There are thirty distinct credit score levels that you should know about. It is quite likely that the average person is unaware of this fact and might end up searching for the ideal credit score on Google, only to find a plethora of conflicting answers. Unfortunately, a majority of this information can be daunting and even misleading, leading you to a dark place. My name is Joe Mahlow and I have been involved in the domain of finance and credit repair for more than fifteen years. My objective is to provide you with informative and unadulterated advice regarding various topics, including credit scores. By serving more than twenty thousand clients, I have assisted them in improving their credit scores. I aim to offer you adequate knowledge to do the same. Let's delve into it.
Contents:
Different Types of Credit Scores and Their Scoring Models
Determining a Good Credit Score
What Credit Score Do You Need to Buy a House?
Ideal Credit Score Range for Car Loans
Tips for Improving Your Credit Score
Joe's Perspective on Improving Your Credit Score
Different Types of Credit Scores and Their Scoring Models
Understanding credit scores is essential to manage your finances better. There are two different credit scoring models that you should know of: the FICO model and the Vantage model. Here's what you need to know about both:
1. FICO Credit Score
The FICO credit scoring model is the most popular and widely used, having eight different models from FICO 2 to FICO 10. You'll usually get a different credit score depending on the credit report used. This is because different lenders pull different FICO reports depending on the type of purchase you're making. For example, a mortgage lender will most likely pull your FICO 5 credit report, whereas a credit card company will probably pull your FICO 8 report.
Why do we have so many FICO scores? It's because each credit report has a different "weight," meaning that the factors important to the lender have a more significant impact on a credit score than the less important ones. For instance, a FICO 5 mortgage report's scores will weigh heavily on previous mortgage history. At the same time, a FICO 8 report, primarily used by credit card companies, will be impacted the most by your previous credit card history.
To get a better visual representation of your FICO scores, visit www.myfico.com and sign up for an account.
2. Vantage Credit Score
Developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, the Vantage Score model aims to compete with the FICO scoring model. Although it's not as well-established as FICO, Vantage Score is gaining popularity as a scoring model, particularly in some sectors, such as personal loans and auto lending.
Is the Vantage Score accurate? While accurate, it depends on the context. Since the Vantage score is not widely used for lending, it's not an accurate reflection of your actual lending score, which is determined by FICO. However, since it's challenging to know your FICO score without paying for it or having a lender pull your credit report, the Vantage score provides a decent general idea of your overall credit scores.
The Vantage Score may become popular among lenders in the next 5-10 years because of its ability to provide the best scoring models based on today's standards. Despite its accuracy, the Vantage Score model remains less dominant than FICO, which still has a far more significant impact on most lending decisions.
Determining a Good Credit Score
Credit scores, whether calculated by FICO or Vantage models, range from 350 to 850. The lower your score, the worse it is, and the higher it is, the better. As you aim for a higher score, it's crucial to know the following essential thresholds to help you keep track of your progress:
620 or below
If your score is below 620, you have bad credit, and you likely have a history of late payments or high balances on your credit cards, or you may not have any credit cards at all. To improve your score, make prompt payments and maintain ten active revolving credit accounts. Secured credit cards such as the Credit Builder Card or OpenSky Credit Card can assist you in establishing credit. Once you reach the 620 range, you can qualify for an FHA home mortgage.
640-680
With scores in this range, you are considered to have fair to good credit. You may have some derogatory marks on your credit or high balances on your credit cards to address, and you may have opened new accounts recently, which can temporarily lower your scores. However, if you maintain good payment habits and keep your revolving credit accounts paid, your score will eventually improve.
740+
A credit score above 740 is "super-prime," and it qualifies you for the best interest rates on most loans. Achieving a score of 740 or higher is a significant milestone, as only 20% of the US population have a score this high. Keep making timely payments, don't carry high balances on your credit cards, and maintain your ten active revolving credit accounts, and you'll stay in excellent credit standing.
What Credit Score Do You Need to Buy a House?
To determine the credit score required for purchasing a house, one needs to consider the type of mortgage loan. Government regulations and policies back most mortgages; thus, the qualifying requirements of these loans are usually alike or distinct. Three of the most widespread mortgage loan options are conventional, FHA, and VA loans.
