Were you aware that credit scores have 30 varying levels? Many individuals are not aware of this fact and when they search on Google for the best credit scores, they are often presented with conflicting information. This can lead to confusion and even misinformation which can make matters worse. My name is Joe Mahlow and I have been working in the finance and credit repair industry for over 15 years. My aim is to provide you with honest and useful advice on a variety of topics, such as credit scores. I have successfully helped over 20,000 clients improve their credit scores and I hope that the information I share with you can help you achieve the same outcome. Let's dive in.
Contents:
What are the Different Credit Scoring Models and their Significance?
Understanding Good Credit Scores
What Credit Score Do You Need To Buy a House?
Determining the Credit Score for Buying a Car
Tips for Increasing Your Credit Score
Insightful Musings by Joe
What are the Different Credit Scoring Models and their Significance?
Understanding the different credit scoring models is crucial. Two common credit scoring models include the FICO and Vantage. It is necessary to comprehend their disparities in an attempt to calculate the credit score accurately. The FICO model remains the widely used and popular scoring system comprising eight FICO models ranging from 2 to 10. Each model analyses your credit report differently according to the creditor who requests it. For instance, a FICO 5 mortgage report focuses more on the past mortgage history that is critical to a mortgage lender. In contrast, credit card companies focus on the FICO 8 report, which highlights the credit card history. An auto lender would most likely use the FICO-2 report focusing on the previous auto history.
On the other hand, the Vantage scoring model emerged as an alternative to FICO and is presently frequently utilized by credit monitoring websites to issue free credit reports. Equifax, Experian, and TransUnion jointly developed Vantage. Although it is gaining popularity for personal loans and auto lending sectors, it has not dominated the lending niche. The Vantage score remains crucial but inaccurate until when it comes to actual lending scoring. Hence, it is an excellent “general idea†of your FICO score and helps one to determine their overall credit rating.
Credit reporting agencies are essential data collection firms, providing the best scoring data. In the next 5 to 10 years, it is likely that Vantage scoring models would be widely used by lenders as it captures the best standards of credit scoring models of today's context. Unlike the FICO scoring model, which I consider outdated, Vantage provides a clear representation of credit scores. To access your various FICO scores, sign up for www.myfico.com.
Understanding Good Credit Scores
Credit scores range from 350 to 850, with 350 being the worst score and 850 being the best score for both the FICO and Vantage models. To achieve high credit scores, it's essential to evaluate where you stand in building your credit scores and set goals to improve them. Here are some important credit score thresholds:
620 or below:
This credit score range is considered bad credit, with possible adverse credit history, high-balance credit card accounts, or no credit cards. To increase credit scores, it's important to make timely payments and have ten open active revolving credit accounts. If you're looking to build your credit, you can get a Credit Builder Card or OpenSky Credit Card, which are secured credit cards. When you reach a 620 credit score, you can start qualifying for an FHA home mortgage.
640-680:
This credit score range is considered fair for good credit. It suggests that you have established credit, but you may have derogatory marks or accounts on your credit and high balances on your credit cards that need to be paid down. The scores may also drop temporarily due to newly opened accounts. If you're in this range and have recently opened a new account, don’t panic; your scores will improve.
740+:
Any credit score above 740 is considered "super-prime" and gives you the best interest rates for most loans. If you have a credit score of over 740, congratulations! You are part of the 20% of the US population with this score. To maintain your credit scores, always pay your accounts on time and keep your revolving credit card accounts paid.
What Credit Score Do You Need To Buy a House?
To answer this question, it's important to consider the type of mortgage loan you are aiming to qualify for. Most mortgage loans have similar requirements regulated by federal authorities and backed by the government, though the specifics may differ. The three most common types of mortgage loans are conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans, which are the most popular and attractive loan options after VA loans, do not require private mortgage insurance (PMI). PMI can increase your monthly payment or down payment expense. This type of loan typically has lower down payment requirements and better interest rates than others. The usual requirement for a credit score is about 640, with a debt-to-debt ratio no higher than 43%.
2. FHA Loan
For the FHA mortgage loan, credit scores are lower, typically ranging between 580 and 619. However, loan programs can vary, so shopping around is essential, especially to get the best financial option. Unlike conventional loans, you must keep PMI for at least 11 years, which can significantly add up to your mortgage expenses. On this loan, you will have a higher debt-to-income limit of up to 50% and down payment requirements of at least 3.5% of the purchase.
