As incredible as it may sound, there are 30 different levels of credit scores that you can obtain. It's not uncommon for people to realize that finding the best credit score can be a tough task, as there is a wealth of varying information available online. This information can often be bewildering, and sometimes lead you down an endless labyrinth of misinformation. Hi there, my name is Joe Mahlow, and with fifteen years of experience in the financial literacy and credit repair field, my goal is to provide you with valuable insights on topics like credit scores. Over the years, I've been able to assist over twenty thousand clients in improving their credit scores, and I believe that I can equip you with the information you need to achieve the same positive results. So let's dive in!
Contents:
Understanding Different Types of Credit Scores
Determining a Good Credit Score
Optimum Credit Score to Qualify for a Home Loan
Determining the Ideal Credit Score for Purchasing a Car
Tips for Boosting Your Credit Score
Insights by Joe
Understanding Different Types of Credit Scores
Credit scores are crucial in determining your creditworthiness and are used by lenders to decide whether to approve or deny your loan application. There are two types of credit scoring models used today: the FICO model and the Vantage model. Here is a breakdown of each model:
1. FICO Credit Score
The FICO scoring model is the most widely used system to analyze your credit report and calculate your credit score. However, there are eight different FICO models that lenders have the option to choose from depending on the type of loan. For example, if you're applying for a mortgage, the lender will likely pull your FICO 5 credit report. Alternatively, if it's a credit card you're after, the lender will likely use your FICO 8 credit report.
Why so many FICO scores?
Each credit report's weight varies because lenders prioritize different factors depending on the type of loan. For instance, if you have a great payment history on a previous mortgage on an FICO 5 report, it will weigh more in your favor score-wise than if you had no history or negative history. The same goes for all the other FICO models, which is why there are so many scores.
2. Vantage Credit Score
The Vantage scoring model was developed by the three major credit-reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO scores. This model is gaining popularity in some sectors, such as personal loans and auto lending, but it's still not widely used for lending purposes.
Is the Vantage Score accurate?
The Vantage Score is accurate but not as accurate as FICO since it's not widely used for lending purposes. Instead, it gives you a rough idea of where your credit score could be. In the next 5-10 years, the Vantage scoring model may become more widespread since credit reporting agencies have the most significant data collection database, giving them the upper hand in offering the best scoring data.
Determining a Good Credit Score
Credit scores under the FICO and Vantage models range from 350 to 850, where the best score is 850 and the worst is 350. To strive for the highest possible score, it is essential to recognize your position in the credit score range to plan accordingly. Here are some crucial score thresholds to help guide you along the way:
1. 620 or below
Having a score of 620 or less can be considered bad credit, resulting from credit history issues like high-balance credit card accounts or no credit cards at all. To improve your score, ensure you make timely payments and maintain ten active revolving credit accounts. You may also opt for secured credit cards like the Credit Builder Card or OpenSky Credit Card to build credit. Upon reaching this range, you can qualify for an FHA home mortgage.
2. 640-680
A credit score ranging from 640-680 is a fair result for good credit. Scores in this range indicate establishing credit, possible derogatory marks or accounts, and high balances that need settlement. You may also experience a temporary drop in scores due to newly opened accounts. However, this shouldn't be a cause for concern as your scores will return to normal.
3. 740+
A score above 740 is super-prime; it gives access to the best interest rates for most loans. If you have over 740, congratulations, you belong to the 20% of the US population with that credit score. Ensure you keep up with a good credit score by paying all your accounts on time and maintaining paid revolving credit card accounts.
Optimum Credit Score to Qualify for a Home Loan
Qualifying for a mortgage loan is a complex process that requires you to meet specific lending criteria. It is imperative to understand that the requirements and guidelines will largely depend on the type of mortgage loan you are seeking as per federal regulations and government backing. Outlined below are the three most common mortgage loan types and the corresponding credit score and debt-to-income ratio requirements for each.
