It may come as a surprise to learn that there are actually 30 different levels of credit scores out there. When searching for the best credit score online, it can be overwhelming to receive varied and sometimes conflicting information. In fact, this type of content can be confusing and lead you astray. However, fear not, for I am Joe Mahlow and I have spent well over a decade working in finance and credit repair. My objective is to offer you genuine and no-nonsense guidance on a multitude of topics - starting with credit scores. Over the years, I have helped more than twenty thousand clients to improve their credit scores, and my hope is to provide you with the knowledge to do the same. Let's dive right in!
Contents:
Understanding the Different Types of Credit Scores
Understanding Credit Scores
What Credit Score Do You Need to Buy a House?
Importance of Credit History When Buying a Car
Tips for Improving Your Credit Score
Insights by Joe
Understanding the Different Types of Credit Scores
Credit scores are an essential aspect of your financial health and can impact your ability to obtain credit. There are two primary credit scoring models: FICO and Vantage. It's crucial to understand these models and the differences in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most widely used model and has eight different FICO models. The score you receive generally depends on the credit report pulled by the lender. For instance, a FICO 5 mortgage report will weigh heavily on your previous mortgage history, whereas a FICO 8 credit card report will largely depend on your credit card history. The various FICO scoring models allow lenders to focus on the most critical factors while making credit decisions.
Vantage Credit Score
The Vantage Score model, developed by Equifax, Experian, and TransUnion, is a newer scoring model. While FICO dominates the lending sector, Vantage is becoming more prevalent in sectors such as personal loans and auto lending. Although the Vantage Score is accurate, it's not widely used for lending purposes and may not provide an accurate lending score. Nonetheless, it's a good indicator of your overall credit score and can provide a general idea of where you stand financially.
Looking Ahead
The Vantage scoring model is gaining popularity and may become more widely used in the future. While FICO is currently the standard, experts believe that Vantage may provide the best scoring models based on today's standards. Credit reporting agencies are data collection powerhouses outside of social media companies, and their ability to provide accurate scoring data makes them important players in the lending world.
Understanding Credit Scores
Credit scores are essential when it comes to securing a loan or credit. For both FICO and Vantage models, scores can range from 350 to 850; the higher your score, the better. To help you understand where you stand, let us outline some score thresholds:
1. 620 or below
A score of 620 or below is considered bad credit. This indicates adverse credit history, high-balance credit accounts, or no credit cards. You can improve your score by timely payments and having ten open revolving credit accounts. We recommend the Credit Builder Card or OpenSky Credit Card to build your credit. When you reach the 620 credit score range, you can start qualifying for an FHA home mortgage.
2. 640-680
Scores in this range indicate fair to good credit. You have established credit, but with some derogatory marks or accounts, and high balances on your credit cards that require payment. Newly opened accounts may also impact scores temporarily; don't worry, this is just temporary.
3. 740+
Any credit score over 740 is considered "super-prime" and gives you the best interest rates for most loans. Having a score over 740 puts you in the top 20% of the US population. Ensure that you always pay your accounts on time, and keep your revolving credit card accounts paid, and you'll be in great shape.
What Credit Score Do You Need to Buy a House?
Determining a good credit score for buying a house is dependent on the type of mortgage loan for which you are looking to qualify. Mortgage requirements and guidelines are standard for most loans; however, they may vary depending on the type of mortgage. The three most commonly used mortgage loans are conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans are the most common and ideal for savings when compared to VA loans. Unlike VA loans, Conventional loans do not have a requirement for private mortgage insurance (PMI), which could increase the up-front cost or monthly payments. Typically, the down payment for conventional loans is lower compared to other mortgages, and the interest rates are better. The typical requirement for credit is 640, and the debt-to-debt ratio should not exceed 43%.
2. FHA Loan
FHA mortgage loans are best suited for those with lower credit scores between 580 and 619. However, lenders and their requirements vary, so it's best to compare different lenders to find the best option that suits your demand. FHA loans require PMI for a minimum of 11 years, which could increase the overall mortgage cost, especially if you are working with a tight budget. However, the debt-to-income limit is higher, up to 50%, which allows people with lower income to own a home. You could have as little as a 3.5% down payment, making it an affordable option, but that usually comes with higher interest rates.
3. VA Loan
VA loans are exclusive to veterans and military service people. There is no minimum credit score requirement, but defaulted loans and past-due debts are reviewed during pre-qualification. To qualify, one must have served a minimum of 181 days in the United States Military, 90 continuous days during wartime, or served for six years with the National Guard. The VA loan has the lowest and best interest rates for mortgage loans, and down payment is often not required.
Importance of Credit History When Buying a Car
When it comes to buying a car, your credit history is the most crucial factor in determining your eligibility, not just your credit score. A higher credit score is significant but plays a minor role in determining the interest rate you qualify for. The lender assesses your credit history, both past, and present, to determine the extent of the risk involved in extending credit. Borrowers who have defaulted on prior loans, have late payments in their credit records, or have a repossession will face a more challenging time getting their loan approved. While some subprime lenders will qualify anyone for a car loan, even those with previous repossessions, there are specific criteria one must meet. These criteria may include a higher down payment and extra charges to the dealership to approve your loan. Moreover, dealerships may also choose to charge a fee to cover the risk of defaulting on the loan. A down payment or equity gives borrowers the most leverage when purchasing a vehicle on credit.
While there is no specific credit score that guarantees approval for a car loan, a credit score above 680 is ideal. Lower credit scores mean a higher risk, thus attracting a higher interest rate. The impact of the credit score on the interest rate is illustrated in the following example: a borrower with a 720 credit score or above will pay $5,500 in interest on average, while someone with 580 credit score or above will pay an average of $15,300 in interest on a loan. With this in mind, it is evident that the higher the credit score, the lower the interest rate, hence positively impacting the credit score.
Tips for Improving Your Credit Score
Building a good credit score takes time and patience. However, there are several things you can do right now to improve your credit score with little effort. Here are some tips:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is one of the best options for improving your credit score. Start with a secured credit card like Open Sky or Credit Builder Card that focuses more on your ability to pay the card on time than your credit score. Revolving credit makes up 30-35% of your overall credit score and is the best option to help build credit scores quickly. Pay your balance on time and keep it at $5-10 each time you make a payment.
2. Request a credit limit increase
You can quickly request a credit limit increase for your credit cards to help lower your credit utilization percentage. Contact your credit card company and request a "Credit Limit Increase." They will typically have you fill out some information, including your current income, and it will go in front of their credit team, who will decide if a credit limit increase is something they will be open to doing.
3. Pay down your balances
Keeping your balance low and close to zero is critical. Leave about a $1-5 balance on your credit cards when paying your bill each month. If you have high balances, make a game plan to pay them down each month. Remember to limit your credit card usage and not spend more than you can afford.
Insights by Joe
Undoubtedly, having a poor credit score can be a challenging situation. However, it is crucial to acknowledge and take your credit situation seriously to bring about significant changes to your credit score quickly. Often, individuals with negative credit history get stuck in a never-ending cycle, considering good credit impossible to attain. Developing an excellent credit score demands time and effort, and those who prioritize their credit and focus on their spending behavior are the ones who win. Begin by creating a budget and working towards rectifying any bad spending habits which will directly impact your credit score. This article provides valuable insights to help you better understand credit. If you require guidance or assistance in credit repair, do not hesitate to reach out to my office today at www.asapcreditrepairusa.com.