Were you aware that credit scores have 30 varying levels? It may come as a surprise that people tend to receive a plethora of answers when seeking the optimal credit score online. Unfortunately, the abundance of available information can be bewildering and even misguiding at times, leading you astray. My name is Joe Mahlow, and I have spent more than fifteen years in the realm of finance and credit repair. My aim is to provide you with authentic tips on various financial matters, such as credit scores. Having helped over 20,000 clients improve their credit scores, I am determined to furnish you with enough knowledge to do the same. Without further ado, let’s delve into it.
Contents:
Understanding the Different Types of Credit Scores
Understanding Good Credit Scores
Credit Score Requirements for Different Mortgage Loans
Determining the Minimum Credit Score Needed to Buy a Car
Tips on Boosting Your Credit Score
Tips from Joe to Improve Your Credit Score
Understanding the Different Types of Credit Scores
Credit scoring models play a crucial role in determining your overall credit score. Two popular credit scoring models are the FICO and Vantage models. It’s important to know the differences between these models and how they are used in order to understand the calculation of your credit score.
FICO Credit Score
FICO is the most commonly used credit score model out there, with eight different FICO models ranging from FICO 2 to FICO 10. The type of lender you use determines which FICO model they pull when you apply for credit. For example, if you’re applying for a mortgage, the lender will most likely access your FICO 5 report. If you’re applying for a credit card, they’re more likely to pull your FICO 8 report. Each FICO model has varying weights that evaluate different factors critical to the lender. For instance, a FICO 5 report may weigh previous mortgage history more heavily than a FICO 8 report. The FICO model considers various types of credit, and this is why you may have multiple FICO scores.
Vantage Credit Score
Developed by the three credit reporting agencies (Equifax, Experian, and TransUnion), the Vantage Score model aims to compete with the FICO scoring model. The Vantage Score is a newer model compared to FICO, which has been in use since the seventies. Though not widely used for lending purposes, credit monitoring websites often use Vantage to provide a free copy of your credit report. Some sectors, such as personal loans and auto lending, are considering the Vantage Score model. While the Vantage Score model is accurate, its accuracy can vary because it is not widely used as a lending score like FICO.
Which Score is Best?
The Vantage Score is a good "general idea" of your FICO score because it gives you an idea of your overall credit scores. However, the FICO model remains the most recognized scoring model and is the most accurate when it comes to your actual lending score. Lenders nationwide rely on the FICO score to determine a borrower's creditworthiness. Nonetheless, the Vantage Score model could eventually become more widely used in the next 5-10 years. Credit reporting agencies are significant data collection agencies, and if they have the data, they can provide the best scoring data.
Understanding Good Credit Scores
Credit scores from both the FICO and Vantage models range between 350 and 850, with 350 indicating the worst credit score and 850 indicating the best score. It is important to know where you stand within this range in order to set achievable goals for the highest scores. Below are some crucial score benchmarks to help you track your progress:
1. 620 or below
- This score range is considered bad credit and typically indicates adverse credit history.
- To improve your credit scores, try making timely payments and maintaining ten active revolving credit accounts.
- Consider the Credit Builder Card or OpenSky Credit Card, which function as secured credit cards to help establish or rebuild credit.
- A 620 credit score can qualify you for an FHA home mortgage.
2. 640-680
- Scores in this range indicate fair to good credit; though some derogatory marks or accounts may be present.
- High credit card balances may need to be paid down.
- Recently opened accounts can cause temporary drops in credit scores.
3. 740+
- Any credit score greater than 740 is considered "super-prime."
- Super-prime credit scores give you access to the best interest rates for most loans.
- Achieving a score above 740 puts you among the 20% of the US population.
- Continue paying all accounts on time and maintaining responsible revolving credit accounts to keep up the good work!
Credit Score Requirements for Different Mortgage Loans
The credit score requirement to buy a house varies according to the type of mortgage loan you're after. Mortgage loans have become regulated to the extent that most of the requirements are similar for all loan types, except for a few. Here are the three most common mortgage loans in the market and their credit score requirements:
Conventional Loans
Conventional loans are the most popular loan types and typically the best savings loan option except for the VA Loan. With conventional loans, you're not obliged to maintain private mortgage insurance (PMI) for which you pay an added cost. This option saves your down payment or monthly payment. Conventional loans usually come with lower down payment requirements and better interest rates than other mortgage loans. However, conventional mortgage loans require a credit score of at least 640 and a debt-to-income ratio that's no higher than 43% for qualification.