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Conventional Loans
Conventional loans remain the most popular mortgage loans and offer the best savings option other than the VA loan. Unlike other mortgage loans, they typically don't require you to maintain private mortgage insurance (PMI), which can be an added cost. The minimum credit score requirement is 640, and the maximum debt-to-income ratio should not be higher than 43%, while down payment requirements are lower than other types of loans, and interest rates are competitive.
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FHA Loans
The FHA loan is designed for people with lower credit scores, typically between 580 and 619. They require that you keep paying PMI for at least eleven years, increasing the overall mortgage costs. However, this loan allows you to secure a mortgage with as little as 3.5% down payments and higher debt-to-income ratios of up to 50%. While interest rates might be higher than in other loans, several lenders will work with your credit score.
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VA Loans
VA loans are not particularly concerned with credit scores. However, they do look for previous defaulted loans and government owed debts when pre-qualifying you. To qualify for a VA loan, you must have a military background, having served the US Military for at least 181 days, served 90 consecutive days during wartime, served 6 years or more with the National Guard, or lost your spouse while on active military duty. VA loans offer the best interest rates and no down payment, making them an excellent option for veterans.
Determining the Ideal Credit Score for Purchasing a Car
While your credit score is certainly important when purchasing a car, it's not the most crucial factor in determining your eligibility. Instead, lenders will look at your credit history to assess the risk involved in extending a loan. It's important to note that credit history plays a greater role in the interest rate you'll be charged, rather than your credit score alone. If you have a history of late payments or repossessions, you may find it challenging to secure a car loan. Some lenders may approve you for a loan but with specific criteria, including a higher down payment and additional fees to lessen the risk of defaulting on the loan. This is where equity, or a down payment, can be advantageous when purchasing a car on credit.
When it comes to credit score, there's no set number that guarantees approval for a car loan.
However, a score of over 680 is seen as ideal. Anything below this score could potentially increase the interest rate you'll be charged due to the perceived risk you pose to the lender. For example, someone with a credit score over 720 will pay an average of $5,500 in interest on a loan, while someone with a score of 580 or above will pay an average of $15,300 in interest on a loan. This data underscores the importance of maintaining a good credit score and history to secure the best interest rate and save money on the overall cost of a car loan.
Tips for Boosting Your Credit Score
Improving your credit score can be a slow process, but there are actions you can take today with little effort that can make a difference. Patience is critical when building credit, as rash decisions can worsen your problems. Here are a few things you can do immediately to better your credit score:
Open 3-5 Revolving Credit Accounts (Credit Cards)
Raise Your Credit Limits
Pay Down Your Balances
Revolving credit can help increase your credit score, especially for those with limited credit history. Consider starting with a secured credit card like Open Sky or Credit Builder Card, which focus more on your ability to pay on time rather than your credit score. Remember that revolving credit makes up 30-35% of your overall credit score, so paying your balance on time and keeping it small is important.
Requesting a credit limit increase for your active revolving credit card accounts can lower your credit utilization percentage. This can help increase your overall credit limit and improve your credit score. Contact your credit card company to request a “Credit Limit Increase†and demonstrate your excellent payment history.
Keeping your balance low is essential to your credit score. Only use your credit cards for small purchases and leave a $1-5 balance on your card when paying off your bill. If you have high balances, create a plan to pay them down gradually each month. Limit your credit card usage to avoid worsening your credit score, as high interest rates often lead to interest-heavy payments.
Insights by Joe
Let's face it; most of us have probably experienced a less than ideal credit score at some point. It's crucial to take your credit situation seriously and dedicate the time and effort needed to improve both your financial habits and credit score. Don't fall prey to the cycle of bad credit; instead, commit to developing a healthy credit score that can be achieved with hard work. By prioritizing your credit and focusing on your spending habits, you too can turn your credit situation around. To start, create a budget and examine any poor spending habits that are affecting your credit score. For more guidance and support to improve your credit score, including credit repair, visit our website at www.asapcreditrepairusa.com. Our team is always ready to help.