There are actually 30 different levels of credit scores that many people are unaware of. When searching for the best credit score, it can be difficult to get a definitive answer since different sources provide varying information. Unfortunately, sifting through this data can sometimes be confusing and even lead you down the wrong path. As someone who has been working in the financial literacy and credit repair industry for over a decade, allow me to introduce myself. My name is Joe Mahlow and my mission is to provide straightforward advice on various topics, such as credit scores. Through assisting more than twenty thousand clients during my tenure, I have gained significant insight into the credit repair process. My hope is that I can equip you with the necessary tools to also improve your own score. With that said, let’s dive in.
Contents:
Understanding the Different Types of Credit Scores
Understanding What Qualifies as Good Credit Scores
Credit Score Requirements for Different Mortgage Loan Types
Credit History is More Important Than Credit Score When Buying a Car
Tips for Improving Your Credit Score
Joe's Views on Improving Your Credit Score
Understanding the Different Types of Credit Scores
When it comes to credit scores, there are two models you should be familiar with: the FICO model and the Vantage model. Knowing the differences between these models is essential as they play a significant role in calculating your credit scores.
FICO Credit Score
The FICO model, with its eight different scoring models ranging from FICO 2 to FICO 10, is the most popular and widely used credit scoring model. Each FICO model provides a different credit score based on your credit report. Lenders use different FICO reports based on the type of credit you're applying for. For instance, mortgage lenders usually pull FICO 5 credit reports, while credit card companies primarily use FICO 8 reports. Each FICO score is unique, and the factors that are most critical to a particular lender weigh heavily in determining the credit score for that report.
Vantage Credit Score
Equifax, Experian, and TransUnion developed the Vantage Score as a competing model to the FICO model. While FICO has been around since the seventies, Vantage is a recent scoring model that is gaining popularity in some sectors, such as personal loans and auto lending. Vantage provides a free credit report on various credit monitoring websites in the United States.
Accuracy of the Vantage Score
While accurate in its assessment of credit, the Vantage Score's accuracy depends on context. As the Vantage Score is not used widely for lending purposes, it may not reflect your actual lending score. Since FICO is the most recognized scoring model, Vantage's accuracy can vary. However, the Vantage Score provides a general idea of your FICO score. Using your Vantage score is a good starting point to gauge where your overall scores are.
Looking Forward
While the FICO scoring model is still the most widely used, the Vantage model has the potential to become as popular within the next 5-10 years. Credit agencies collect significant amounts of data, giving them an advantage over other data collection agencies when it comes to providing the best scoring data. Given the advances in technology and data collection, the Vantage Score may soon offer more comprehensive and accurate scoring models than FICO.
Understanding What Qualifies as Good Credit Scores
Credit scores for both the FICO and Vantage models range between 350 and 850. The highest score is 850, and the worst is 350. When planning to attain the highest scores, it is vital to understand your status regularly in your score-building journey. Here are some critical score thresholds to note:
1. Scores of 620 or below:
This is classified as poor credit. A below-threshold score can result from a history of adverse credit, high-balance credit card accounts, or a lack of credit cards overall. The most efficient way to boost scores is by making payments on time and having ten active revolving credit accounts open. Secured credit cards, such as Credit Builder Card or OpenSky Credit Card, are advisable in this case. A score in the 620 range qualifies for an FHA home mortgage.
2. Scores ranging from 640-680:
This is deemed reasonable for good credit. Such scores imply established credits, but there may be some derogatory marks or accounts, high balances on credit cards to pay down, or recent credit accounts, which could temporarily decrease the scores. A newly opened account causing a slight drop in the score should not cause panic as this can be resolved.
3. Scores of 740+:
A credit score over 740 is "super-prime." It provides the best interest rates for most loans. Congratulations to the 20% of people in the US with this score. Maintaining timely payments and keeping revolving credit card accounts paid will keep such individuals in great shape.
Credit Score Requirements for Different Mortgage Loan Types
To determine the ideal credit score needed to purchase a house, knowing the type of mortgage loan you are eligible for is crucial. Federal regulations and government support have resulted in various requirements for different mortgage loan types. The most popular ones are the conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are a top choice among borrowers due to their attractive interest rates and low downpayment requirements. Unlike other mortgage loans, conventional loans do not require you to maintain private mortgage insurance (PMI), which can escalate the costs of your monthly payment. An average credit score requirement of 640 and a debt-to-debt ratio no higher than 43% make it a sensible option for borrowers.
