It is interesting to note that there exist 30 different levels of credit scores. Despite this fact, many people are unaware of this information. Searching for the best credit score on Google often results in receiving numerous responses that can be confusing and misleading. As someone who has spent over fifteen years in the financial literacy and credit repair industry, my name is Joe Mahlow and I aim to provide honest advice on a variety of topics, such as the importance of credit scores. With over twenty thousand successful clients, I hope to impart enough knowledge for you to improve your own credit score. Let's delve into the specifics.
Contents:
Various Types of Credit Scores: How Do They Work?
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a House?
Determining the Right Credit Score for Buying a Car
How to Boost Your Credit Score?
Joe's Insights on Improving Your Credit Score
Various Types of Credit Scores: How Do They Work?
Credit scoring models differ significantly, and two of the most prominent systems utilized are the FICO and the Vantage models. Understanding these models' differences is crucial, especially when it comes to how they calculate credit scores.
The FICO Credit Score:
The FICO credit scoring model is the most widely used among lenders, with eight different FICO models currently in use. Each model considers various factors, and certain lenders will pull specific models depending on the type of credit a borrower is requesting. For example, a mortgage lender is likely to use the FICO 5 credit report, while a credit card company is more likely to use FICO 8. The different models weigh different factors more heavily, which can result in varying credit scores. The best way to understand your credit score according to the different FICO models is to sign up at www.myfico.com.
The Vantage Credit Score:
Vantage is a newer credit scoring model, developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO scoring model. Many credit monitoring websites use Vantage to provide a free copy of credit reports. Although not widely used for lending purposes, it is gaining popularity in some sectors, such as personal loans and auto lending. While Vantage scores can give a general idea of a borrower's credit score, FICO remains the most secure and trusted system since it’s been widely utilized since the seventies.
Accuracy of Vantage Score:
Vantage scoring can be accurate depending on how the score is interpreted. For instance, it may provide a general idea of a borrower’s credit score. However, it does not give an accurate score regarding the ability to obtain a loan since FICO is the most recognized scoring system. Nonetheless, in the next 5-10 years, Vantage scores may increase in usage given that credit agencies are the most significant data collection agencies around, holding vast amounts of data similar to social media firms. As lending standards continue to evolve, Vantage scores may be the most precise scoring models.
Understanding Good Credit Scores
Both the FICO and Vantage models have scores from 350 to 850. A score of 350 is the worst, while a score of 850 is the best. To achieve the highest scores, it's essential to know where you stand. Here are some score thresholds to consider:
1. 620 or below:
This score is considered bad credit, and likely means you have a negative credit history, high credit card balances, or no credit card accounts. Timely payments and ten active revolving credit accounts can help improve your score. Consider secured credit cards, such as Credit Builder Card or OpenSky Credit Card. When you reach 620, you can qualify for an FHA home mortgage.
2. 640-680:
This score range is considered fair for good credit. You may have derogatory marks or accounts on your credit report, as well as high balances on your credit cards that you need to pay down. Newly opened accounts may also temporarily decrease your score.
3. 740+:
Having a credit score over 740 is considered super-prime. Congratulations, as you are part of the 20% of the population with this score, and you will get the best interest rates for most loans. Maintain timely payments and keep your revolving credit accounts paid for optimal results.
What Credit Score Do You Need to Buy a House?
The required credit score to qualify for a mortgage depends on the type of loan you are applying for. Mortgage loans are grouped into three main types: conventional, FHA, and VA loans. The eligibility requirements and guidelines for these loans are similar, if not different, due to federal regulations and government support.
Conventional Loans
Conventional loans are the most widely-used and cost-effective option after VA loans. Conventional loans do not require borrowers to maintain private mortgage insurance (PMI), which can be an additional expense that raises down payment or monthly payments. Conventional loans usually have lower downpayment requirements and better interest rates compared to other loans. Borrowers must have a credit score of at least 640 and a debt-to-debt ratio that does not exceed 43%.
FHA Loans
FHA loans are designed for borrowers with lower credit scores, typically ranging from 580 to 619. However, specific requirements for FHA loans may vary across lenders, so make sure to shop around for the best financial option. FHA loans require borrowers to pay PMI for at least 11 years, which can raise the overall mortgage cost. To offset this, the loan permits a higher debt-to-income limit of up to 50%. Borrowers are only required to have a down payment as low as 3.5%, but may have to pay a higher interest rate.
