It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? It's a commonly overlooked fact that many individuals are unaware of. When searching for the best credit score, the results can become overwhelming and often lead to conflicting information. Unfortunately, this confusion can lead people down a path of misinformation that can leave them feeling lost. My name is Joe Mahlow, and I have spent the last fifteen years in the realm of financial literacy and credit repair. Through my experience, I aspire to provide practical advice on various topics, such as credit scores. With over twenty thousand clients under my belt who have transformed their credit scores, I hope to offer you enough insight to do the same. So, let's dive in!
Contents:
Types of Credit Scores
What Constitutes a Good Credit Score
The Importance of Credit Score for Different Mortgage Loans
Credit Score and History: What You Need to Know About Buying a Car
Tips on Improving Your Credit Score
Advice from Joe
Types of Credit Scores
Credit scores are essential aspects of our financial lives, and it’s essential to know the different types. The FICO and Vantage models are the two most common scoring systems. Both models work to calculate your credit scores, but there are some significant differences.
FICO Credit Score
The FICO scoring model is the most widely used system. There are eight FICO models available, from FICO 2 to FICO 10, and each calculates your credit score differently. Different types of lenders require different FICO models. For example, mortgage lenders pull a FICO 5 credit report, while credit card companies use a FICO 8 report.
Why So Many FICO Scores?
Each FICO model is different because each carries a weighted emphasis on your previous credit history. For example, if you are taking a mortgage loan, your FICO score will weigh heavily on your mortgage history. It’s the same for all the FICO scoring models. To see your various FICO scores and how they vary, you can visit www.myfico.com.
Vantage Credit Score
The Vantage Score model was implemented in an effort to compete with the popular FICO model. The three major credit reporting agencies (Equifax, Experian, and TransUnion) developed the Vantage Score, which is a new system compared to FICO’s decades-old model. Although the FICO model is currently the more widely used system, Vantage is gaining in popularity in some sectors, such as personal loans and auto lending.
Can You Trust the Vantage Score?
The accuracy of Vantage Scores is essential, but it depends on the context of how they are used. Since the Vantage model is less utilized for lending purposes, the scores may vary from what your actual lending score would be. It’s best to use the Vantage model as a general idea of where your overall credit scores are. While this new model may become more prevalent in the lending sector in the next 5-10 years, it’s always wise to check your FICO score to get a more accurate representation. Remember, credit reporting agencies have access to vast data and can determine the best scoring models based on current standards.
What Constitutes a Good Credit Score
Both the FICO and Vantage models operate on a scale of 350 to 850, with 350 being the worst credit score and 850 being the best. It's essential to bear this in mind when aiming to achieve the highest scores, and I'll share some important score thresholds with you.
1. 620 or less
A score below this threshold is considered bad credit, and you probably have some blemishes on your credit history, high-balance credit card accounts, or no credit cards at all. To improve your score, ensure that you make payments on time and have ten active revolving credit accounts. The Credit Builder Card or OpenSky Credit Card is recommended for secured credit cards that'll help you build your credit. Once your score reaches 620, you can qualify for an FHA home mortgage.
2. 640-680
This score range is fair for good credit. If you have a score in this range, you probably have established credit, but may still have some accounts with derogatory marks or high balances on credit cards that have to be paid down. Your score could also drop temporarily if you have newly opened accounts. There is no reason to panic if your score falls into this range after opening a new account, as it will temporarily recover.
3. 740+
If you have a score of over 740, congratulations! It is considered "super-prime" and gives you the very best interest rates for most loans. You can count yourself among the 20% of the US population with this score. Keep up the excellent work, always pay your accounts on time, and keep your revolving credit card accounts paid. You are in fantastic shape!
