Are you aware that there are 30 different levels of credit scores? It's an aspect that is often overlooked when people are searching for the best credit score. The information available on the internet can be perplexing and sometimes lead you into a confusing trail. My name is Joe Mahlow, and I have been involved in the financial literacy and credit repair industry for over 15 years. My aim is to provide you with straightforward advice on various topics, such as credit scores. I have had the privilege of helping over 20,000 clients improve their credit scores, and I hope to provide you with enough knowledge to do the same! So, let's begin.
Contents:
Different Kinds of Credit Scores: Understanding FICO and Vantage Scoring Models
Understanding What Constitutes a Good Credit Score
Credit Score Requirements for Different Types of Mortgage Loans
Tips to Get a good Credit Score for Auto Loans
Tips for Improving Your Credit Score
Insights from Joe
Different Kinds of Credit Scores: Understanding FICO and Vantage Scoring Models
Credit scores are critical when it comes to applying for credit. While there are many scoring models, the two most important ones are FICO and Vantage. The FICO model is the most popular one in the United States. With eight different models, ranging from FICO 2 to FICO 10, the FICO model calculates credit scores differently, based on the credit report used. Credit card companies primarily use the FICO 8 report, focusing on your previous credit card history, while mortgage lenders will most likely pull the FICO 5 report and auto lenders the FICO-2 report.
The Vantage model is a new scoring model competing with the FICO model. Although not widely used for lending in the United States yet, the Vantage model is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending. Credit monitoring websites all over the United States currently use Vantage to give you a free copy of your credit reports. While the Vantage score is accurate, its usefulness depends upon the context within which you are asking. As a general idea of your FICO score, the Vantage score can provide the best representation, especially if you use it to see roughly where your overall scores are.
As credit reporting agencies collect more data, the user experience will continue to change. Undoubtedly, the FICO scoring model will eventually be outmoded. Therefore, the Vantage model is expected to grow and be the norm for reporting credit scores in the next 5-10 years.
Understanding What Constitutes a Good Credit Score
Both the FICO and Vantage models rank credit scores on a scale of 350 to 850, with 350 being the worst and 850 being the best possible score. If you aim to achieve high scores, it is crucial to understand where you stand on your credit-building journey. Here are some important score thresholds to keep in mind:
620 or below
This range is considered bad credit, indicating some adverse credit history or possibly no credit cards at all. Timely payments and ten active revolving credit accounts can help improve your scores. Consider using secured credit cards like the Credit Builder Card or OpenSky Credit Card. Once you reach the 620 credit score range, you can start qualifying for an FHA home mortgage.
640-680
Credit scores in this range indicate fair for good credit, implying established credit but with some derogatory marks or accounts and high balances on credit cards. A drop in scores may also result from opening new accounts. Scores often return to normal with time.
740+
Any score over 740 is considered "super-prime" and attracts the absolute best interest rates for loans. Having a credit score over 740 places you in the top 20% of the US population. Keep maintaining timely payments and paid revolving credit card accounts to keep up the excellent work!
Credit Score Requirements for Different Types of Mortgage Loans
When it comes to buying a house, the credit score requirement varies depending on the type of mortgage loan you want to qualify for. Federal regulation and government backing enforce similar requirements and guidelines for most mortgage loans, but there are differences worth mentioning. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans, each with its unique features and requirements.
1. Conventional Loans
Conventional loans are quite popular and the best "savings" loan option besides the VA loan. For conventional loans, you don't have to maintain Private Mortgage Insurance (PMI), which can add to your monthly payment and downpayment. PMI protects the lender when you stop making your loan payments. Conventional loans have lower downpayment requirements and better interest rates than other mortgage loans. Typically, conventional mortgage loans require a credit score of at least 640, and a debt-to-income ratio of no higher than 43%.
2. FHA Loans
The FHA mortgage loan is meant for individuals with lower credit scores, typically ranging from 580 to 619. However, different lenders have various credit score limits, so it's best to shop around for the best financial lender. With an FHA loan, you must keep PMI for at least 11 years, which can add to your mortgage and become a budget consideration. This loan type usually has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan. With an FHA loan, the downpayment requirements are as low as 3.5% of the purchase price, making it possible to own a home with less money out of your pocket. However, the interest rates for this loan type are usually higher.
