It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Despite this fact, many people tend to be unaware of this when they search for the best credit score. Often, finding the right information can be tedious and confusing, leading one down a rabbit hole of uncertainty. As someone with over fifteen years of experience in the financial literacy and credit repair space, my name is Joe Mahlow, and my aim is to provide raw advice on different topics, such as credit scores. Having helped over twenty thousand clients transform their credit scores over the years, I am here to offer the same guidance to you. Let's dive in, and I'll provide you with everything you need to know about credit scores.
Contents:
Different Credit Scoring Models Explained
Determining a Good Credit Score
What is the Minimum Credit Score Required to Qualify for a Mortgage Loan?
Ideal Credit Score to Buy a Car
Effective Tips for Increasing Your Credit Score
Insights from Joe on Credit Score Improvement
Different Credit Scoring Models Explained
There are two types of credit scoring models: the FICO Model and the Vantage Model. As a borrower, it's important to understand the differences between them to better understand how your credit score is calculated.
FICO Credit Score
The FICO scoring model is the most widely-used credit scoring model, consisting of eight different FICO models. Each FICO model differs based on the way it calculates your credit score. For instance, if you apply for a mortgage, your lender will use the FICO 5 model, whereas a credit card lender will most likely use your FICO 8 model. Why so many models? Well, each lender is looking for different things depending on the loan they are providing, and so the models are tailored to specific situations. Each model weighs different factors of your credit report more heavily to produce a score that best suits the lender's requirements. So, if you want a better idea of your FICO score, you can check it out on www.myfico.com.
Vantage Credit Score
The Vantage Model was developed by Equifax, Experian, and TransUnion and competes with the FICO model. While it's a newer scoring model than FICO, it's fast gaining popularity in the personal loan and auto lending sectors and is often used by credit monitoring websites to provide free credit reports. However, since the Vantage score is not widely used in the lending sector, it may not give an accurate representation of your actual lending score.
Is the Vantage score accurate?
Yes, but only in context. It provides a good general idea of your overall credit score but not as accurate as FICO when it comes to your actual lending score. I believe that lenders will begin to use the Vantage scoring model more in the future, as it provides the best scoring models based on today's standards. The FICO scoring model might be outdated and may not give the real picture of your credit scores. But, with the significant data collection ability of credit reporting agencies, their scoring models will undoubtedly remain the most accurate.
Determining a Good Credit Score
Both the FICO and Vantage models assign scores ranging from 350 to 850. 850 is the highest score, whereas 350 is the lowest. To achieve the best possible credit scores, it is necessary to appreciate where you stand throughout your credit-building journey. Here are some vital score thresholds to help you understand.
1. 620 or below
This score is commonly identified as bad credit since applicants at or below this threshold usually have an unfavorable credit history, including high-balance credit card accounts or none at all. Making timely payments to maintain ten active revolving credit accounts is the best way to boost credit scores. The Credit Builder Card or OpenSky Credit Card, which are secured credit cards, are recommended as they aid in credit-building. Homebuyers may become eligible for an FHA home mortgage once they reach the 620 credit score range.
2. 640-680
This range is considered fair for good credit. A credit score within this range indicates established credit, which may also feature derogatory marks and accounts or high balances on credit cards that need payment. Another factor that may lower your score temporarily is recently opened accounts. This is normal, and your score will improve after some time.
3. 740+
Credit scores above 740 are classified as "super-prime" and will qualify individuals for the best interest rates on most loans. You are part of the 20% of the US population with this score if you achieve a score of 740 or higher. Congratulations! Paying your accounts on time and keeping your revolving credit card accounts paid will help you maintain your creditworthiness.
What is the Minimum Credit Score Required to Qualify for a Mortgage Loan?
Finding out the minimum credit score required to buy a house depends on the type of mortgage loan you're looking for. Most mortgage loans have similar requirements and guidelines due to federal regulations and government backing, but there could be differences among them. Conventional, FHA and VA loans are the most common types of mortgage loans. Below are the requirements for each type of loan:
1. Conventional Loans
Conventional loans are the most favored among borrowers because of their better interest rates and lesser downpayment requirements. They typically require a credit score of 640 and a debt-to-debt ratio below 43%. Also, they don't require maintaining private mortgage insurance (PMI), which saves extra costs.
2. FHA Loans
The FHA loan is an affordable option with a minimum credit score requirement of 580. This loan program is designed for people with lower credit scores, usually ranging between 580-619. However, it is essential to shop around for different lenders as their requirements may differ. FHA loans require a mortgage insurance premium (MIP) of at least 11 years, and a higher debt-to-income ratio of up to 50%. The downpayment requirement on an FHA loan is as low as 3.5% of the purchase, but the interest rates are typically higher.
