Were you aware that there are 30 distinct levels of credit scores? Many individuals are not aware that finding the best credit score can be a confusing process, as they are often presented with a plethora of options that can be misleading or cause confusion. As a financial literacy and credit repair expert with over fifteen years of experience, I am happy to provide straightforward and informative content on a variety of topics, including credit scores. Throughout my career, I have helped more than twenty thousand clients significantly improve their credit scores, and I hope to offer you the information needed to do the same. So, let's dive in!
Contents:
Credit Score Types: FICO vs Vantage
Understanding what constitutes a good credit score
Determining the Appropriate Credit Score for Homebuying
Understanding Credit Scores When Buying a Car
Helpful Tips on How to Improve Your Credit Score
Insights from Joe on Credit Score Improvement
Credit Score Types: FICO vs Vantage
When it comes to credit scores, there are two main models that you should know about: FICO and Vantage. Each model has its unique way of calculating scores, and lenders may use different models depending on the type of credit you are applying for. Here's what you need to know about both models:
FICO Credit Score
The FICO scoring model is the most widely used model by lenders. With eight different FICO models, your credit score may vary depending on the type of lender you are using. For instance, a mortgage lender will most likely pull your FICO 5 credit report, while a credit card issuer will probably pull your FICO 8 credit report.
Why so many FICO scores?
Each FICO score corresponds to a different credit report with different weight given to various factors. For example, your FICO 5 score will heavily weigh on your mortgage payment history, while your FICO 8 score will focus more on your credit card history. Therefore, if you want to understand your various FICO scores, it's best to sign up for an account on www.myfico.com.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies as an alternative to FICO. Although it's not as widely used by lenders, Vantage is gaining popularity in personal loans and auto lending. Credit monitoring websites often use Vantage to provide free credit reports.
Is the Vantage Score accurate?
While the Vantage Score is accurate, it may not be as useful as FICO for determining your actual lending score. However, the Vantage score can provide a general idea of where your overall scores lie. In the future, Vantage may become widely used by lenders due to its up-to-date scoring model.
In conclusion, understanding both FICO and Vantage scoring models can give you a better idea of your credit score. Keep in mind that lenders may use different models, so it's essential to track your scores for each model to ensure you have a complete picture of your credit health.
Understanding what constitutes a good credit score
Credit scores can range from 350 to 850 on both the FICO and Vantage models. The scores of 350 are deemed the worst credit score attainable, while 850 is an indication of excellent credit. As you work towards achieving a stellar score, it's crucial to be in tune with your progress. Here are some essential score thresholds to note:
1. 620 or below:
This is characterized as poor credit
It implies that one has an unfavorable credit history, high-balance credit cards, or no credit cards at all. To improve your credit scores, it is advisable to pay bills on time and have at least ten active revolving credit accounts open. You can start qualifying for an FHA home mortgage once you have reached the 620 credit score range. We recommend the Credit Builder Card or OpenSky Credit Card, which are secured credit cards that aid you in building credit.
2. 640-680:
This range is deemed fair to good credit
Scores in this range imply that one has established credit, some derogatory marks or accounts on their credit, and high balances on their credit cards that need to be settled. It is common to experience an initial drop in your scores when a new account is opened, but these scores will gradually return to normal.
3. 740+:
Any score over 740 is known as "super-prime"
It offers you the best interest rates for most loans. If you have a credit score above 740, you are in the top 20% of people in the US with such a score, so congratulations! To maintain this score, ensure that you always pay your bills on time and keep your revolving credit accounts paid.
Determining the Appropriate Credit Score for Homebuying
To determine the appropriate credit score for home buying, you need to consider the type of mortgage loan you desire to qualify for. The guidelines and requirements for most mortgage loans are similar, but there might be slight differences due to federal regulations and government backing. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are usually the most popular type of mortgage loans and among the best savings options except for VA loans. Conventional loans do not mandate private mortgage insurance (PMI), which often increases downpayments and monthly payments. PMI operates as a shield for lenders if borrowers default. Conventional mortgage loans usually request low downpayment requirements and offer superior interest rates than other mortgage loans. The credit score prerequisite for conventional mortgage loans is usually 640 while the debt-to-debt ratio should not be above 43%.