VA Loans
VA loans do not have a specific credit score requirement. Instead, lenders look at the borrower's past-due debts and defaulted loans. To qualify for a VA loan, a borrower must have served in the United States military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a spouse that passed away during active duty. VA loans typically have the lowest interest rates, and may not require a down payment. This type of loan is a great benefit that gives back to our veterans.
Determining the Right Credit Score for Buying a Car
When purchasing a car, your credit history holds higher value in deciding your loan eligibility than your overall credit score. While a good credit score is essential, it plays a lesser role in setting your interest rate. Financial institutions assess your credit records to gauge the risk involved in extending credit. Late payments on previous auto loans or repossessions on current or prior borrowings can make it challenging to get approved for a car loan. Nevertheless, some lenders consider individuals with bad credit, subjecting them to a higher down payment and additional fees to negate the credit risk. It might surprise you, but the dealership may also have to pay a fee to lessen the probability of default and ensure the eligibility for credit. Entrepreneurially, these charges are covered by marking up the price of the car and selecting the vehicle eligible for approval on a loan. Ultimately, having equity or a down payment on the car adds leverage.
Credit Score Range for Car Loans
A credit score of over 680 is desirable to get approved for a car loan. Generally, lower credit scores imply a higher interest rate, increasing the risk you pose to the lender. The following table lists the average amount of interest that various credit scores pay on loans to determine the effect of a credit score:
1. Anyone with a 720 credit score or above will pay, on average, $5,500 in interest on a loan.
2. Anyone with a 680 credit score or above will pay, on average, $6,600 in interest on a loan.
3. Anyone with a 650 credit score or above will pay, on average, $8,100 in interest on a loan.
4. Anyone with a 615 credit score or above will pay, on average, $10,200 in interest on a loan.
5. Anyone with a 580 credit score or above will pay, on average, $13,900 in interest on a loan.
6. Anyone with a credit score of 580 or above will pay, on average, $15,300 in interest on a loan.
From this, it is clear that a higher credit score results in lower interest rates, thereby positively impacting overall credit scores.
How to Boost Your Credit Score?
It is possible to increase your credit score without making a significant effort. However, building a good credit score takes time and demands a great deal of patience. Irrational decisions with your credit happen if you make haste or feel frustrated, so the key to successfully building credit is patience. Besides that, it would be best if you kept an eye on the following points to improve your credit score:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
One of the best ways to maximize your credit scores is through revolving credit. It is easier, especially for someone with a limited credit history or looking to rebuild their credit. While obtaining a large loan demands a lot of effort, a secured credit card is the best option to get approved quickly. Revolving credit constitutes 30-35% of your overall credit score, so it can help improve your credit score quickly. Always ensure that you pay your balance on time, limit your credit card usage to small purchases like gas or simple groceries, and keep the balance at $5-10 each time you pay your bill.
2. Raise Your Limits!
You can quickly increase your overall credit limit and lower your credit utilization percentage by requesting a credit limit increase for your active revolving credit card accounts. To raise your limits, get in touch with your credit card company and request a credit limit increase. They will require you to fill out some information, including your current income and payment history. The credit card company typically wants to see 7-15 months of excellent payment history before granting you a credit limit increase.
3. Pay Down Your Balances!
Keeping your balance low and close to zero is critical. You are not obliged to use your credit cards each month; however, I recommend using them for small purchases. Leave a balance of $1-$5 on your credit cards when it's time to pay each month. If you have high balances and are unable to pay them off, create a game plan to pay a certain percentage of your paycheck each month to pay your credit card debt. Avoid running the balance when you pay off your credit card. Remember that since your credit card spending habits play a massive role in your overall credit score, limiting the usage of the credit card is crucial. Moreover, interest rates on credit cards are incredibly high, which can put your finances at a disadvantage.
Joe's Insights on Improving Your Credit Score
All of us have experienced bad credit at one point or another. However, if you are determined to improve your credit score, you can achieve massive changes in a relatively short time. Unfortunately, many people with bad credit get caught in an endless cycle of credit issues and often think that having good credit is impossible. But developing excellent credit requires dedication and commitment. By making your credit a priority and reviewing your spending habits, you can make progress in repairing your credit. The first step is to create a budget and address any negative spending patterns. This will have a positive impact on your credit score. For more information on credit and guidance on improving your score, you can visit our website at www.asapcreditrepairusa.com.