It may come as a surprise to many, but credit scores come in 30 different levels! Often, when searching for the best credit score, people find themselves bombarded with diverse answers on Google. Unfortunately, some information could be confusing and even misleading. My name is Joe Mahlow, and I've spent over fifteen years working with financial literacy and credit repair. My aim is to offer you helpful insights on various topics, starting with credit scores. Having helped over twenty thousand customers enhance their credit scores, I'm confident that I can provide you with the relevant information to help you along the way. So, let's dive in.
Contents:
Different Credit Score Models to Know
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a House?
What is a Favorable Credit Score for Auto Financing?
Ways to Increase Your Credit Score
Joe's Insights on Credit Improvement
Different Credit Score Models to Know
Understanding credit scores is essential, and there are two significant credit-scoring models to be familiar with: FICO and Vantage. Both scoring models have their distinct ways of calculating credit scores, and it's crucial to know the differences between them.
FICO Credit Score
The most widely used credit-scoring model in the lending industry is the FICO model. With eight different FICO models available, ranging from FICO 2 to FICO 10, the credit score calculation will vary depending on the credit report. Each FICO model has a different "weight" based on the critical factors considered by the lender. For example, a mortgage lender would most likely pull your FICO 5 credit report, while a credit card company would primarily use your FICO 8 credit report.
Why So Many FICO Scores?
Each FICO report has a different "weight" because specific factors critical to the lender have a more significant impact on the credit score than others. For instance, a FICO 5 mortgage report would weigh heavily on previous mortgage history, while a FICO 8 report would consider previous credit card history to impact the score the most.
Vantage Credit Score
Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), Vantage is a newer credit-scoring model competing against FICO. Although Vantage is not widely used in the lending sector, it's gaining popularity in some sectors such as personal loans and auto lending.
Accuracy of Vantage Score
While accurate, the Vantage score is not widely used for lending purposes. It's recommended to use it as a "general idea" of your FICO score. However, Vantage may become the most recognized scoring model in the next 5–10 years, providing the best scoring models based on today's standards.
Conclusion
With credit reporting agencies as major data collection agencies, it's essential to understand the different credit-scoring models and how each score is calculated. To obtain a better representation of your credit scores, check out www.myfico.com to sign up for an account to see all your different credit scores.
Understanding Good Credit Scores
Credit scores can range from 350 to 850 using the FICO and Vantage models. The higher your score, the better. Here are the essential score thresholds you should keep in mind when building your credit:
1. 620 or Below:
This score range is considered bad credit. If you have a score below 620, you may have high-balance credit card accounts, some adverse credit history, or no credit cards at all. The best way to improve your score is by having ten active revolving credit accounts and making timely payments. Using secured credit cards like Credit Builder Card or OpenSky Credit Card can help you build your credit. Once you reach the 620 credit score range, you can start qualifying for FHA home mortgages.
2. 640-680:
Scores in this range are considered fair for good credit. You may have some derogatory marks or accounts on your credit or a high balance on your credit cards. Newly opened accounts can temporarily drop your scores. Scores will return to their previous level, so don't panic.
3. 740 or Higher:
A score over 740 is considered "super-prime," and you're part of the 20% of the US population with this score. Congratulations! With a score this high, you'll be qualified for the best interest rates for most loans. Keep up the excellent work, pay your accounts on time, and maintain your revolving credit card accounts.
What Credit Score Do You Need to Buy a House?
When it comes to purchasing a home with a mortgage loan, the credit score requirement will vary depending on the type of loan you are seeking. Federal regulation and government backing of most mortgage loans generally translate to similar requirements and guidelines, yet there may be some notable differences. The most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are a popular option among buyers and offer excellent savings outside of the VA loan. One of the benefits of this loan type is that it does not require private mortgage insurance (PMI). PMI can increase downpayment or monthly payments and serves to protect the lender in case the borrower stops making payments. The credit score requirement for conventional loans is typically 640, and the debt-to-debt ratio must be no higher than 43%. Additionally, conventional loans often have lower downpayment requirements and better interest rates compared to other mortgage loans.
