It might come as a surprise to many, but did you know that there are 30 different levels of credit scores? Often when people try to search for the best credit score, Google provides them with a plethora of confusing and misleading information, leading them down a dark rabbit hole. My name is Joe Mahlow, and I have been in the financial literacy and credit repair industry for over 15 years. My aim is to provide unbiased advice on various topics, starting with credit scores. With my assistance, I have been able to help over 20,000 clients improve their credit scores, and I'm hopeful that I can offer enough information to enable you to do the same. So let's dive in.
Contents:
Understanding Different Types of Credit Scores
Understanding Good Credit Scores
Good Credit Score Needed to Qualify for a Home Loan
Determining Credit Requirements for a Vehicle Purchase
Tips on Improving Your Credit Score
Joe's Insights on Improving Your Credit Score
Understanding Different Types of Credit Scores:
Credit scores can be calculated using different models, the two most common being the FICO and Vantage models. It’s important to understand the differences between these models and how they calculate your credit score.
1. FICO Credit Score
The FICO credit scoring model is the most widely used, with eight different FICO models from FICO 2 to FICO 10. You may receive a different credit score based on the credit report the lender pulls. For example, a mortgage lender will likely pull a FICO 5 credit report, while a credit card company will typically pull a FICO 8 credit report. Your credit score is weighted based on the factors that are most important to the lender.
2. Vantage Credit Score
The Vantage scoring model was developed as an alternative to the FICO model and is gaining popularity in certain sectors, like personal loans and auto lending. However, it’s not widely used for lending purposes and may not be accurate in predicting your actual lending score. Still, the Vantage score can give you a general idea of what your FICO score might be.
It’s worth noting that credit reporting agencies are in the business of collecting data. As lenders and borrowers adopt new standards, the scoring models are likely to evolve, too. In the meantime, you can sign up for an account at myfico.com to see all of your different credit scores.
Understanding Good Credit Scores
Credit scores vary between 350 and 850 for both the FICO and Vantage models, where 350 denotes the worst credit and 850 shows the best. As you aim to achieve the highest scores, it's vital to comprehend your credit standing to build your scores effectively. The following are some crucial score thresholds that you need to keep in mind as you build your credit:
620 or below:
This score is considered bad credit, and if you have a score below this threshold, it's most likely due to some adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit score, it's best to have ten active revolving credit accounts and make timely payments. Recommended options include the Credit Builder Card or OpenSky Credit Card, since they're secured credit cards that can help you build your credit. Achieving this score range (620) makes you eligible for an FHA home mortgage.640-680:
A credit score that ranges between 640-680 is considered fair for good credit. If your score falls in this range, it's usually a sign that you have set up a credit history, but you may have some derogatory marks or accounts on your credit or high balances on your credit cards that you need to pay down. There are also chances that you may have recently opened new accounts that can momentarily drop your score. However, this is just for a short period, and your credit score will quickly bounce back.740+:
Any credit score exceeding 740 is considered "super-prime" and guarantees the best interest rates for most loans. If you have a credit score above 740, congratulations! You are part of the 20% of the US population with this score range. You can maintain your excellent credit score by always making timely payments and paying your revolving credit card accounts.
Good Credit Score Needed to Qualify for a Home Loan
The credit score required to qualify for a mortgage loan will depend on the type of loan you are seeking. The guidelines and requirements for conventional loans, FHA loans, and VA loans will vary due to federal regulations and government backing. Here are the specifics for each loan type:
1. Conventional Loans
Conventional loans are the most popular option and usually offer better interest rates than other mortgage loans. They typically require a lower down payment and a credit score of at least 640, along with a debt-to-income ratio no higher than 43%. Unlike other loans, conventional loans do not require private mortgage insurance (PMI).
2. FHA Loan
The FHA loan is ideal for individuals with lower credit scores, ranging from 580 to 619. Nevertheless, it is advisable to shop around for different lenders who offer the best financial options. While the FHA loan usually requires a higher debt-to-income limit of up to 50%, you will need to maintain PMI for at least 11 years. The down payment requirements for an FHA loan can be as low as 3.5%, making it an attractive option for those with a smaller down payment.
3. VA Loans
The VA loan is an exceptional benefit reserved only for eligible veterans or active military members. They do not technically require a certain credit score, but lenders will check for past due debts and previously defaulted loans during pre-qualification. Those who qualify will benefit from the best interest rates available without needing to make a down payment. This loan is intended to serve as a way of giving back to our military personnel for their service to our country.
Determining Credit Requirements for a Vehicle Purchase
When considering purchasing a vehicle on credit, it's important to understand that your credit history holds more weight than your credit score when lenders make decisions. Although a higher credit score can be beneficial, the interest rate you qualify for is affected by your past and present credit performance. Lenders gauge their risk based on this information and will charge higher interest rates for applicants with lower credit scores.
For example, someone with a recent or past history of late payments or repossessions will find it difficult to get approved for a car loan. Subprime and special finance lenders may approve applicants with poor credit histories, but they often have specific criteria, such as higher down payments and additional fees for the dealership to extend the loan. This fee helps to mitigate some of the risk of lending to someone with a questionable credit history. It is not uncommon to find dealerships selecting the vehicle that you will be approved for based on the dealership's markup on the car to cover their fee and risk. Lastly, having equity or a down payment can provide leverage when buying a vehicle on credit.
While it's difficult to provide a clear-cut credit score for auto loan approval, having a credit score above 680 is ideal. A score lower than this increases the interest rate and risk for the lender. The interest rates that someone can expect are based on their credit score and risk level. For instance, a borrower with a 720 credit score will pay on average $5,500 in interest, while a borrower with a 580 score or below will pay, on average, $15,300 in interest.
These numbers demonstrate that a higher credit score saves you money in the long run by paying less in interest.
Tips on Improving Your Credit Score
Building a good credit score takes time and effort. Impatience can lead to irrational and poor financial decisions that exacerbate problems. Here are some ways to help increase your credit score:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
- Revolving credit can maximize credit scores, making it a great option for those with limited credit or looking to rebuild it.
- Start with a secured credit card that doesn’t focus on credit score like Open Sky or Credit Builder Card.
- Make sure to pay the balance on time and keep it at $5-$10 each time you make a payment.
2. Raise your Limits!
- Request a credit limit increase for your credit cards to increase your overall credit limits and lower your credit utilization percentage.
- Call your credit card company and request a “Credit Limit Increase", and fill out information, including your current income.
- Credit card companies usually want to see 7-15 months of an excellent payment history on a credit card before agreeing to a credit limit increase.
3. Pay down your balances!
- Keeping your balance low and spending within your means is crucial in improving your credit score.
- Leave about a $1-$5 balance on your credit cards, and make a game plan to pay off credit cards if you're unable to pay them off currently.
- Limit your credit card usage, and remember that most credit card payments go towards interest rather than principal.
Joe's Insights on Improving Your Credit Score
No one is immune to having less than satisfactory credit. However, it is crucial to acknowledge your current credit situation and take steps to improve it. With determination and effort, you can observe significant changes in your credit score in no time. Sadly, many individuals with poor credit histories resign themselves to this fate and assume that getting back in good credit standing is an impossible feat. Earning an excellent credit rating requires much work, and those who make it a priority and concentrate on their spending habits will ultimately succeed. The first step towards this goal is devising a budget and correcting poor spending habits, which will positively impact your credit score. This article provides valuable insights into understanding credit. If you require guidance or assistance in credit repair, reach out to my office at www.asapcreditrepairusa.com. The experts there will help you repair your credit score comprehensively.