FHA Loan
The Federal Housing Administration (FHA) mortgage loan is suitable for individuals with lower credit scores, typically between 580 and 619. As different loan programs come with unique requirements, if your credit score falls within 580 - 619, it's best to seek out mortgage lenders and compare their offers. FHA loans require borrowers to maintain PMI for at least 11 years, which increases the overall mortgage payment. Also, this loan type has a higher debt-to-income limit of up to 50%, which allows you to buy more expensive homes than conventional loans if you have a lower income. The down payment requirement is as low as 3.5% of the purchase price, but you'll most probably have higher interest rates.
VA Loan
With the VA Loan, there's no precise credit score requirement. However, the authorities evaluate your qualification status by checking for any past-due debts owed to the government or defaulted loans. To qualify, 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 spouse of a military member who died on active duty. VA loans offer the best interest rates available and don't require a down payment, making them a perfect fit for veterans.
Determining the Minimum Credit Score Needed to Buy a Car
When looking to purchase a car, your credit history carries more weight than your credit score. While a high credit score is essential, it is not the only factor in securing a favorable interest rate. Your past and present credit histories are analyzed to assess the risk before extending credit. If you have a previous vehicle repossession or have been late on prior or existing auto loans, you might have a challenging time getting approval for a car loan.
Even if your credit is poor, there are lenders who will still qualify you for a car loan. However, you will be required to meet specific conditions, such as a higher down payment and additional fees to reduce the risk for the dealership. When buyers with poor credit visit a dealership, they might be limited to the choices of vehicles that the dealership has the capacity to mark up to pay for the fees associated with the car loan approval process. Lastly, to have the most influence when buying a car on credit, try to have equity or a downpayment.
Ideal Credit Score Range for Financing a New Car
There is no precise credit score that guarantees loan approval, as several factors are involved, including those mentioned above. Nevertheless, a credit score of at least 680 is recommended. If your score is below this, the interest rate you are given will increase because of your high-risk status.
Here is an example of how different credit scores can affect the amount of interest you will pay:
- Those with a credit score of 720 or above pay an average of $5,500 in interest.
- Those with a credit score of 680 or above pay an average of $6,600 in interest.
- Those with a credit score of 650 or above pay an average of $8,100 in interest.
- Those with a credit score of 615 or above pay an average of $10,200 in interest.
- Those with a credit score of 580 or above pay an average of $13,900 in interest.
- Those with a credit score of 580 or below pay an average of $15,300 in interest.
As illustrated in the provided data, the lower your credit score, the higher the interest rate, impacting your overall credit score.
Tips on Boosting Your Credit Score
To improve your credit score, there are several key steps that require little effort but can have a significant impact. Building a strong credit score is a gradual process that takes time, so it is essential to be patient and avoid making rash decisions. Fortunately, you can take the following steps right away to improve your credit:
1. Open 3-5 revolving credit accounts:
This is one of the best ways to maximize your credit score, especially if you have limited credit or are rebuilding your credit. A secured credit card like Open Sky or Credit Builder Card is perfect as they focus more on your ability to pay on time than your credit score. Revolving credit accounts make up 30-35% of your overall credit score, making them the best option for building credit quickly. Pay your balance on time, and limit the use of the card to small purchases.
2. Raise your limits:
You can request a credit limit increase for your active revolving credit card accounts to lower your credit utilization percentage. Each credit card company has a different process, and you can call them for a “Credit Limit Increase†request. Credit card companies usually require 7-15 months of excellent payment history to agree to a credit limit increase.
3. Pay down your balances:
Keep your credit card balance low and close to zero, leaving about a $1-5 balance on your cards when making payments. If you currently have high balances, make a plan to pay them down gradually, so you don't run the balance back up. You must limit your credit card usage since your credit card spending habits play a significant role in your overall credit score.
Remember, while it can take 2-4 months to see an increase in your credit score after taking these steps, they are effective in gradually boosting your score over time.
Tips from Joe to Improve Your Credit Score
Having bad credit can be a frustrating experience, but it's not impossible to turn things around. It's important to take your credit situation seriously and make the necessary changes to see a significant improvement in your credit score. Don't let the cycle of bad credit continue; instead, prioritize your credit and make a commitment to improving your spending habits. Here are some simple steps to take:
1. Create a budget
Create a budget to better manage your finances and gain control over your spending.
2. Fix bad spending habits
Work on fixing any bad spending habits and be diligent with your credit payments.
3. Achieve a great credit score
With effort and dedication, you can achieve a great credit score and break the pattern of poor credit.
If you're looking for help with credit repair, don't hesitate to contact our office at www.asapcreditrepairusa.com. This article serves as a guide to better understand the world of credit and how to improve your score.