3. VA Loans
VA loans are only available to those who have either served in the military or have a spouse who has lost their life during active duty. The VA loan program doesn't have a minimum credit score requirement, but lenders are looking for defaults on previous loans and any government-owed past-due debts while pre-qualifying applicants. One of the benefits of this loan program is that they typically have the best interest rates available and no down payment requirement, offering a great option for veterans.
Ideal Credit Score to Buy a Car
When contemplating purchasing a car, your credit history instead of your credit score is the vital aspect to consider. While having a high credit score is significant, it plays a smaller role in determining the interest rate you qualify for. When applying for a car loan, lenders analyze your past and present credit histories to assess the potential risk of giving you an extended credit. If there are any problems with your credit history such as a current or past due auto loan, a repossession, or a low credit score, it could affect your chance of getting approved for a loan. However, some lenders may qualify you for a car loan even with bad credit or previous vehicle repossessions by implementing specific approval criteria like higher down payments and extra fees to the dealership. Typically, the dealership may select a car that has a higher markup to lessen the risk and help cover the fee. Finally, to increase your leverage when purchasing a vehicle on credit, it's ideal to have equity or down payment available.
Credit Score Range for a New Car
There's no specific credit score that confirms your approval because various factors determine the interest rate. However, a credit score above 680 is ideal. Anything below this score can lead to higher interest rates on the loan due to your perceived risk to the lender. For instance, if your credit score is 720 or above, you will pay around $5,500 in interest on a loan. If your score is 680 or above, you may pay around $6,600, while a score of 650 and above equates to $8,100 in interest. However, a score of 615 and above corresponds to an average of $10,200, while a score of 580 and above will cost $13,900 or more in interest. From this data, it's clear that a higher credit score results in lower interest rates and affects your overall credit score.
Effective Tips for Increasing Your Credit Score
Improving your credit score does not have to be a complicated process; there are several easy steps you can take right now. However, patience is key when it comes to repairing your credit score, and it will not happen overnight. Without patience, many people make irrational decisions that can make matters worse. Here are some steps you can take to help boost your score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit accounts are instrumental in maximizing your credit score. Opening several accounts can increase your chances of approval. For individuals with less credit or are rebuilding, attaining approval for a massive loan can be challenging. Open a secured credit card such as Open Sky or Credit Builder Card, which prioritizes your ability to repay on time, instead of focusing on your credit score. Revolving credit accounts constitute 30-35% of your overall credit score and can provide a tangible boost in just a few months. Ensure that your balance remains at $5-$10, and keep your expenses to necessities like gas and groceries to limit credit use.
2. Request a Credit Limit Increase
Requesting a credit limit increase on your active credit card accounts is a simple way to lower your credit utilization percentage. A substantial factor that can hurt your credit score is credit card balances that exceed 30% of your overall limit. To avoid this, request a credit limit increase, which can increase your overall limit.
To request an increase, call your credit card company and ask for a "Credit Limit Increase." The company may require you to fill out a form and provide your current income information, which will go to the credit team to evaluate. Credit card companies typically require 7-15 months of excellent payment history on your account before approving.
3. Pay Down Your Balances
Paying off your debts is critical. Large balances can have adverse effects on your credit score, so it's best to keep your balance as low as possible. Use your credit cards for small purchases and leaving balances between $1-$5 when paying off the bill each month. A sound plan to pay off your credit cards is to take a percentage of your paycheck each month. Consistency in repaying your debt, coupled with limiting credit card usage, is essential in repairing your credit score. It's easy to relapse into debt if you're not disciplined, so be mindful of your expenses. Remember that high-interest rates can negate your payments, and your funds will primarily go towards interest.
Insights from Joe on Credit Score Improvement
Admit it, we have all been in a situation where our credit score was not up to par. But if you are serious about improving your credit score, it is possible to see remarkable results in a relatively short period of time. Many individuals with poor credit believe that they will be caught in a vicious cycle forever, not realizing that with dedication and effort, it is feasible to establish and maintain a good credit score. Nonetheless, achieving this feat requires substantial work, and anyone who is determined to prioritize their credit and implement better financial habits would eventually succeed. Begin by crafting a budget that aligns with your existing needs, while also identifying and curtailing any negative spending habits that could negatively impact your credit score. Additional help is available on credit understanding and score improvement, and if you require professional assistance with credit repair, kindly contact my office today at www.asapcreditrepairusa.com.