The Importance of Credit Score for Different Mortgage Loans
The credit score required to buy a house depends on the type of mortgage loan you are interested in. Most mortgage loans have similar or varying requirements and guidelines due to federal regulation and government backing. 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 usually the best option for savings outside of VA loans. These loans do not require private mortgage insurance (PMI) which can increase the down payment or monthly payment. PMI protects the lender in case of loan default. The credit score requirement for the conventional loan is typically 640 with a debt-to-debt ratio of up to 43%. Compared to other mortgage loans, conventional loans usually have better interest rates and require lower down payments.
2. FHA Loans
This loan is for borrowers with a credit score between 580 and 619. However, the loan requirements are different among lenders so it's best to shop around. The minimum down payment on an FHA loan is 3.5% of the purchase price. The higher the down payment you make, the lower the interest rate you'll be charged. But keep in mind that FHA loans require PMI for a minimum of 11 years, which could be an added cost to the mortgage. The debt-to-income limit for an FHA loan is up to 50%, allowing borrowers with lower incomes to purchase more homes.
3. VA Loans
VA loans are open to military personnel who have served for at least 181 days or 90 consecutive days during wartime. National Guard members who have served for six years or a deceased spouse of a military member during active duty also qualify. The VA loan has no credit score requirement, but pre-qualifying includes looking for defaulted loans or government-owed past-due debts. VA loans offer the best interest rates and usually don't require a down payment. This type of loan honors and supports veterans.
Credit Score and History: What You Need to Know About Buying a Car
When it comes to purchasing a car, your credit score is not the sole factor that determines your eligibility for a loan. Credit history plays a significant role in this decision. Although a high credit score is beneficial, the interest rate you qualify for depends more on your credit history. When you apply for a car loan, lenders investigate your past and current credit histories to assess the associated risks. Consequently, someone who has faced problems such as missed EMI payments or repossession of a vehicle would face difficulties getting approval for a car loan. While bad credit or special finance lenders may grant car loans to such individuals, they also require specific criteria be met such as higher down payments and extra fees to the dealership to protect themselves against loan defaulting. Dealerships may guide customers into choosing specific vehicles with higher markups to cover for this risk allowance fee.
The Credit Score Range for New Car Loans
There is no set credit score that guarantees approval for a car loan since several factors come into play. However, a credit score of 680 or above is considered ideal, while anything below this may result in higher interest rates. For instance, a person with a score of 720 and above will pay an average interest rate of $5,500 on a car loan. In contrast, an individual with a credit score of 580 or above will pay an average interest rate of $15,300 on a car loan. Hence, a higher credit score can help you manage your financial burden more effectively when buying a vehicle on credit.
Tips on Improving Your Credit Score
Increasing your credit score takes time and patience. Rushing it can lead to poor decision-making and worsen the problem. Here are some things you can do to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, like credit cards, is an excellent way to improve credit scores, especially for those with limited credit or trying to rebuild it. Start with a secured credit card like Open Sky or Credit Builder Card. Make sure to pay the balance on time and only use the card for small purchases like gas or groceries.
2. Raise your limits:
Request a credit limit increase for your active revolving credit cards to lower your credit utilization percentage. Call your card company and ask for a "Credit Limit Increase." They usually require seven to fifteen months of excellent payment history on a credit card before granting an increase.
3. Pay down your balances:
Keep your balance low or close to zero by using your credit card for small purchases only. Leave a $1-5 balance on your credit cards when paying your bills. If you have high balances, make a plan to pay them down with a percentage of your paycheck each month.
Advice from Joe
At some point, many of us have experienced the difficulties of having poor credit. However, if you are committed to addressing your credit situation and dedicating time and effort to improving your score, you can witness significant improvements in a short amount of time. Too often, people with bad credit believe that is how it will always be and give up on improving their credit altogether. Yet, establishing a strong credit score requires dedication, and those who prioritize their finances and focus on their spending habits can ultimately triumph. Consider initiating a budget and resolving any spending patterns that might negatively impact your credit score. This article sheds light on how credit works and ways to enhance your score. If you require assistance with credit repair or credit guidance, promptly visit www.asapcreditrepairusa.com for support.