It might come to you as a surprise that there exist 30 different levels of credit scores! When you search for the best credit score on Google, you're likely to receive different answers that can be confusing or even misleading, taking you down a dark rabbit hole. As a financial literacy and credit repair professional for over fifteen years, my name is Joe Mahlow, and it's my goal to offer you straightforward advice on various topics, including credit scores. Through my experience, I've assisted more than twenty thousand clients in improving their credit scores, and I'm committed to providing you with enough knowledge to do the same. So, let's delve into it.
Contents:
Different Types of Credit Scores
Guide to Understanding Credit Scores
Choosing The Best Mortgage Loan Based on Credit Score
The Importance of Credit History When Buying a Car
A Guide to Improving Your Credit Score
Joe's Tips on Achieving a Better Credit Score
Different Types of Credit Scores
Understanding credit scores is essential for managing your finances and accessing loans. There are two primary credit scoring models you need to know about: the FICO model and the Vantage model. Here is everything you need to know about these scoring models in detail.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used. There are eight different FICO models, ranging from FICO 2 to FICO 10. The model used depends on the type of credit you are applying for. For example, a mortgage lender will pull your FICO 5 credit report, while a credit card issuer will likely use your FICO 8 report.
The reason why there are so many FICO scores is because each credit report has a different weight. Factors critical to the lender will impact the credit score more than the less important ones. For instance, a FICO 5 mortgage report will weigh heavily on previous mortgage history. This means your credit score will be higher if you have a great payment history on a previous mortgage than if you had no history or negative history.
Vantage Credit Score
The Vantage Score is a new credit scoring model developed by Equifax, Experian, and TransUnion to compete with FICO. Although FICO currently dominates the lending sector, the Vantage Model is gaining popularity in some sectors such as personal loans and auto lending.
The Vantage Score is accurate; however, it may not be accurate for your actual lending score since it is not widely used for lending purposes. Instead, the Vantage scoring model is useful as a “general idea†of your FICO score. Using your Vantage score can give you a rough idea of where your overall scores are.
Conclusion
In conclusion, understanding credit scores is crucial for financial management. The FICO and Vantage models are the two primary credit scoring models that lenders use. While the FICO model dominates the lending sector, the Vantage model is gaining popularity in some sectors. However, its accuracy may vary since it is not widely used for lending purposes. Nonetheless, regular review of both credit scores can give you a general idea of your credit score status.
Guide to Understanding Credit Scores
Understanding credit scores is essential in setting goals to achieve the best score possible. Both FICO and Vantage models have a range from 350 to 850, with 850 being the best score and 350 being the worst. To help you understand where you stand and set vital targets, here are some score thresholds you need to know.
1. 620 or below - Considered bad credit, and if your score is in this range, you may have adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your score, make timely payments, and have ten active revolving credit accounts, including Credit Builder Card or OpenSky Credit Card. When you reach the 620 range, you can qualify for an FHA home mortgage.
2. 640-680 - Considered fair for good credit, it means you have established credit, but you may have some derogatory marks or high balances on your credit cards. Newly opened accounts may also temporarily lower your scores, so it's nothing to panic about.
3. 740+ - Any credit score over 740 is considered "super-prime" and gives the best interest rates for most loans. If you have a score over 740, you're part of the 20% of the US population with this score, so keep paying your accounts on time and keep your revolving credit card accounts paid. Congratulations!
Choosing The Best Mortgage Loan Based on Credit Score
When buying a house, the credit score requirement will vary based on the type of mortgage loan. Most mortgage loan requirements and guidelines will be similar, if not different, due to federal regulation and government backing. The three standard types of mortgage loans typically used are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular savings loan option outside of VA loans. These loans do not require private mortgage insurance (PMI), which can save you the extra cost of increasing your down payment or monthly payment. With a credit score requirement of 640 and a debt-to-debt ratio of no more than 43%, conventional mortgage loans usually have lower down payment requirements and better interest rates than other loans.
2. FHA Loans
FHA loans are specially designed for lower credit scores ranging from 580 to 619. However, all loan programs are different, so shop around for different lenders that provide the best financial options within your credit score limit. With an FHA loan, you will need to keep PMI for at least 11 years, which can considerably increase your mortgage payments. This loan typically has a higher debt-to-income limit of up to 50%, which allows you to buy more homes than with a conventional loan if you have a lower income. Though the down payment requirements on FHA loans are as low as 3.5% of the home purchase, this loan generally has higher interest rates.
