Fun fact: Did you know that credit scores have 30 different levels? It's a staggering number that can leave most people confused when they search for reliable information on improving their scores. Search engines such as Google can sometimes lead you to unhelpful and even misleading information. My name is Joe Mahlow, and with over fifteen years of experience in the financial literacy and credit repair industry, I want to provide you with honest and straightforward advice on improving your credit scores. In this article, I'll be sharing my insights and tips that have helped over 20,000 clients turn their credit scores around. So, let's dive right in!
Contents:
Different Types of Credit Scores
Understanding Good Credit Scores
Credit Score Needed for Buying a House
Determining a Qualifying Credit Score for Buying a Car
Tips for Improving Your Credit Score
Joe's Advice on Building Credit
Different Types of Credit Scores
Credit scoring models play an important role in assessing your creditworthiness and determining your eligibility for loans and credit facilities. Two popular credit scoring models that you should be familiar with are the FICO model and the Vantage model. Each of these models has its unique way of calculating your credit score.
FICO Credit Score
The FICO model is the most widely used and recognized credit scoring model, comprising eight different models from FICO 2 to FICO 10. Depending on the lender and the type of credit you seek, your credit score may differ based on the specific FICO model they pull. For example, a mortgage lender is likely to use FICO 5, while a credit card provider will likely use FICO 8. Each FICO model weighs different factors critically, and your score will vary based on your credit history in that area.
Why Different FICO Scores?
Each credit report has a different weight, meaning that critical factors to the lender will have a more significant impact on your credit score than the less important ones. For example, if you have a good payment history on a previous mortgage, it will weigh more in your favor score-wise than if you had no history or a negative history, especially on a FICO 5 mortgage report. This goes for all the different FICO scoring models, and each is designed to match specific credit products, such as auto loans or credit cards.
If you want to see your different FICO scores, you can sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies to provide a competitive alternative to the FICO model. It is a new credit scoring model compared to the FICO model, which has been around since the seventies. Vantage scores are often used by credit monitoring websites to provide you with a free copy of your credit reports. Although not as widely used for lending purposes as FICO, the Vantage model is gaining popularity in some sectors like personal loans and auto lending.
Accuracy of Vantage Score
The Vantage score is reliable, but it may not accurately predict your lending score. FICO is the most recognized scoring model used by lenders, and that is what you need to focus on for your lending scores. Instead, use your Vantage score to provide an idea of where your overall scores land. The Vantage model is the best general idea of your FICO score, and it can give you a decent sense of credit trends over time. While FICO still dominates the lending scene today, the Vantage model offers the best scoring models based on today's standards.
Credit scores are vital financial markers, and having a clear idea of what goes into determining them is essential in managing your finances. As credit reporting agencies continue to collect data and improve their scoring models, we expect to see more innovations in credit scoring models that better serve consumers.
Understanding Good Credit Scores
When determining your credit score, you will be scored on a scale from 350 to 850 by both FICO and Vantage. The lower your score, the worse your credit is assessed to be, with 350 as the lowest and 850 being the highest. Setting your goals and striving for the highest score possible is key, so it is essential to be aware of where you stand and the thresholds to reach. Here are the crucial score thresholds to consider:
620 or Below:
This score is considered terrible, indicating that you may have adverse credit history, high-balance credit cards, or no credit cards at all. Timely payments and owning ten revolving credit accounts can help improve your credit scores. Consider getting a secured credit card such as a Credit Builder Card or OpenSky Credit Card to boost your credit. With a 620 credit score, you can start qualifying for an FHA home mortgage.
640-680:
This score range is considered fair or good credit. If you fall under this category, you've established credit, but you may have derogatory marks or accounts, high balances on your credit cards, or newly opened accounts that can temporarily reduce your scores. Avoid worrying if you recently opened a new account; your score will improve.
740+:
A credit score over 740 falls under "super-prime" and translates to the best interest rates for most loans, but more importantly, congratulations are in order if you have scored above 740 because only 20% of the US population takes up this score. Pay your accounts on time, and keep your revolving credit card accounts paid, and you'll stay in excellent financial shape!
Credit Score Needed for Buying a House
The credit score you need to buy a house depends on the type of mortgage loan you are seeking. Mortgage loan requirements may be similar or different based on federal regulation and government backing. There are three popular types of mortgage loans, conventional loans, FHA loans, and VA loans, each with unique features.
Conventional Loans
Conventional loans are one of the most popular lending options and require a credit score of at least 640 and a debt-to-debt ratio no higher than 43%. This loan type does not require private mortgage insurance (PMI), so you won't have to pay an added cost. This mortgage option usually has lower down payment requirements and better interest rates compared to other options.