Conventional Loans
Among the three, conventional loans are the most popular. This loan option does not mandate a private mortgage insurance (PMI) requirement. PMI is an additional cost that could elevate one's down payment or monthly payment and serves as protection for the lender. Conventional loans have lower down payments, less interest, and a typical credit score requirement of 640 with a debt-to-income ratio that's usually not higher than 43%.
FHA Loans
On the other hand, FHA loans, designed to aid lower credit scores, typically range between 580 and 619. Remember, different loan programs have varying policies. Hence it's essential to compare different lenders to get the best financial option for your credit score. FHA loans require one to keep their PMI for at least 11 years, which can be an additional burden if on a tight budget. The loan also has a higher debt-to-income limit of up to 50%, presenting a viable option if you have a lower income, even though down payment requirements are lower than conventional loans. You may require as little as 3.5% of the purchase, but the interest rates tend to be higher.
VA Loans
VA loans do not technically have a credit score requirement, but previous default loans and government-owed past debts are taken into account when pre-qualifying. Additionally, you must qualify by serving in the military or being a military spouse. The VA loan typically has the best interest rates with no down payment requirement, making it an excellent loan option that honors the service of our veterans.
Ideal Credit Score Range for Car Loans
While the credit score is an important factor when buying a car, your credit history plays a more significant role in determining whether you get approved or not. The interest rate you qualify for is determined by your credit history, even more than your credit score. When applying for a car loan, lenders consider your previous and current credit histories to determine the credit risk.
If you have a poor credit history, you may have a challenging time getting approved for a car loan. In contrast, if you have a good credit history, lenders will be more likely to approve your loan request. However, even with poor credit, some lenders can still qualify you for a car loan but with specific criteria that must be met. These criteria might include a higher down payment or additional fees that the dealership must pay to lessen the risk of you defaulting on the loan.
When it comes to credit score and buying a new vehicle, there is no exact number that guarantees approval since various factors are considered. Still, a credit score of 680 or higher is considered ideal. Any score lower than this can lead to higher interest rates due to an increased risk posed to the lender.
Here's how various credit scores will affect the amount of interest you pay on a loan:
- A credit score of 720 or above costs an average of $5,500 in interest
- A credit score of 680 or above costs an average of $6,600 in interest
- A credit score of 650 or above costs an average of $8,100 in interest
- A credit score of 615 or above costs an average of $10,200 in interest
- A credit score of 580 or above costs an average of $13,900 in interest
- A credit score of 580 or below costs an average of $15,300 in interest
As the data shows, higher credit scores attract lower interest rates, which ultimately impacts your credit score positively. Additionally, having a down payment or equity can increase your leverage when buying a vehicle on credit.
Tips for Improving Your Credit Score
Improving your credit score requires time and patience. However, there are several things you can do right now to help increase your credit score with little effort. Here are some steps you can take to improve your credit:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is one of the best options for building credit. Start with a secured credit card that focuses on your ability to pay on time like Open Sky or Credit Builder Card. Revolving credit accounts makeup 30-35% of your overall credit score and can help you build credit quickly. Make sure to pay your balance on time and limit the use of the card to small purchases.
2. Raise your limits:
Request a credit limit increase for your credit cards to help increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase." Note that a credit card company usually wants to see 7-15 months of excellent payment history before agreeing to do this.
3. Pay down your balances:
Keeping your balance low and close to zero is critical. If you have high balances, make a game plan to pay off the credit card debt by taking a percentage of your paycheck each month to pay it down. Leave about a $1-5 balance on your credit cards and limit your credit card usage since your credit card spending habits will play a massive role in your overall credit score.
Joe's Perspective on Improving Your Credit Score
Having poor credit is a common problem that many individuals face, but it is not impossible to overcome. If you are committed to improving your credit, you will begin to notice significant results in a relatively short period of time. Often, individuals experiencing credit issues become stuck in a perpetual cycle, believing that restoring their credit is an insurmountable task. However, building a great credit score calls for dedication and a willingness to modify one's spending habits. Begin by creating a budget and addressing any problematic spending patterns that may be affecting your credit score. Making these changes will actively reflect on your creditworthiness. This write-up serves as a guide to augment your understanding of credit. Don't hesitate to seek assistance with your credit score or credit repair needs. Contact our office now at www.asapcreditrepairusa.com for any further queries.