3. VA Loans
If you've 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 your spouse was in the military and lost their lives during active duty, you may qualify for VA loans. These loans typically have the best interest rates available and usually don't require down payment. VA loans don't technically have a credit score requirement, but they consider previous defaulted loans and government-owed past-due debts when pre-qualifying you. VA loan is an excellent way for the government to give back to the veterans.
The Importance of Credit History When Buying a Car
When it comes to buying a car, your credit history holds more significance than just your credit score. While having a higher credit score is important, it is not the only factor that determines your interest rate when applying for a car loan. Lenders closely examine your credit history to determine your creditworthiness before approving your loan. This includes assessing your payment history on previous and current loans and any repossessions. Those with a poor credit history may struggle to secure a loan but can still qualify through special finance lenders. However, borrowers with bad credit must meet specific criteria such as paying a higher down payment and including additional fees to reduce the lender's risk. Dealerships may also charge a fee to lessen the risk. When buying a vehicle on credit, having equity or a down payment can give you more leverage.
Credit Score Range to Buy a New Vehicle
To determine if you are eligible for a car loan, your credit score is a vital factor to consider. While lenders don't have a fixed credit score requirement, a score of 680 or higher is ideal. Having a score below this threshold increases the interest rate you'll be charged. A higher credit score means lower interest payments, which can significantly affect the overall cost of your loan. The table below represents how a person's credit score can influence the interest payments on a loan:
| Credit Score | Interest Payments (on average) |
|---|---|
| 720 or above | $5,500 |
| 680 or above | $6,600 |
| 650 or above | $8,100 |
| 615 or above | $10,200 |
| 580 or above | $13,900 |
| Below 580 | $15,300 |
This data shows that the higher your credit score, the lower the interest payments you'll make.
```
A Guide to Improving Your Credit Score
There are various simple but impactful ways to boost your credit score, but it requires patience and consistency. Building a good credit score can take time, and trying to rush the process could lead to unfavorable decisions and outcomes. To enhance your credit score progressively, you can follow these steps:
1. Obtain 3-5 revolving credit card accounts:
Revolving credit, like credit cards, can help you optimize your credit score, especially if you have a limited credit history or you're rebuilding your credit. Rather than seeking a massive loan, this approach grants you a higher probability of approval. An excellent starting point is to apply for secured credit cards like OpenSky or Credit Builder Card, which place less emphasis on your credit score and prioritize your payment history and income instead. Revolving credit comprises 30-35% of your credit score and can generate quick improvements after 2-4 months of consistent use. However, ensure you pay your balance on time and keep it around $5-10 to leverage its benefits.
2. Request for a credit limit increase:
Active revolving credit card holders are eligible for a credit limit increase, which can raise their overall credit limits and lower their credit utilization ratio. A high credit utilization percentage can negatively impact your credit score if it exceeds 30%. Contact your credit card provider, either through its online platform or phone call, to request a credit limit increase and submit your income details. The provider's credit team should confirm whether you meet the standards for a credit limit increase. Typically, a credit card company requires seven to fifteen months of excellent credit card payment history.
3. Pay down your balances:
Minimizing your credit card balance and maintaining a low balance can optimize your credit score. It's not mandatory to use your credit cards every month. Instead, you can use them for small purchases and leave a balance of around $1-5 when paying off your credit card bill. Checking your credit card usage is crucial in enhancing your credit score since payment history plays a significant role in calculating it. If you have a high balance and can't pay it all off at once, come up with a plan to use a percentage of your paycheck to settle the balance progressively and avoid repeat incidents. High credit card balances lead to high interest rates, with a significant portion of your payments going to interest rather than the principal amount.
```Joe's Tips on Achieving a Better Credit Score
It's common to have experienced less than ideal credit. However, it's essential to take such situations seriously by investing time and effort into improving oneself and one's credit. Neglecting one's credit and getting stuck in a vicious cycle of credit issues can make it seem like rebuilding one's credit is an impossible task. But those who prioritize their credit and spending habits can attain excellent credit scores. To begin, start by creating a budget and working towards improving any poor spending habits you may have, as this will undoubtedly reflect positively on your credit score. This article is an excellent resource for anyone looking to gain a better understanding of credit. If you are interested in learning more about credit repair and require guidance, do not hesitate to contact us at www.asapcreditrepairusa.com.
Key points:
- Taking credit seriously is crucial.
- Prioritizing credit and spending habits can lead to higher credit scores.
- Improving spending habits can positively affect one's credit score.
- The article is a great resource for understanding credit.
- ASACP Credit Repair is available to provide guidance and help.