understanding Credit Scores
Credit scores are provided by both FICO and Vantage models and range from 350 to 850. A higher score indicates better creditworthiness, with 850 being the best possible score. Here are some threshold scores that you should bear in mind to monitor your progress towards excellent credit.
620 or below:
This score is indicative of bad credit. If you fall below this threshold, it's likely due to high-balance credit accounts, adverse credit history, or a lack of credit cards. One way to improve your credit score is by making timely payments and opening ten active revolving credit accounts. Consider secured credit cards like Credit Builder Card or OpenSky Credit Card for building your credit. Once you reach the 620 credit score range, you will start qualifying for an FHA home mortgage.
640-680:
You have established credit with this score range, but there may be some derogatory marks or accounts on your credit report. Suppose you have taken out new lines of credit, which can temporarily drop your scores. To recover, don't worry, and keep making timely payments.
740 or above:
A score of 740 or higher falls under "super-prime'' and often gives you the best interest rates for most loans. Congratulations if you have achieved a score in this range; you are part of the 20% of the US population with this score. To maintain your excellent score, pay your accounts on time, and keep your revolving credit card accounts paid.
What Credit Score is Preferred to Purchase a Home?
The credit score required to qualify for a mortgage loan depends on the type of loan you are seeking. Regulations imposed by the federal government and its support for most mortgage loans make their requirements and guidelines quite similar. There are three common mortgage loan types: conventional loans, FHA loans, and VA loans.
Conventional Loans
Among the most popular loans, conventional loans are the best option to save money besides the VA. Unlike other mortgages, conventional loans do not require private mortgage insurance (PMI), which raises your downpayment or monthly payments. PMI is essential coverage for the lender in case you stop making loan payments. These loans usually have lower downpayment requirements, better interest rates compared to other loans, and require a credit score of 640 and a debt-to-debt ratio less than 43%.
FHA Loan
The FHA mortgage loan accepts lower credit scores typically ranging from 580 to 619. Different lenders structure their loan programs differently, which is why you must shop around for the best financial option within the range of your credit score. PMI protection is required for at least 11 years under this loan, which could increase overall mortgage expenses, especially if you're working on a budget. Also, the debt-to-income limit with this loan could go up to 50%, providing assistance for individuals buying more homes than conventional loans. FHA loans have lower downpayment requirements, sometimes as low as 3.5% of the purchase, but usually having higher interest rates.
VA Loan
Technically, VA loans do not have a credit score requirement. However, it would be best to pre-qualify, taking account of prior defaulted loans and any overdue government debts. Eligibility is granted to an individual that served for at least 181 days in the U.S. Military, served 90 consecutive days during wartime, served the National Guard for six years, or has a spouse who lost their life while actively serving in the military. Most importantly, VA loans have the best interest rates and usually do not require a down payment. This loan assists veterans or military members in the best way possible.
Importance of Credit History When Buying a Car
When purchasing a car, your credit history has more weight than your credit score in determining your eligibility. A high credit score is still essential, but it plays a minor role in determining the interest rate you qualify for. Lenders determine the risk involved in extending credit by scrutinizing your current and past credit histories during the car loan application process. Someone who has defaulted on a previous or current car loan or has experienced a repossession will find it challenging to get approved for a new car loan, unlike someone with a spotless credit history. However, subprime or special finance lenders can approve anyone for a car loan regardless of their credit history. They set specific approval criteria, such as higher down payments and dealership fees, to mitigate the risk of extending credit to those with bad credit. To have the most leverage when buying a car on credit, it's advisable to have equity or a down payment.
When it comes to determining the credit score required to buy a new car, it varies because various factors come into play. A credit score over 680 is deemed ideal. Anything below this score poses a risk to the lender and can result in higher interest rates. The table below presents a current example of how credit scores impact the interest rates charged.
Interest rates based on credit scores:
- Someone with a credit score of 720 or higher will pay an average of $5,500 in loan interest.
- Someone with a credit score of 680 or higher will pay an average of $6,600 in loan interest.
- Someone with a credit score of 650 or higher will pay an average of $8,100 in loan interest.
- Someone with a credit score of 615 or higher will pay an average of $10,200 in loan interest.
- Someone with a credit score of 580 or higher will pay an average of $13,900 in loan interest.
- Someone with a credit score of 580 or lower will pay an average of $15,300 in loan interest.
From the data above, it's clear that a higher credit score results in lower interest rates, which translates into a more favorable credit score overall.
Assisting You in Raising Your Credit Score
Improving your credit score can be achieved through several essential steps that require minimal effort. Bear in mind that building a good credit score takes time and requires patience because quick decisions and irrational choices can lead to further problems. Here are some actions you can take to improve your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Obtaining a large loan can be challenging and time-consuming, especially if you have limited credit or are looking to rebuild your credit. Therefore, opening 3-5 revolving credit accounts can boost your credit scores more efficiently. Secured credit cards that focus on your ability to pay the card on time, such as Open Sky or Credit Builder Card, are good options, as they don't focus solely on your credit score. Revolving credit comprises 30-35% of your credit score and can help to raise it quickly. Ensure that you pay your balance on time and keep it between $5-$10 each time you make a payment, and limit the usage of the card to small purchases.
2. Request an Increase in Your Credit Limits
Requesting a credit limit increase for your credit cards can raise your overall credit limits and lower your credit utilization percentage, which can affect your credit score negatively. Most credit card companies have different processes for increasing your limits, but calling them and requesting a "Credit Limit Increase" is a good start. They will usually require information about your current income, and their credit team will decide if they're willing to increase your credit limit. Having 7-15 months of excellent payment history on a credit card can increase your chances of approval.
3. Pay Down Your Balances
Maintain a low balance or keep it close to zero. You may not always need to use your credit cards every month, but when you do, limit your spending to small purchases. When paying off your bill each month, leave a balance of about $1-$5. If you have high balances and can't afford to pay off your credit card debt, make a plan and pay an “x†percentage of your paycheck each month to reduce your debt gradually and ultimately stop using your cards. Your credit card habits play a significant role in determining your credit score, so it's essential to limit your usage. Additionally, credit card rates are high, and most of your payments will go towards interest and not principal.
Key Insights from Joe: How to Improve Your Credit Score
Whether it's due to financial difficulties or inexperience, many people may find themselves with a less than desirable credit score. Fortunately, with some self-reflection and dedication, you can actively improve your credit situation and see noticeable progress in a short period of time. Don't fall into the trap of believing that bad credit is a life sentence. Achieving a stellar credit score and maintaining it requires ongoing effort, but it's within your grasp. The first step is to establish a budget and address any problematic spending habits. As you work towards improving your finances, you'll see a direct correlation in the uptick of your credit score. If you're looking for further guidance to achieve your credit goals, don't hesitate to contact my office at www.asapcreditrepairusa.com.