Were you aware that there are actually 30 distinct levels of credit scores? It's not widely known that conducting a search for the "best" credit score can generate a range of ostensible answers from Google. Unfortunately, the information available can often be difficult to decipher and may even mislead you, sending you down a potentially troublesome path. My name is James Anderson, and I have spent the past 15 years working in the realms of financial literacy and credit repair. My aim is to offer unfiltered insight into various finance-related subjects, such as credit scores and how to manage them. With my assistance, I've been able to help more than 20,000 clients in improving their credit scores and financial outlook. In this piece, I will endeavor to provide you with the same practical and informative guidance in order to help you in your own journey towards sound financial management. Let's dive right in.
Contents:
Different Types of Credit Scores Explained
Understanding Good Credit Scores
Determining the Required Credit Score to Obtain a Mortgage
Credit History Matters More When Buying a Car
Tips on Improving Your Credit Score
Joe's Perspective on Improving Your Credit Score
Different Types of Credit Scores Explained
Understanding credit scores is important when it comes to handling finances. There are two commonly used credit scoring models, namely the FICO model and the Vantage model. It is crucial to comprehend the differences between these models and how they calculate credit scores.
FICO Credit Scores
The FICO credit scoring model is the go-to model for most lenders and has eight different versions ranging from FICO 2 to FICO 10. A credit score obtained using this model may vary based on which lender pulls your report for credit applications. For example, a mortgage lender will likely use the FICO 5 score, while a credit card company will go for FICO 8. The reason there are different FICO scores is that each credit report has varying weights impacting the credit scores according to the lender's needs.
Vantage Credit Scores
Competing with the FICO model is the Vantage score, developed by the three major credit-reporting agencies, Equifax, Experian, and TransUnion. The Vantage model has gained popularity, especially in sectors such as personal loans and auto lending. However, FICO still dominates the lending industry.
Comparing the Accuracy
Both scoring models are accurate. However, the Vantage score is not widely used for lending purposes, so it cannot be as accurate as the FICO score when it comes to obtaining actual loans. On the other hand, the Vantage score serves as an excellent "general idea" of the FICO score. While the FICO model may appear to be outdated, the Vantage model currently doesn't give a clear representation of credit scores. The Vantage scoring model may be more widely used in the future, making data collection agencies the sole providers of the best scoring models.
To track your FICO score accurately, you can visit the myfico.com website, where you can access different credit scores transparently.
Understanding Good Credit Scores
Both FICO and Vantage models use a scale of 350 to 850. 850 is the highest score any credit agency can award, while 350 is the lowest. Maintaining excellent scores requires an understanding of where you stand. Exceeding score thresholds is essential to increasing one's credit, so below are some fundamental ones.
620 or below
- Scores below this limit mean bad credit.
- If you fall below the threshold, you likely have negative credit history.
- Paying bills on time and ten open revolving credit accounts is critical to increasing your score.
- Consider using either a Credit Builder Card or OpenSky Credit Card for secured credit cards to boost your score.
- Once your scores reach 620, you can start qualifying for an FHA home mortgage.
640-680
- Scores within this range are recognized as fair or good credit.
- This score means that you have established credit.
- However, you may have one or more derogatory marks or high credit card balances that you need to manage.
- Newly opened accounts can bring about a temporary drop in your score, so don't panic when this occurs.
740+
- Anything above this score is considered "super-prime" credit.
- A score above 740 earns you the best interest rates on loans.
- It's an elite score since only 20% of people in the US have this rating.
- To achieve and maintain this score, pay your accounts on time, and keep all revolving credit card accounts in balance.
Determining the Required Credit Score to Obtain a Mortgage
The credit score you require to qualify for a mortgage loan may vary depending on the type of loan you are seeking. There are three types of loans available, namely, conventional loans, FHA loans, and VA loans. These loans have varying requirements and guidelines due to federal regulation and government backing. Let's take a closer look at each of these types of loans.