2. FHA Loans
FHA mortgage loans are intended for lower credit score recipients, typically ranging from 580 to 619. It's important to note that all loan programs are different, so shopping around for various lenders who offer the best financial option within your credit score limits is essential. FHA loans demand PMI for at least 11 years, adding an extra cost to borrowers, especially those on a budget. The loan possesses high income-to-debt limits of up to 50%, which helps recipients with lower income purchase more homes than conventional loans. FHA loans require downpayments as low as 3.5% of the total purchase price, which allows you to obtain a mortgage with less money than a conventional mortgage loan. However, the interest rates are higher.
3. VA Loans
There is technically no credit score requirement for VA loans, but borrowers must not have defaulted on loans previously, and no past-due debts must be owed to the government when pre-qualifying borrowers. Veterans who have worked in the United States military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or whose spouses have died while on active duty can receive VA loans. VA loans typically have the best interest rates and do not require a down payment. VA loans are remarkable in that they honor and reward military personnel who have served their country.
Understanding Credit Scores When Buying a Car
When it comes to buying a car, your credit history is more important than just your credit score. While a good credit score is helpful, it plays a lesser role in determining the interest rate you will be offered. Lenders will scrutinize both your previous and current credit records to assess the risk associated with extending credit. Late payments on past or current auto loans or repossession can negatively impact your loan approval chances. Special finance lenders may qualify anyone for a car loan, albeit with stricter requirements such as a higher down payment and additional dealership fees. In some cases, dealerships may choose the vehicle you are allowed to buy to cover the fees they incur in approving your loan.
Credit Scores and Loan Approval
While there is no specific credit score that can guarantee loan approval, having a score of over 680 is ideal. Having a score lower than that will increase your interest rate due to your perceived risk to the lender. A higher credit score can save you a lot of money in interest payments. Based on the current average, someone with a score of 720 or more can expect to pay around $5,500 in interest on a loan, while someone with a score of 580 or below will pay an average of $15,300 in interest. To maximize your chances of buying a car on credit, having equity or a down payment is crucial.
Helpful Tips on How to Improve Your Credit Score
Improving your credit score takes effort and time, but there are specific steps you can take right now that will help you see results. It's important to remember that building good credit is a gradual process, and impatience can lead to irrational decisions and detrimental consequences. In this regard, practicing patience is key to long-term success.
Outlined below are some actionable steps you can take to improve your credit scores:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit is an excellent way to maximize your credit scores. If you have limited credit or you need to rebuild it, obtaining a massive loan may be challenging. Therefore, creating a revolving credit account is an excellent way to increase your chances of approval. We recommend starting with secured credit cards from lenders like Open Sky or Credit Builder Card that focus more on payment ability than credit score. Revolving credit comprises 30-35% of your overall credit score and is the best option to build it quickly. Making small purchases and paying your balance on time while maintaining a balance of $5-10 is advisable.
2. Raise Your Credit Limits
Requesting a credit limit increase for your revolving credit cards can help increase your overall credit limits and lower your credit utilization rates. High credit card balances that exceed 30% of your overall limits can hurt your credit score. To avoid this, contact your credit card company and request a "Credit Limit Increase." They will likely require you to fill out some forms, notably your current income, and have an excellent payment history on your credit card for 7-15 months.
3. Pay Down Your Balances
Keeping your balance low is critical to improving your credit score. You don't need to use your credit card monthly, so we recommend using them for small purchases and leaving a $1-$5 balance when you pay your bill. If you have high balances and cannot pay your credit cards off, it's best to create a game plan to tackle the debt slowly. Avoid using your credit card means you will have to pay less interest and more on principal, which helps you save money in the long run while improving your credit score.
Insights from Joe on Credit Score Improvement
Undoubtedly, many people have experienced periods of poor credit scores. However, by approaching your credit situation with seriousness and putting in the required time and effort to improve, your credit score can improve significantly in a short time. Many individuals with bad credit find themselves continually stuck in a credit predicament, assuming that reclaiming a favorable credit score is impossible. Nevertheless, building a great credit score is doable for those who are dedicated to their finances, prioritize their credit situation while working towards fixing their bad spending habits. Creating a budget and sticking to it is a practical way to make a constructive impact on one's credit score. To better understand credit and achieve your desired credit score, don't hesitate to get in touch with my office today at www.asapcreditrepairusa.com.
Below are some of the crucial tips to keep in mind when working on your credit score:
1. Approach your credit situation seriously
2. Put in the required effort and time to work on it
3. Stay focused on your spending habits and credit score
4. Start by creating a budget and stick to it.