FHA Loans
The minimum credit score requirement for FHA loans is generally lower, ranging between 580 and 619. It's worth noting that each loan program has its own set of qualifications and criteria. So, it's essential to shop around for different lenders to find the best financial option available. FHA loans typically require PMI for at least 11 years, which can increase the overall mortgage cost, especially if you're on a budget. These loans also have a higher debt-to-income limit of up to 50%, making it possible to buy more homes if your income is low. Finally, FHA loans have downpayment requirements as low as 3.5%, making it a feasible option for those with little money to spare. However, the interest rates are generally higher than conventional loans.
VA Loan
VA Loans do not technically have a credit score requirement. Your eligibility for these loans will depend on previous defaulted loans and any government-owed debts when pre-qualifying. To qualify for VA Loans, one must be a U.S military veteran who served for at least 181 days, served 90 consecutive days during wartime, served six years in the National Guard, or lost a spouse who served on active duty. A notable benefit of VA loans is that they usually come with the best interest rates available and do not require a down payment. VA Loans are an excellent financial option for our veterans.
What is a Favorable Credit Score for Auto Financing?
When looking to finance the purchase of a vehicle, it is natural to think that having a high credit score is the most crucial factor to qualify. But in reality, your credit history has a more significant impact than simply your credit score. Simply put, an individual with a better credit history has a higher chance of getting approved for a loan, even with a lower credit score. Your credit history reveals your past and present credit issues, giving lenders the information they need to evaluate the risk involved in extending credit. For instance, someone with a repossession or has been late on a car loan in the past will find it more challenging to obtain a loan compared to someone with a clean history. Although bad credit or high-risk lenders would approve you for a car loan regardless of past defaults, they will set specific criteria you must meet, such as a more significant down payment and higher dealership fees to lower their risk. Dealerships will sometimes add a markup fee to a car to help cover such costs. Lastly, it is essential to have equity or a down payment to have more leverage in the financing process.
Guiding Credit Score Range for Auto Financing
There is no specific credit score that guarantees approval for auto financing, given the multiple factors beyond credit score that are evaluated. However, a credit score over 680 is deemed favorable, unlike lower credit scores that increase the interest rate charged due to the risk exposed for the lender. To put this into perspective, below is an example of how credit score affects interest rate:
Example interest rates based on credit score:
- A credit score above 720 may lead to an average interest of $5,500 for a loan.
- A credit score above 680 may receive an average interest of $6,600 for a loan.
- A credit score above 650 may attract an average interest of $8,100 for a loan.
- A credit score above 615 may trigger an average interest of $10,200 for a loan.
- A credit score above 580 may result in an average interest of $13,900 for a loan.
- A credit score of 580 and below may experience an average interest of $15,300 for a loan.
The presented data indicates that the higher your credit score, the lower the overall interest paid on the loan.
Ways to Increase Your Credit Score
Improving your credit score is vital, and there are several things you can do right now that require little effort. Remember, building a good credit score takes time, and it requires patience to avoid making irrational and bad decisions with your credit. The following are proven methods to improve your credit score:
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Open Revolving Credit Accounts:
Revolving credit is the best option to help you maximize your credit score, especially if you have limited credit or are trying to rebuild your credit. Start with a secured credit card that focuses on your ability to pay the card on time rather than your credit score.
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Raise Your Limits:
Request a credit limit increase for your credit cards if you have active revolving credit card accounts. This will increase your overall credit limits and lower your credit utilization percentage, which affects your credit score.
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Pay Down Your Balances:
Keep your balance low, and don't spend more than 30% of your credit limit. If you currently have high balances, make a plan to pay them down gradually. The key is to limit your credit card usage and avoid running the balance back up.
Remember, these methods take time to show an increase in your credit scores, so it's essential to remain patient and disciplined while working on your credit improvement.
Joe's Insights on Credit Improvement
No one is exempted from having a poor credit score. However, if you are serious about turning your financial situation around, then you need to put in the necessary effort and time to work on your credit. Majority of individuals with bad credit tend to accept their situation as a lifelong cycle, and count themselves out of ever having a good credit score again. Contrarily, it is not impossible to achieve a great credit score, but it requires hard work and determination. If you prioritize your credit and focus on improving your spending habits, then you can witness significant improvement in your credit score in no time. Start off by creating a budget and addressing your bad spending habits; that is a direct path to improving your credit score. This post provides essential information on credit improvement. Should you seek professional guidance on credit repair or have any inquiries, feel free to contact us today via www.asapcreditrepairusa.com.