Were you aware that your credit score is segmented into 30 different levels? It's a common misconception that searching for the best credit score will yield a straightforward answer. Unfortunately, the information available can be overwhelming, misleading, and even detrimental. As someone who has been involved in financial literacy and credit repair for over fifteen years, my name is Joe Mahlow, and I aim to provide you with knowledgeable insight on various subjects, including credit scores. My ultimate goal is to share my unfiltered advice so that you can improve your credit score and join the thousands of clients I have assisted. Are you ready to dive in? Let's get started!
Contents:
Different Credit Scoring Models Explained
Qualifying for Different Credit Scores
Exploring Credit Score Requirements for Different Mortgage Loans
How Credit History Affects Car Loans
Tips on Increasing Your Credit Score
Joe's Insights on Improving Your Credit Score
Different Credit Scoring Models Explained
Understanding credit scoring models is essential for managing your credit score rating properly. There are two primary scoring models - the FICO model and the Vantage model. In this article, we will discuss the different types of credit scores in detail.
FICO Credit Score
The FICO model is the most commonly used scoring model with eight different FICO scores available. These scores depend on the credit report used to calculate them. These different models exist because lenders use different reports to pull credit information. For example, a mortgage lender would use FICO 5 reports, while a credit card company would use the FICO 8 report.
The varying credit scores exist because each credit report carries a different weight or significance based on the lender's requirements. For instance, FICO 5 reports used for mortgages weigh heavily on a person's previous mortgage history. These scores vary based on the critical factors a lender considers while granting credit.
Vantage Credit Score
The Vantage model is relatively new and competes with the FICO model. Experian, Equifax, and TransUnion created Vantage, and it is currently used by some personal loan and auto loan lenders. Although it is not as popular as FICO, it can provide a general idea of a person's FICO score.
Vantage is accurate in giving you a clear picture of your overall credit score rating. However, its accuracy in determining your lending score is limited since it isn't widely used. In contrast, FICO scores are widely known and recognized for their ability to provide accurate details.
With time, Vantage scores may become more popular than FICO scores since the Vantage model uses data that is up to date to determine credit scores. It is worth noting that credit reporting agencies have access to vast data that can help in generating better scoring data.
For more accurate information about your credit score, you can sign up on myFICO.com to view all your credit scores.
Qualifying for Different Credit Scores
Credit scores have a range of 350 to 850 for both FICO and Vantage models. A good score is 850, whereas the worst is 350. Achieving a high score is crucial, and to do so, you need to understand where you stand during the process of raising your score. Here are some essential score thresholds:
1. 620 and below:
This score range is considered bad credit. It indicates having negative credit history, including high-balance credit card accounts or no credit cards at all. The most effective way to improve your score is by making timely payments and having ten active revolving credit accounts. You can also consider using specific credit builder cards like Credit Builder Card or OpenSky Credit Card to build your credit. Reaching the 620 score range can qualify you for an FHA home mortgage.
2. 640-680:
Scoring in this range signifies fair to good credit. While establishing a good credit history, you may have some derogatory marks on your credit and high credit card balances, which need paying down. Recently perceived accounts could temporarily decrease your score, so there is no need to worry. It is just temporary, and the score will return.
3. 740 or above:
Any score above 740 is the "super-prime," which can help you earn the best interest rates for loans. Having a 740+ score suggests being part of the 20% population in the US with such credit. Paying accounts on time and keeping revolving credit cards paid will ensure you remain in great shape. Congratulations if you have over 740 scores!
Exploring Credit Score Requirements for Different Mortgage Loans
The answer to the question of what credit score is needed to buy a house is not straightforward as it largely depends on the type of mortgage loan you qualify for. Mortgage loan requirements and guidelines are determined by federal regulations and government backing. Therefore, most mortgage loans have comparable requirements and guidelines. There are three primary types of mortgage loans that we will discuss: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
These are the most prevalent loans and typically offer the best savings options outside of VA loans. Conventional loans do not require you to maintain private mortgage insurance (PMI), which decreases your down payment or monthly payment. PMI serves as protection in case you default on your loan payments. Conventional loans usually have lower down payment requirements and better interest rates compared to other mortgage loans. However, they require a typical credit score of 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loans
FHA mortgage loans are designed for individuals with lower credit scores, typically between 580 and 619. It's important to note that different loan programs may have varying credit score limits. FHA loans require you to maintain PMI for at least 11 years, which can be an added cost to your mortgage. They have a higher debt-to-income limit of up to 50% which enables you to purchase more homes than with a conventional loan if you have a lower income. It has a lower down payment requirement at 3.5% of the purchase price but a higher interest rate.
