It may surprise you to learn that there are actually 30 different levels of credit scores. Many people are unaware of this fact and will turn to search engines such as Google to find the best credit score. However, with so much information available online, it can be confusing and even misleading. I'm here to help. My name is Joe Mahlow, and as someone who has worked in financial literacy and credit repair for over fifteen years, I aim to provide you with honest and insightful advice on relevant topics, such as credit scores. In my career, I have assisted over twenty thousand clients with improving their credit scores, and I hope the information I give you will do the same. So, without further ado, let's dive into the subject!
Contents:
Understanding the Types of Credit Scores
What Constitutes a Good Credit Score
Choosing the Right Credit Score for Mortgage Loans
Determining what your credit score should be to buy a car
Tips for Improving Your Credit Score
Advice from Joe
Understanding the Types of Credit Scores
Credit scores are essential financial tools that determine your creditworthiness and the likelihood of obtaining a loan. Different types of credit scores exist, but two models are prevalent: The FICO model and the Vantage model. Each scoring model calculates your credit score differently, so it is crucial to understand both to determine your overall creditworthiness.
The FICO Credit Score
The FICO scoring model is the most widely used credit scoring model, with eight different models from FICO 2 to FICO 10. Each model produces a different credit score depending on your credit report. Mortgage lenders tend to pull the FICO 5 report, while credit card companies primarily use the FICO 8 report. Auto lenders generally use the FICO-2 reports, with each report weighting specific factors differently. For example, a FICO 5 mortgage report weighs heavily on your previous mortgage history when calculating your score.
The Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. While not as widely used, some credit monitoring websites in the US use Vantage to provide free copies of credit reports. The Vantage model is gaining popularity in sectors such as auto lending and personal loans.
Is the Vantage Score Accurate?
The accuracy of the Vantage Score depends on the context. While it provides a good "general idea" of your FICO score, it may not be accurate in determining your actual lending score. Since FICO is the most widely used scoring model for lenders, Vantage's accuracy can vary. However, with its ability to provide data-based scoring models, Vantage may become widely used in the future.
To see your different FICO scores, sign up for an account at www.myfico.com. Remember, credit reporting agencies are vital data collection agencies that have an upper hand in providing the best scoring data.
What Constitutes a Good Credit Score
Both the FICO and Vantage models range in scores from 350 to 850. A score of 350 is the worst credit score, and the best score is 850. To achieve the highest scores, it is imperative to understand your standing in your journey toward building your scores. Here are vital score thresholds for which you should aim:
1. 620 or below:
This is considered a bad credit score, possibly resulting from adverse credit history, lack of credit card usage, or high-balance credit card accounts. To improve credit scores, make timely payments, and have ten active revolving credit accounts open. To build your credit score, try using Credit Builder or OpenSky-secured credit cards. It's essential because reaching the 620 credit score range can help you qualify for an FHA home mortgage.
2. 640-680:
This score range is considered fair for good credit. If you have scores in this range, you may have some derogatory marks, high balances on your credit cards, or newly opened accounts, which can temporarily lower your scores. To improve this range, pay down high balances and keep your credit card revolving accounts in good standing.
3. 740+:
Any credit score that is over 740 is considered "super-prime" and offers the best interest rates for most loans. If you have achieved a score of over 740, congratulations because you are part of the 20% of the US population with this score. The key to maintaining a good score is to continue paying your accounts on time and keeping your revolving credit card accounts paid.
Choosing the Right Credit Score for Mortgage Loans
The credit score requirement for obtaining a mortgage loan varies depending on the type of loan you want to qualify for. Mortgage loans are subject to federal regulation and are backed by the government, which makes the guidelines and requirements for most loans similar but not entirely identical. There are three main types of mortgage loans that homeowners can consider: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are currently the most preferred and popular loans available in the market. Outside VA loans, typical conventional loans do not require the borrower to maintain private mortgage insurance (PMI). PMI is meant to protect lenders in case the borrower stops making payments on the loan. Since no PMI is required, down payment and monthly payment requirements are significantly lower than other types of mortgage loans. Typically, the credit score requirement for a conventional mortgage loan is 640 with a maximum debt-to-debt ratio of 43%.
FHA Loan
The Federal Housing Administration (FHA) mortgage loan is tailored to individuals with lower credit scores, usually ranging from 580 to 619. Requirements vary by lender and loan program, so shopping around is advised. This type of loan requires PMI for a minimum of 11 years, making it an added expense to consider. Having higher debt-to-income limits of up to 50% also makes it possible to buy a more expensive home, as payments can be spread out. FHA loans require a lower down payment, as low as 3.5% of the purchase price, but often have higher interest rates.
