It's a lesser-known fact that there are 30 different tiers of credit scores. Many consumers may not be aware of this when conducting their research to find the best credit score. Unfortunately, the abundance of information available online can often add to the confusion and provide misguided advice to those seeking it. My name is Joe Mahlow, and I have extensive experience in the financial literacy and credit repair field, spanning over fifteen years. My main objective is to offer honest and practical advice on various topics, including credit scores. Through my career, I have successfully aided over twenty thousand clients to enhance their credit scores and I would be delighted to provide you with adequate knowledge to do the same. Let's delve into the topic at hand.
Contents:
Different Types of Credit Scores Explained
Understanding Good Credit Scores
Good Credit Score for Home Buying Understanding Loan Types and their Requirements
Determining a Suitable Credit Score for Buying a Car
Tips on Boosting Credit Score
Thoughts by Joe
Different Types of Credit Scores Explained
Credit scoring is a critical factor when it comes to borrowing money and obtaining credit. It's important to understand the different types of credit scoring models you could encounter and the nuances between them to ensure you're aware of what lenders see when they assess your creditworthiness. Below, we explore two of the most common scoring models, FICO and Vantage.
FICO Credit Score
FICO is the most widely used credit scoring model, with eight different versions ranging from FICO 2 to FICO 10. The version used by a lender can vary depending on the type of credit applied for. For example, mortgage lenders typically use FICO 5, whereas FICO 8 is commonly used by credit cards issuers. This is because different types of credit come with different risks, and lenders want to assess risk appropriately.
Why So Many FICO Scores?
Each credit report has a different "weight," meaning factors critical to the lender receive more significant emphasis than less important ones. For example, FICO 5 mortgage reports place more weight on mortgage payment history. Meanwhile, credit card companies primarily use FICO 8, meaning your previous credit card history will have the most significant impact on your score. Auto lenders usually pull FICO-2 reports, and your scores will be weighted towards your previous auto history. To see your different FICO scores, sign up for an account at www.myfico.com.
Vantage Credit Score
Developed by the three major credit reporting agencies, the Vantage Score scoring model was created to compete with FICO. It is a relatively new credit scoring model that is gaining popularity in some sectors, such as personal loans and auto lending. Although the Vantage Score is accurate, it is not widely used for lending purposes and may not reflect your actual lending score. Instead, consider it a good general idea of your FICO score.
The Future of Credit Scoring
While FICO is currently the most recognized scoring model, the Vantage scoring model is expected to gain traction in the next 5-10 years. Credit reporting agencies have access to vast amounts of data and are best positioned to provide the most accurate scoring data, period. As such, remaining up to date with the latest scoring models is essential to ensure you're informed when applying for credit.
Understanding Good Credit Scores
Credit scores can be measured using the FICO and Vantage models, both ranging from 350 to 850. With 850 being the highest and 350 the lowest score, it is essential to maintain the highest score possible. Below are vital score thresholds to help understand where you stand when building your credit scores.
620 or below
A score in this range means you have bad credit, with adverse credit history, high-balance credit card accounts or no credit cards. Ten active revolving credit accounts and timely payments will significantly improve your scores. You can also opt for a Credit Builder Card or OpenSky Credit Card as a secure means of building your credit. Once your score hits the 620 range, you begin qualifying for an FHA home mortgage.
640-680
Scores between 640 and 680 are fair for good credit; you most likely have established credit, but derogatory marks, high balances, or newly opened accounts may drop your score temporarily. Do not panic; these drops are temporary, and your score will return to the normal range.
740+
A score above 740 is excellent, commonly referred to as "super-prime". With a score like this, you have access to the best interest rates for loans. Only 20% of the US population has a score this high. Keep up the good work, ensure timely payments, manage outstanding balances and credit accounts, and you will be in excellent shape!
Good Credit Score for Home Buying: Understanding Loan Types and their Requirements
The credit score required for buying a house depends upon the type of mortgage loan you plan to apply for. Mortgage loans are backed by the government, and hence the requirements across most loans are similar yet different. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and considered the best option for lenders outside the VA loan. They do not require you to maintain private mortgage insurance (PMI), enabling you to avoid any extra upfront or monthly fees. This is because PMI protects the lender and is charged to you in case of loan payment defaults. The credit score requirement for conventional loans is at least 640 and you cannot have a debt-to-debt ratio higher than 43%. Conventional loans also have lower down payment requirements and better interest rates compared to other loans.
2. FHA Loans
FHA loans are an excellent choice for individuals with low credit scores, typically between 580 and 619. It is essential to shop around for different lenders, as they may offer different lending options based on your credit score. FHA loans have a higher debt-to-income (DTI) ratio of up to 50%, enabling you to buy more houses than conventional loans. However, FHA loans require you to keep PMI for at least 11 years, which can increase your mortgage payment. The down payment requirements for FHA loans are as low as 3.5% of the purchase price, but you may end up paying higher interests.
