It is quite interesting to know that there are actually 30 different levels of credit scores. Surprisingly, many individuals are not aware of this fact. When one conducts a search for the best credit score, Google provides a vast range of answers to choose from. However, such information can be confusing and quite misleading. My name is Joe Mahlow, and I possess over fifteen years of experience in the financial literacy and credit repair space. My aim is to provide straightforward advice on various topics, including credit scores. Over the years, I have helped over twenty thousand clients enhance their credit scores, and I hope to do the same for you by providing enough information. So, let us dive into it.
Contents:
What are the Types of Credit Scores and How Do They Work?
Guide to Understanding Credit Scores
The Ideal Credit Score for Buying a Home
Determining the Credit Score for Car Buying
Tips for Improving Your Credit Score
Joe’s Insights on Improving Your Credit Score
What are the Types of Credit Scores and How Do They Work?
Credit scores are important indicators of one's creditworthiness, and there are two major models that consumers should be aware of: FICO and Vantage. While these scoring models serve similar purposes, there exist significant differences in how they calculate credit scores.
FICO Credit Score
FICO is the more widely-used model, with eight versions ranging from FICO 2 to FICO 10. Each version yields a different score based on a credit report. Mortgage, credit card, and auto lenders all rely on different FICO scores when considering creditworthiness.
The variation in FICO scores is due to the fact that different lenders weigh different credit report metrics differently. For example, mortgage lenders focus on a borrower's previous mortgage history heavily, while credit card companies prioritize credit card payment history.
Vantage Credit Score
The Vantage Score model was developed by the three major credit-reporting agencies as a FICO competitor. It is a newer scoring model that has been gaining popularity among personal loan and auto lending sectors. Vantage Scores provide a general idea of a consumer's creditworthiness. Some credit-monitoring websites offer free reports based on the Vantage model.
While Vantage scores are accurate in their own context, they may differ from FICO scores since FICO is more widely used. Nevertheless, Vantage's popularity may increase in the future. Credit reporting agencies' ability to collect data gives them an edge in the provision of the most accurate scoring data.
Guide to Understanding Credit Scores
The FICO and Vantage scoring models both range between 350 and 850, with a higher score being better. It's important to track your progress in improving your score by having an idea of where you stand throughout your credit-building journey. Here are essential score thresholds:
1. 620 or below
A score in this range means you have bad credit, most likely due to high-balance credit card accounts, adverse credit history, or no credit cards at all. To improve your score, prioritize making timely payments and have ten revolving credit accounts open. You can use the Credit Builder Card or OpenSky Credit Card to build your credit. When you reach this range, you can qualify for an FHA home mortgage.
2. 640-680
A score in this range signifies fair-to-good credit. Although you have established credit, you may have derogatory marks or accounts on your credit and high balances on your credit cards. Opening new accounts can also temporarily lower your score. If you're in this range, don't worry, this drop is brief and your score will recover.
3. 740+
A credit score over 740 is considered "super-prime" and offers lower interest rates for most loans. Kudos if you're among the 20% of the US population with this credit score, as it means you're doing an excellent job. Always aim to pay your accounts on time and keep your revolving credit card accounts paid for a great credit standing.
The Ideal Credit Score for Buying a Home
When it comes to buying a house, the ideal credit score varies based on the mortgage loans you are looking to be eligible for. This is because every mortgage loan type has varied requirements and regulations due to government backing and federal policies. The three most prevalent mortgage loan types include the FHA loan, conventional loans, and VA loans.
Conventional Loans
Out of all the loan options, conventional loans are the most popular and affordable outside of VA loans. One of the most significant benefits of a conventional loan is that it does not require you to maintain Private Mortgage Insurance (PMI), which can increase your out of pocket costs and monthly payments. Conventional loans typically have better interest rates and lower down payment requirements compared to other mortgage loans. Additionally, the average credit score requirement for conventional mortgage loans is 640 and a debt-to-debt ratio not exceeding 43%.