VA loan
VA loans are the best option for veterans and their families. There isn't technically any credit score requirement with the VA Loan, but lenders look for any existing government-owed past-due debts and a history of previous defaulted loans when pre-qualifying you. To qualify for a VA loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years in the National Guard, or your spouse was in the military and died while on active duty. VA loans are attractive because they offer the best interest rates available, and they do not require down payments.
Determining what your credit score should be to buy a car
When it comes to buying a car, your credit history is more crucial than your credit score in terms of determining whether you're eligible for a loan. While having a good credit score is important, it doesn't have as much of an impact on your interest rate. Lenders assess your credit history to determine the risk that comes with providing credit, especially when there are credit issues. Having a late payment or repossession in your current or previous auto loan can make it difficult to secure a loan. However, special finance or subprime lenders can still qualify you for a car loan, albeit with specific requirements you must meet, such as higher down payments and dealership fees. If you have a poor credit score and apply for a car loan through a dealership, they will select the vehicle with a markup that can cover the loan fee they have to pay. Lastly, having equity or down payment is essential when purchasing a vehicle on credit.
Ideal credit score for a new vehicle
Many factors determine whether you're approved for a car loan, but an excellent credit score is typically anything above 680. Any score below this will increase the interest rate on the loan, depending on the risk you present to the lender. The amount of interest you will pay depends on your credit score, as evidenced by current market data:
1. A credit score of 720 or higher will pay an average of $5,500 in interest on a loan.
2. A credit score of 680 or higher will pay an average of $6,600 in interest on a loan.
3. A credit score of 650 or higher will pay an average of $8,100 in interest on a loan.
4. A credit score of 615 or higher will pay an average of $10,200 in interest on a loan.
5. A credit score of 580 or higher will pay an average of $13,900 in interest on a loan.
6. A credit score of under 580 will pay an average of $15,300 in interest on a loan.
As such, having a higher credit score ultimately leads to less interest paid over the loan period, gradually improving your overall credit score.
Tips for Improving Your Credit Score
Building a good credit score takes time and patience. Taking some simple steps can make a significant difference in improving your credit score:
1. Open 3-5 revolving credit accounts (credit cards).
Revolving credit is an effective way to improve your credit score, especially if you have limited credit or are looking to rebuild your credit. A secured credit card such as Open Sky or Credit Builder Card is a good option because they focus more on your ability to pay your card on time and has no bankruptcy history or income requirements. Revolving credit makes up 30–35% of your overall credit score. To see an increase in your credit score, make sure you pay your balance on time and keep it at $5–10 each time you make a payment.
2. Raise your limits.
Requesting a credit limit increase for your active revolving credit cards can help increase your overall credit limits and lower your credit utilization percentage. Most credit card companies allow you to do it online through your portal or by calling them. Typically, the credit card company wants to see 7–15 months of excellent payment history on your credit card.
3. Pay down your balances.
Keeping your balance low and close to zero is critical. Limit the use of your credit cards to small purchases like gas or simple groceries if possible. If you have high balances and cannot pay them off, make a plan to take a percentage of your paycheck each month to pay down your credit card balance. Avoid running the balance back up after paying it down. Since your credit card spending habits play a significant role in your overall credit score, it is essential to limit your credit card usage. The interest rates on credit cards are usually high, and most of your payments will go towards interest, not principal.
Remember that building a good credit score is a continuous process that takes time and effort. By following these steps, you can see a significant improvement in your credit score over time.
Advice from Joe
Let's face it, many of us have encountered the struggle of having poor credit in the past. If you're serious about improving your credit status, it's essential to devote time and effort to modifying your spending habits. Don't fall prey to the vicious cycle of bad credit that can plague consumers for years. Despite the common belief that restoring good credit is impossible, a remarkable difference can be achieved with some hard work. Establishing a solid credit rating requires discipline and dedication, and those who are prepared to prioritize their credit will come out on top. Start by creating a budget and evaluating any harmful spending habits that may be adversely affecting your credit score. This post aims to provide guidance on credit improvement. Should you require professional assistance with credit repair, don't hesitate to contact my office today at www.asapcreditrepairusa.com.
To summarize:
1. To improve your credit score, you must make an effort to modify your financial habits.
2. Consumers frequently feel trapped in a cycle of bad credit, but it is possible to restore a good credit rating with hard work.
3. Building a strong credit score necessitates commitment and discipline.
4. Begin by making a budget and correcting harmful spending tendencies.
5. If you require assistance with credit repair, contact Joe's office at www.asapcreditrepairusa.com.