3. VA Loans
VA loans do not have specific credit score requirements but pre-qualify individuals that have defaulted loans or government-owed past-due debts. The VA loan is available to those who have served in the military for a certain period or lost their lives during active duty, and the interest rates are the best in the market. This loan typically does not require any down payment, which allows you to save on upfront costs. The VA loan presents a perfect opportunity to give back to veterans who have fought for our country.
Determining a Suitable Credit Score for Buying a Car
When it comes to purchasing a vehicle, your credit score is not the most crucial factor in determining your eligibility. Instead, your credit history carries more importance. Nonetheless, maintaining a higher credit score can have some influence on the interest rate that lenders offer. It's crucial to note that lenders thoroughly assess your prior and present credit histories to weigh the risk of acquiring you as a borrower when you apply for a car loan. For instance, if you have been late on a former or current auto loan or have experienced repossession, getting loan approval can be difficult. Special finance lenders and lenders for people with blemished credit histories will generally approve anyone for a car loan, including those with prior repossessions. However, they would impose strict criteria such as paying a higher down payment and additional dealership fees to make up for the increased risk. In such a scenario, the dealership pays the lender a fee to reduce the default risk when approving the loan. If you have bad credit and are buying a car through a dealership, they may indicate which car you can buy, as they receive a high markup on those cars to cover the fee. Lastly, having equity or a down payment could give you more leverage while purchasing a car on credit.
Credit Score Range for Acquiring a New Car
As stated earlier, no single credit score determines loan approval since several factors, as discussed above, play a role. Nevertheless, a credit score of over 680 would be deemed ideal for such purposes. A credit score below this range increases the interest rate, exposing the borrower to more risk. Let's review the credit score ranges and the corresponding average interest rates for a better understanding:
Credit score of 720 or above
$5,500 average interest rate for loans
Credit score of 680 or above
$6,600 average interest rate for loans
Credit score of 650 or above
$8,100 average interest rate for loans
Credit score of 615 or above
$10,200 average interest rate for loans
Credit score of 580 or above
$13,900 average interest rate for loans
Credit score of below 580
$15,300 average interest rate for loans
From the above data, it is evident that a better credit score guarantees lowered interest rates, positively impacting your overall credit history.
Tips on Boosting Credit Score
Improving your credit score is possible with a few simple measures, but keep in mind that it may take time. It is vital to have patience when building credit, as hasty decisions may hurt your credit score. Here are some steps you can take to improve your credit score:
1. Open 3-5 Revolving Credit Accounts:
Revolving credit includes credit cards and is an excellent option for improving your credit scores. For those with limited credit or looking to rebuild their credit, obtaining a large loan can be difficult. Instead of a large loan, try opening a secured credit card like Open Sky or Credit Builder Card. These credit card companies require that you pay your balance on time, and they focus less on your credit score. Revolving credit comprises 30-35% of your overall credit score, making it the quickest way to enhance your credit scores.
2. Raise Your Limits:
You can ask your credit card company for a credit limit increase to boost your overall credit limit and lower your utilization percentage. Exceeding 30% of your credit card balances to overall limits may negatively impact your credit scores. To avoid this, increase your credit limits by calling or requesting an increase online through your credit card company's portal. Keep in mind that you must have an excellent payment history on your credit card for seven to 15 months for a higher chance of getting a credit limit increase.
3. Pay Down Your Balances:
Keeping your balance low is essential for your credit score. Do not use credit cards each month unless necessary. I recommend paying a small amount and leaving $1-5 balance on your credit cards when paying your bill each month. If you have high balances and don't have the capacity to pay them off every month, develop a plan to take a certain percentage of your paycheck every month to pay down the debt. Avoid using credit cards after paying them down. Spending habits and interest rates play a significant role in your credit score.
Thoughts by Joe
Many of us have experienced having less-than-desirable credit scores. However, taking ownership of your credit situation and working on improving it can lead to significant increases in your score over a short period. Unfortunately, for many people, credit trouble becomes a recurring problem that seems insurmountable. Achieving excellent credit requires dedication, but anyone who prioritizes their credit and works on curbing bad spending habits can attain it. Start by creating a budget and making a conscious effort to adjust your habits. By doing so, your credit score will improve, too. Additionally, if you require guidance or assistance with credit repair, do not hesitate to contact our team at www.asapcreditrepairusa.com. Here are some tips to help you understand credit better:
1. Recognize the seriousness of your current credit situation.
2. Focus on developing good spending habits.
3. Create a budget and stick to it.
4. Seek help from a reputable credit repair company if needed.