3. VA Loans
There isn't a specific credit score requirement for VA loans. Instead, they evaluate your previous defaulted loans and any government-owned past-due debts when pre-qualifying you. You must have served in the US Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or be the spouse of an individual who served in the military and lost their lives during active duty. The VA loan has the best interest rates and typically does not require a down payment. It's an excellent option for veterans, as it provides them with valuable benefits.
How Credit History Affects Car Loans
When it comes to buying a car, your credit history holds greater importance than your credit score. While a good credit score is beneficial, lenders mainly rely on your credit history to determine your eligibility for a car loan. This is because they assess the risk of lending money to someone by reviewing their credit histories, past and present. A borrower with previous late payments or records of repossession may find it more difficult to get approved for a car loan than someone with a clean credit history.
Special finance lenders
Special finance lenders can approve almost anyone, but with specific conditions in place. For those with bad credit, these conditions may include a higher down payment and additional fees to the dealership. In these situations, it's common for dealerships to choose the car that will cover the fees through a higher markup on the car. To have more leverage when buying a car on credit, it's recommended to have equity or a downpayment.
Credit score
While there's no exact credit score that guarantees approval, a credit score above 680 is considered ideal. A score lower than this can result in a higher interest rate, which is determined by the level of risk you pose to the lender. Based on current statistics, the interest rate you'll pay can vary depending on your credit score. Anyone with a 720 credit score or higher can expect to pay an average of $5,500 in interest, while someone with a score of 580 or below may pay an average of $15,300 in interest on a loan. This shows that maintaining a good credit score can greatly impact the amount of interest you pay and ultimately affect your overall credit score.
Tips on Increasing Your Credit Score
Improving your credit score is achievable by taking some crucial steps with minimal effort, although it takes time and patience to build a good credit score. Rushing this process can lead to irrational and irresponsible credit decisions that will worsen your situation. Here are some actions that you can take to build or rebuild a good credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Opening revolving credit is an excellent option to increase your credit score, particularly if you have limited credit or seek to rebuild it. Applying for a large loan to build credit requires a lot of work, so you are better off starting with a secured credit card, such as Open Sky or Credit Builder Card. These cards focus more on your ability to pay on time and have a less stringent credit score requirement. Revolving credit accounts make up about 30-35% of your overall credit score and allow you to build your credit score quickly. However, it may take 2-4 months to see the positive impact on your credit scores. You should pay your balance on time and let it remain between $5-$10 for optimal results. We recommend using your card for small purchases like gas or groceries.
2. Request a Credit Limit Increase
Another way to increase your credit score is to request a credit limit increase from your credit card company. If you have active revolving credit card accounts, the credit limit increase can raise your overall credit limits and lower your credit utilization percentage. Remember that exceeding 30% of your overall limits can affect your credit score significantly. Hence, increasing your credit limits can lower the utilization percentage and increase your credit score.
How to Raise Your Limits
Each credit card company has different processes when it comes to increasing your credit limit. Some allow you to do so online, while others might require a call. If you are unsure about the process, call your credit card company and request a “Credit Limit Increase.†Expect the company to want specific information such as your current income, credit history, and payment history, among others. Some companies like to see an excellent payment history of about 7-15 months before they can approve your request.
3. Pay Down Your Balances
Keeping your balance low and close to zero is essential. You do not have to use your credit card every month, but when you charge something, leave about a $1-$5 balance on your card. If you have high balances and can't pay your credit cards off at once, consider taking a percentage of your paycheck each month to pay your credit card down. That way, you can ultimately stop using credit cards and save yourself from paying high-interest rates. Your credit card usage pattern significantly influences your overall credit score and must be managed.
Joe's Insights on Improving Your Credit Score
We've all faced credit troubles at some point, which may leave us feeling like we're stuck in a rut. Fortunately, there is hope for those committed to turning their credit situation around. By putting in the time and effort to improve your credit, you can experience a significant improvement in your credit score sooner than you might think. Many people with poor credit fall into the trap of believing they'll never overcome it, but with hard work and determination, it's possible to achieve a great credit score. Starting with a budget and addressing any problematic spending behaviors is an excellent way to reflect positive changes in your credit score. This article delves into the topic of credit in more detail. If you need support in boosting your credit score or help with credit repair, contact us today at www.asapcreditrepairusa.com.
Bullet Points:
- Don't give up if you have bad credit
- Commit to improving your credit situation
- Develop good spending habits and prioritize your credit score
- Start with creating a budget
- Reach out to www.asapcreditrepairusa.com for more help