3. VA loan
The VA loan has no defined credit score requirement. However, they examine government owed past-due debts and previous defaulted loans as a pre-qualifying measure. The VA loan typically has the best interest rates available, and they do not usually require a down payment. To qualify for the VA loan, you must have served in the United States Military for at least 181 days, 90 consecutive days during wartime, served for 6 years with the National Guard, or have a spouse who was in the military and lost their life during active duty. The VA loan is an excellent mortgage option that gives back to veterans.
Determining the Credit Score for Buying a Car
When it comes to buying a car, the key factor in qualifying for financing is not your credit score but your credit history. While a higher credit score is essential, it plays a less significant role in getting approved at a reasonable interest rate.
To elaborate, if you have credit issues and apply for a car loan, lenders evaluate your current and past credit history to assess the risk involved in extending credit. Those who have been late on prior auto loans or have experienced repossession have a harder time getting approval than those who haven't. Nevertheless, the worst credit or special finance lenders approve just about anyone, although they add specific requirements to meet the risk's lender. This extends to higher down payments and additional fees for the dealership to approve a loan. Indeed, the dealership will pay a fee to lessen the possibility of you defaulting on the loan. If you have lousy credit, you may have visited a dealership where they select the approved vehicle. This is because they have a higher markup on the cars, making it easy to cover the fee. Lastly, the most substantial leverage to have when purchasing a vehicle on credit is to have equity or a down payment.
Credit Score Range for a New Car
When it comes to determining if you're approved for a car loan, it isn't possible to single out an exact credit score since many factors need to be taken into account, as mentioned above. However, a credit score over 680 is ideal. If the score is below 680, the interest rate you will be charged will increase due to the risk you pose to the lender.
Here's a current example of how a credit score can affect the amount of interest you pay:
Those with 720 credit scores or above will pay an average of $5,500 in interest on a loan.
Those with 680 credit scores or above will pay an average of $6,600 in interest on a loan.
Those with 650 credit scores or above will pay an average of $8,100 in interest on a loan.
Those with 615 credit scores or above will pay an average of $10,200 in interest on a loan.
Those with 580 credit scores or above will pay an average of $13,900 in interest on a loan.
Those with a credit score of 580 or above will pay an average of $15,300 in interest on a loan.
Therefore, it's evident from this data that the higher your credit score, the less interest you pay; thus, positively impacting your overall credit score.
Tips for Increasing Your Credit Score
If you're wondering how to improve your credit score, there are a number of things you can do that require little effort. However, it's important to keep in mind that building good credit takes time and requires patience. Rushing the process can lead to irrational and detrimental decisions that can compound your problems. Some of the things you can do right now to improve your credit score include:
1. Open three to five revolving credit accounts
Revolving credit, such as credit cards, is an excellent option for maximizing your credit score. It's an especially good option for those with limited credit or who are looking to rebuild their credit. If you want to open a secured credit card, consider companies like Open Sky or Credit Builder Card that focus more on the ability to pay on time rather than credit score. Revolving credit makes up 30-35% of your overall credit score and is the best way to help build credit scores quickly.
2. Raise your limits
Requesting a credit limit increase can help increase your overall credit limits and lower your credit utilization percentage. If your credit card balances exceed 30% of your overall limits, it could hurt your credit score. Every credit card company has different processes, and some will let you do this online, while others may require you to call in. If you are unsure, call your credit card company and request a "Credit Limit Increase."
3. Pay down your balances
Keeping your balance low and close to zero is critical for building good credit. You do not have to use your credit cards every month, so start using them for small purchases and leave about a $1-5 balance on them while paying the rest of the bill. If you have high balances and cannot pay them off, make a plan to take a certain percentage of your paycheck each month to pay down your credit card balances until they are manageable. While using credit cards is a quick way to build good credit, use them carefully to avoid running up high balances and paying exorbitant interest rates.
Insightful Musings by Joe
Let's face it, we've all been in a situation where our credit score is far from being perfect. However, if you're determined to improve your credit situation and are willing to devote some time and energy, you can witness a significant boost in your credit score in a short period. Often, individuals with poor credit scores fall into the trap of being convinced that they'll never be able to repair their credit. Nevertheless, enhancing your credit rating takes commitment and persistence, and people who prioritize their credit and spending habits will eventually succeed. You can start by developing a budget and addressing any negative spending patterns, and this has a direct impact on your credit score. This post is designed to provide you with a better understanding of credit. If you require guidance on credit score improvement or assistance with credit repair services, please do not hesitate to reach out to our office at www.asapcreditrepairusa.com.