FHA Loan
An FHA loan is an option for those with lower credit scores, typically between 580 and 619. You may find different lenders with better financial options if you're within the credit score limits. FHA loans require you to keep PMI for at least 11 years, which could increase your monthly payment. The debt-to-income limit is up to 50%, allowing you to purchase more homes with a lower income. The downpayment requirement is as low as 3.5%, which could help you get into a mortgage with less out-of-pocket expenses.
VA Loan
A VA loan is suitable for veterans. There isn't a credit score requirement but pre-qualification is based on previous defaulted loans or government-owed past-due debts. You need to have served in the United States Military for at least 181 days or lost your spouse in active duty, among other requirements. The VA loan offers the best interest rates and usually requires no down payment. As it is an excellent way to support our veterans, it is a preferred option for many.
Determining a Qualifying Credit Score for Buying a Car
When attempting to purchase a vehicle, rather than focusing solely on your credit score, it is important to take into account your credit history. Although having a high credit score is important, it is not the sole factor that lenders take into account when determining your interest rate eligibility. Instead, lenders examine your current and previous credit histories to determine the level of risk involved with extending credit. Individuals with flawed credit histories, such as those who have had late payments or a repossession, may have difficulty obtaining a car loan. Special finance lenders, however, would approve almost anyone for a car loan, albeit under strict criteria. To offer an approved loan, dealerships may levy fees in order to lessen the risk of a loan default. When seeking to buy a vehicle on credit, having equity or a downpayment is important.
The Credit Score Range to Qualify for a New Vehicle
There is no single credit score that can determine if you are approved because various factors, such as those discussed above, are involved. However, a credit score above 680 is ideal to qualify for a new car loan. A credit score lower than 680 increases the interest rate because the lender sees you as a more risky borrower. This is demonstrated in the data below, highlighting how the amount of interest paid on loans varies by credit score:
Individuals with a credit score of 720 or above will, on average, pay $5,500 in loan interest.
Individuals with a credit score between 680 and 719 will, on average, pay $6,600 in loan interest.
Individuals with a credit score between 650 and 679 will, on average, pay $8,100 in loan interest.
Individuals with a credit score between 615 and 649 will, on average, pay $10,200 in loan interest.
Individuals with a credit score between 580 and 614 will, on average, pay $13,900 in loan interest.
Individuals with a credit score below 580 will, on average, pay $15,300 in loan interest.
This data shows that the higher your credit score, the less interest you will pay, thereby affecting your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score can be achieved through a variety of actionable steps that do not require extensive effort. It is important to understand that it takes time to build a good credit score, and patience is key to avoiding impulsive and poor decisions that can hinder your progress. Here are some effective steps you can take right now to improve your credit score:
1. Open 3-5 Revolving Credit Accounts:
Revolving credit is an excellent option for maximizing your credit score, especially if you have limited credit history or are rebuilding your credit. Opening a secured credit card, such as Open Sky or Credit Builder Card, is recommended as they focus more on your ability to pay your card on time and not solely on your credit score. Revolving credit accounts make up 30-35% of your overall credit score and can significantly boost your score if used responsibly.
2. Raise Your Limits:
Requesting a credit limit increase on your active revolving credit accounts can help increase your overall credit limits and lower your credit utilization percentage. High credit card balances can negatively impact your credit score, and increasing your credit limit can mitigate this issue. Each credit card company has a different process for requesting a credit limit increase, but typically they require a few months of excellent payment history on your card before they will increase your limit.
3. Pay Down Your Balances:
Keeping your credit card balances low or close to zero is critical to improving your credit score. You can limit your credit card usage by only making small purchases and leaving a $1-5 balance on your credit cards when paying your bill each month. If you currently have high balances that you cannot pay off, make a plan to allocate a percentage of your paycheck each month towards paying them down, and eventually stop using them altogether. Remember that your credit card spending habits play a significant role in your overall credit score, so it is essential to limit your usage and avoid running balances back up.
Joe's Advice on Building Credit
We've all experienced moments in life where our credit wasn't at its best. However, taking action towards improving your credit standing can bring about significant changes in your credit score in a short amount of time. Sadly, many individuals with poor credit history believe that good credit is out of reach, but this couldn't be further from the truth. Improving your credit score is achievable, but it requires effort on your part. A vital first step towards achieving a great credit score is prioritizing your credit and working on your spending habits. Start by creating a budget and, if necessary, addressing any unhealthy spending tendencies. This article serves as a comprehensive guide to help you improve your credit and better understand how credit works. If you're seeking help or guidance in repairing your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com.