3. VA Loans
VA loans don't have hard credit score requirements, but they pre-qualify you based on any previous defaulted loans and past due debts that you might owe the government. For you to qualify for a VA loan, you must have served in the United States military for at least 181 days, 90 consecutive days during wartime, or six years with the national guard. Alternatively, if your spouse was in the military and lost their lives during active duty, you can be eligible for this loan. VA loans typically have the best interest rates available and don't require a down payment, making it an attractive option. As a helpful assistant, we appreciate the VA loan, and we believe it gives back to our veterans and their families in a meaningful way.
Tips to Get a good Credit Score for Auto Loans
When it comes to buying a car, your credit history is more crucial in determining eligibility than just your credit score alone. Though a high credit score is vital, the interest rate you get approved for revolves around an evaluation of your credit background. Financial institutions consider risk factors such as an auto loan default, late loan payments, or repossession on your previous car loan applications. Thus, your approval is based on this information rather than your credit score. If you have credit issues, bad credit, or require special finance lenders, they qualify almost anyone for auto loans. However, additional approval criteria such as higher down payments and dealership fees may be added to your loan. Moreover, you need to have equity or a down payment to have the best leverage when buying a car on credit.
Credit Score Range for Purchasing a Vehicle
While several factors affect loan approval, a credit score over 680 is an ideal range to ensure an acceptable interest rate. Your credit score significantly impacts the interest rate you will pay, indicating the risk involved. The higher your credit score, the less interest you will pay for your loan. Consider, for example, the differences in interest payment:
A borrower with a credit score of 720 or higher typically pays an average of $5,500 in interest on their auto loan.
A borrower with a credit score of 680 or higher typically pays an average of $6,600 in interest on their auto loan.
A borrower with a credit score of 650 or higher typically pays an average of $8,100 in interest on their auto loan.
A borrower with a credit score of 615 or higher typically pays an average of $10,200 in interest on their auto loan.
A borrower with a credit score of 580 or higher typically pays an average of $13,900 in interest on their auto loan.
Thus, having a high credit score can reduce the interest rate you'll have to pay on your loan and overall debt.
Tips for Improving Your Credit Score
Improving your credit score takes time and effort. It is essential to be patient and make good decisions to avoid worsening your problems. Here are some things you can do now to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is the best option to maximize your credit scores. Start with a secured credit card that does not focus on your credit score, such as Open Sky or Credit Builder Card. Revolving credit makes up 30-35% of your credit score and using it responsibly can quickly boost your score.
2. Request a credit limit increase:
If you have active revolving credit card accounts, you can request a credit limit increase to increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a “Credit Limit Increase.†They will typically ask for your current income, and it will go in front of their credit team for review. A credit card company usually wants to see 7-15 months of excellent payment history on a credit card before agreeing to increase your limit.
3. Pay down your balances:
Keeping your balance low and close to zero is crucial. You are not obligated to use your credit cards each month, so use them for small purchases, and when it comes to paying your bill, leave a $1-5 balance on your credit cards. If you have high balances and cannot pay them off, make a plan to pay a percentage of your paycheck each month to pay them down and eventually stop using them.
By following these tips, you can start improving your credit score. Remember to make timely payments and keep your credit utilization low to maintain a good credit score.
Insights from Joe
Let's face it, we've all had credit struggles at some point. However, if you're willing to take your current credit situation seriously and put in some effort to improve it, you'll be amazed at how quickly your credit score can improve. Unfortunately, many consumers with bad credit feel like it's impossible to achieve good credit again and end up in a cycle of credit issues for their entire lives. But with hard work and focus on improving spending habits, anyone can raise their credit score. First things first, create a budget and address any bad spending habits you may have – this will have a direct impact on your credit score. By reading this article, you'll gain a better understanding of credit. If you require guidance or assistance with repairing your credit, visit www.asapcreditrepairusa.com to contact our office.