FHA Loan
The FHA mortgage loan is the go-to option for borrowers with a low credit score, ranging between 580 and 619. As lending criteria differ for all loan programs, research different lenders' financial options that could provide the best deal. FHA loans mandate PMI payments for at least 11 years, increasing mortgage costs. The higher debt-to-income limit of up to 50% can enable you to purchase homes with a lower income. The downpayment requirements on an FHA loan are as low as 3.5% of the purchase, but the interest rates tend to be higher than a conventional loan.
VA Loan
The VA loan is an excellent option for military personnel and their families. There is no minimum credit score requirement; however, VA lenders verify previous defaults and any past-due debts owed to the government. To qualify, you must be a military veteran who served for at least 181 days, served 90 consecutive days during wartime, or served six years with the National Guard. Alternatively, if your spouse was in the military and lost their life while on active duty, you also qualify. Compared to other loans, the VA loan offers the lowest interest rates and does not typically require a downpayment. It is an excellent way to show appreciation to our veterans.
Credit History is More Important Than Credit Score When Buying a Car
When determining your eligibility to buy a car, your credit history is more crucial than your credit score. While having a higher credit score is indeed important, it plays a smaller role in deciding your interest rate. Your previous and current credit histories are reviewed to evaluate the risk factors involved in extending credit when you apply for a car loan, especially when your credit is troublesome. A repossession or a history of late auto loan payments makes it more difficult to qualify for a car loan than someone with a clean record. The worst credit lenders may qualify you for a car loan even with a history of repossession, but with some criteria to meet, such as high down payment and extra dealership fees. To cover the risk of defaulting on your loan, the dealership will pay a fee to approve your loan, and if you have bad credit, they may limit your options for cars. Lastly, to improve your leverage, having equity or a downpayment is crucial when purchasing a vehicle on credit.
Credit Score Range for Buying a New Car
There is no exact credit score needed to guarantee your eligibility for a car loan, given the various factors involved. However, having a credit score above 680 is considered ideal since a score lower than this increases your interest rate and risk to the lender. The following is an example of how credit score affects interest rate:
- A credit score of 720 or higher pays an average of $5,500 in interest.
- A credit score of 680 or higher pays an average of $6,600 in interest.
- A credit score of 650 or higher pays an average of $8,100 in interest.
- A credit score of 615 or higher pays an average of $10,200 in interest.
- A credit score of 580 or higher pays an average of $13,900 in interest.
- A credit score of 580 or higher pays an average of $15,300 in interest.
So, it's evident that your credit score affects the interest you pay on your loan, with a higher score leading to a lower interest rate and overall amount paid.
Tips for Improving Your Credit Score
Improving your credit score is a process that requires time and patience; it won't happen overnight. However, there are things you can do today to help increase your credit score with minimal effort. Here are some tips:
1. Open three to five revolving credit accounts (credit cards):
Revolving credit makes up 30-35% of your overall credit score and is the best option to help build credit scores quickly. Start with a secured credit card that focuses more on your ability to pay on time and has no bankruptcy history in the last two years. Use your card for small purchases and make sure to pay your balance on time and keep it between $5-10.
2. Raise your limits:
Request a credit limit increase for your credit cards, which can help increase your overall credit limits and lower your credit utilization percentage. Call your card company and request a “Credit Limit Increase†and fill out the necessary information, including your current income.
3. Pay down your balances:
Keep your balance low and close to zero by using your credit cards for small purchases only and leaving a $1-5 balance on the card when paying your bill. If you have high balances, make a plan to pay them down gradually with an "x" percentage of your paycheck each month. Remember, your credit card spending habits play a significant role in your overall credit score.
Joe's Views on Improving Your Credit Score
We have all faced the challenge of having poor credit at some point in our lives. However, if you are serious about improving your financial standing, then you need to start investing your time and effort towards improving your credit score. Many people with bad credit are under the impression that they are doomed for life, but this is not the case. It takes a lot of work to rebuild your credit score, and those ready to prioritize their finances and spending habits will inevitably come out on top. To start, formulate a budget that can help you monitor and regulate your expenditure and work towards rectifying any bad spending habits. This will have a significant positive impact on your credit rating. If you need further assistance or guidance on how to repair your credit, do not hesitate to contact our office at www.asapcreditrepairusa.com today.