FHA Loans
FHA mortgage loans are designed for lower credit scores, with the typical range being between 580 to 619. Remember that each lender has distinct standards, so when within the credit score range, shop around different lenders to find the best rates. PMI is mandatory for at least 11 years with FHA loans, which can add up to more costs, particularly if you have a restricted budget. However, this loan usually has a higher debt-to-income threshold of up to 50%, which allows you to purchase more homes than a conventional loan with a lower income. Notably, FHA loans typically require a low down payment, starting at 3.5% of the purchase. This results in fewer out of pocket expenses than the conventional loan. However, there usually is a higher interest rate to compensate for the lower down payment.
VA Loans
Contrary to other loans, there are no particular credit score requirements for the VA loan. However, the qualification process takes into account past defaulted loans and government-owed past-due debts. To qualify, you must have served in the military for at least 181 days, 90 consecutive days during wartime, served six years with the National Guard, or lost your spouse while they were on active duty. Veterans usually qualify for the most favorable interest rates available, and they are typically exempted from down payment requirements. Overall, VA loans are an excellent choice for veterans looking to purchase a house.
Determining the Credit Score for Car Buying
When considering buying a car, credit history matters more than the credit score. Having a high credit score is essential but not the sole factor in determining the interest rate you qualify for. Lenders investigate your past and present credit histories to judge the risk involved in lending money. Those with credit issues, such as late payments, repossession of cars, or current auto loan default, may face difficulty in loan approval. Bad credit lenders extend loans to almost anyone but with a higher down payment and additional fees to dealership to manage the risk factor. Additionally, the credit score range for a new vehicle has no ideal score range; however, having a score above 680 is considered ideal. A lower score can result in increased interest rates due to the risk factor involved. The data indicates that a higher credit score results in lower interest rates, which, in turn, improves the overall credit score.
Examples of how credit score affects interest rate:
720 credit score or above - Average interest of $5,500 on the loan
680 credit score or above - Average interest of $6,600 on the loan
650 credit score or above - Average interest of $8,100 on the loan
615 credit score or above - Average interest of $10,200 on the loan
580 credit score or above - Average interest of $13,900 on the loan
Credit score of 580 or above - Average interest of $15,300 on the loan.
Therefore, buyers must have knowledge of their credit history and maintain good credit history to ensure easy car financing without high-interest payment.
Tips for Improving Your Credit Score
Improving your credit score takes time and consistency. Rushing the process will only lead to irrational decisions and worsen your financial problems. Here are some tips to help increase your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit makes up 30-35% of your overall credit score. Start with secured credit cards such as Open Sky or Credit Builder Card, as they focus more on your ability to pay the card on time than credit scores. Be sure to pay off your balance on time and limit the usage of your card to small purchases.
2. Raise your limits
Request a credit limit increase online or by calling your credit card company. You may need 7-15 months of excellent payment history before they agree to it, but it can help lower your credit utilization percentage.
3. Pay down your balances
Keep your balance low and pay your credit cards off consistently. If you have high balances, make a game plan to pay them down with a percentage of your paycheck and stop using them.
Remember, your credit card usage and payment history are significant factors that affect your credit score, so be mindful of both.
Joe’s Insights on Improving Your Credit Score
We’ve all been in situations where our credit has taken a hit. But, by taking a serious approach towards improving your credit and dedicating time and effort, you can expect to see significant progress in your credit score in no time. Many individuals with poor credit feel like they’re trapped in a vicious cycle and believe that improving their credit score is impossible. Nevertheless, it takes considerable work to create a stellar credit score. Prioritizing your credit and focusing on your spending habits is the key to winning this battle. Begin by creating a budget and addressing poor spending habits; this will have a direct impact on your credit score. This article provides insights into credit and its management. If you seek assistance with credit repair or guidance on improving your credit score, visit our website at www.asapcreditrepairusa.com.