Conventional Loans
Conventional loans are the most popular loans and are typically the best option for saving money outside of VA loans. You do not have to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment. PMI protects lenders if you stop making payments on your loan. On these types of loans, you typically have lower downpayment requirements and better interest rates. Conventional loans have a minimum credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.
FHA Loan
FHA loans are suitable for those who have a low credit score, between 580 and 619. You should shop around for lenders that offer the best financial options if you meet the credit score requirements. You must have PMI for at least 11 years, which can be an added cost to your mortgage and something to consider if you are on a tight budget. This type of loan has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan if you have a lower income. Additionally, the downpayment minimum requirement is 3.5% of the purchase price; however, you will likely have a higher interest rate.
VA Loan
The VA loan does not technically require a credit score. Instead, they look for previous defaulted loans or any past-due debts owed to the government when prequalifying you. You must have either served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was in the military and lost their lives during active duty. VA loans typically have the lowest interest rates available and usually do not require a down payment. The VA loan is a perfect way to give back to our veterans.
Credit History Matters More When Buying a Car
Your credit history, not just your credit score, is the crucial factor that determines your eligibility for a car loan and the interest rate you qualify for. Lenders evaluate your past and current credit histories to assess the risk involved in extending credit to you, especially if you have had previous delinquencies, repossessions, or bankruptcy. However, some lenders specializing in bad credit or special finance may qualify you despite your poor credit. Still, they may impose stricter criteria, such as higher down payments or fees, to mitigate the risks involved. Moreover, having equity or making a down payment can give you more leverage when purchasing a car on credit.
Ideal Credit Score Range for Buying a New Car
Although your credit score is not the only factor, having a credit score above 680 is ideal for obtaining a car loan with favorable interest rates. If your credit score falls below this threshold, you may be charged higher interest due to your higher risk profile. The following example demonstrates how credit scores can affect the amount of interest you pay on a car loan:
Credit score 720 or above: Approximately $5,500 in interest on a loan
Credit score 680 or above: Approximately $6,600 in interest on a loan
Credit score 650 or above: Approximately $8,100 in interest on a loan
Credit score 615 or above: Approximately $10,200 in interest on a loan
Credit score 580 or above: Approximately $13,900 in interest on a loan
Credit score below 580: Approximately $15,300 in interest on a loan
As you can see, maintaining a higher credit score can significantly reduce the amount of interest you pay on a car loan and potentially improve your credit score over time.
Tips on Improving Your Credit Score
Improving your credit score is a process that takes time, but there are steps you can take now to make it happen. Maintaining patience is essential, as impulsive decisions can worsen your financial situation. You can take the following actions to boost your credit score:
1. Open 3-5 Revolving Credit Accounts:
Revolving credit, such as credit cards, can help raise your score more quickly than securing a large loan. Start with a secured credit card that focuses on income and timely payments versus credit history.
2. Raise Your Limits:
Requesting a credit limit increase, which varies per credit card company, can increase your overall credit limits and lower your credit utilization rate.
3. Pay Down Balances:
Keeping credit balances low is crucial. Use credit cards sparingly, and leave a small balance of $1-5 on the card when paying bills. Additionally, creating a plan to pay down higher balances is critical to financial success.
Joe's Perspective on Improving Your Credit Score
Credit issues can happen to anyone, but it's important to take them seriously and work on improving your credit. Many people with bad credit assume that they'll always have credit problems and feel overwhelmed by the idea of improving their score. However, with time and effort, significant changes can be made to your credit score. Developing a great credit score requires hard work and dedication, but it's worth it. Prioritizing your credit and focusing on improving your spending habits are key steps toward achieving a better score. Creating a budget and addressing any negative spending patterns can have a direct impact on your credit rating. This article provides useful insights on credit management, and for further guidance on credit repair or improve your score, you can contact our office at www.asapcreditrepairusa.com.