It may come as a surprise, but did you know that credit scores are segmented into 30 different levels? This is something that most people are not aware of when they embark on a search for the "best credit score." A simple Google search can often yield conflicting information that is not only confusing, but also potentially misleading. My name is Joe Mahlow, and I am a seasoned expert in both financial literacy and credit repair. With over fifteen years of experience, my aim is to provide you with straightforward and transparent advice on various topics, including credit scores. Having successfully assisted over twenty thousand clients in improving their scores, my hope is that I can equip you with enough knowledge to do the same. So let's dive right into it!
Contents:
Different Types of Credit Scores: Explained
Understanding Credit Scores
Determining the Ideal Credit Score to Secure a Home Mortgage
Determining Creditworthiness for Car Loans
Assistance in Improving Your Credit Score
Joe's Advice on Improving Your Credit Score
Different Types of Credit Scores: Explained
Credit scores are essential because they help lenders determine your creditworthiness and the risk involved in lending you money. There are two credit scoring models that you need to know: the FICO scoring model and the Vantage scoring model. It is crucial to understand the differences between them, especially regarding how each one calculates your credit score.
FICO Credit Score
The FICO model is currently the most widely used and popular credit scoring model. It has eight different FICO models, from FICO 2 to FICO 10. When you apply for credit at different lenders, such as a mortgage company or a credit card company, they will pull different FICO reports. The FICO scores vary because each model weighs different factors critical to the lender. For instance, a mortgage lender may pull your FICO 5 score, while a credit card company may use FICO 8. It is essential to know your different FICO scores to understand how each lender perceives your creditworthiness.
Vantage Credit Score
Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), the Vantage model is the newest credit scoring model compared to the FICO model, which has been in use since the seventies. Although not widely used in lending yet, Vantage is gaining popularity for personal loans and auto lending. Many credit monitoring websites provide free copies of your credit reports with Vantage scores.
Is the Vantage Score Accurate?
While the Vantage score can provide a good general idea of your credit score, it's not as accurate as the FICO score, the most recognized scoring model amongst lenders in the United States. However, I believe that the Vantage scoring model may become more used in the next 5-10 years, replacing the outdated FICO model that does not show the user a clear representation of their credit scores. As credit reporting agencies have the most significant data collection outside social media, they have the upper hand in providing the best scoring data based on today's standards.
Understanding Credit Scores
Credit scores, whether it is the FICO or Vantage model, range from 350 to 850, with 850 being the best credit score you can achieve and 350 being the worst. To improve your credit score, it’s essential to understand where you stand in the credit score range. Below are some score thresholds and their implications.
1. Scores of 620 or below:
- This is considered bad credit and indicates that you may have some adverse credit history.
- To improve your credit scores, ensure timely payments, and consider securing credit cards such as the Credit Builder Card or OpenSky Credit Card.
- Once your score reaches the 620 range, you can start qualifying for an FHA home mortgage.
2. Scores of 640 to 680:
- This range is considered fair to good credit and implies that you have established credit.
- You may have derogatory marks or high balances on your credit card accounts or even newly opened accounts, which can temporarily decrease your credit score.
3. Scores of 740 and above:
- Credit scores above 740 are considered "super-prime" and will give you the best interest rates for loans.
- If you have over 740 credit score, you are among the 20% of the US population with this score.
Always maintain timely payments and pay off your revolving credit card accounts, and you will be on the right track. Congrats!
Determining the Ideal Credit Score to Secure a Home Mortgage
The credit score necessary to obtain a home mortgage depends on various factors specific to the loan program. Federal regulation and government support enforce similarities in regulations; however, slight differences can exist between mortgage loan types. This article discusses the credit score requirements for three common mortgage loan types, including Conventional Loans, FHA Loans, and VA Loans.
Conventional Loans
Conventional loans, being the most popular loans, are the best loans to save on, outside of the VA loan. These loans do not call for private mortgage insurance (PMI), which prevents additional costs that could increase a down payment or monthly fee. A PMI protects the lender if a borrower does not repay their mortgage loan. Conventional loans usually require a lower down payment and better interest rates than other mortgage loan schemes. Typically, conventional loans require a credit score of 640 and no debt-to-debt ratio above 43%.
FHA Loan
The FHA mortgage program, tailored to borrowers with lower credit ratings ranging between 580 and 619, can be evaluated based on the credit score limits. Shop for different lenders offering the best financial options if you meet the credit score thresholds, as all schemes differ. Also, borrowers must bear in mind that FHA loans require PMI payments to be made for 11 years in addition to the mortgage payment. As such, it is essential to consider budget constraints. The program offers a higher debt-to-income limit of up to 50%, which means low-income earners may purchase more homes than through a conventional loan. Finally, the down-payment requirements for FHA loans are as little as 3.5% of the purchase value. However, interest rates for these loans are usually higher.
VA Loan
Although there is no credit score prerequisite for VA loans, they evaluate borrowers' previous defaulted loans and past-due debts owed to the government. To qualify for VA loans, you must have served at least 181 days in the United States military, 90 consecutive days during wartime, or 6 years with the National Guard. Rarely, your spouse could have served in the military and passed on during active duty. Typically, VA loans provide the most favorable interest rates and do not require down payments. VA loans are exceptionally suitable for veterans, as they are dedicated to giving back to our veterans.
Determining Creditworthiness for Car Loans
While credit score is an important consideration when buying a car, it is not the only factor that determines your eligibility for a loan or the interest rate that you will be charged. Lenders will examine your credit history to assess the risk involved in lending to you. If you have a poor credit history, you may still be able to get approved for a loan, but with additional fees and a higher down payment. In fact, the dealership may have to pay a fee to approve your loan, which can impact the cost of the vehicle. For borrowers with a credit score below 680, the interest rate charged will increase due to the perceived risk. Ideally, you should aim for a credit score above 680 when seeking car financing.
Credit Score Range and Interest Rates for New Car Loans
The interest rate you are charged for a car loan will depend on several factors, including your credit score. The higher your credit score, the lower the interest rate you will pay. For example, a borrower with a credit score above 720 can expect to pay around $5,500 in interest on a loan, while someone with a credit score of 580 or below may pay over $15,000 in interest. Ultimately, having equity or a down payment will give you more leverage when negotiating for car financing.
Assistance in Improving Your Credit Score
If you're looking to improve your credit score, there are numerous things you can do today to achieve it. Establishing a good credit score takes time and isn't a quick fix. Having patience is crucial, as impulsive decisions can lead to further issues with your credit. Here are the steps you can take to improve your credit:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is the best way to increase your credit score, especially if you have limited credit or are trying to rebuild it. Instead of getting a large loan, obtain a secured credit card such as Open Sky or Credit Builder Card. The company focuses on your ability to pay the card on time, and the process is simple and quick. Maintaining good revolving credit can increase your overall credit score by 30-35%. Ensure to pay your balance on time and keep it between $5-$10.
2. Raise your Limits!
Request a credit limit increase for your credit cards since it can help increase your overall credit limits and lower your credit utilization percentage. Most people use their credit cards a lot, which can negatively impact your credit scores if your balances exceed 30% of your overall limits. To avoid this, contact your credit card company and ask about a Credit Limit Increase. You may need to fill out some information, including your current income and credit history, before getting approval.
3. Pay down your balances!
Keeping your balance low is probably the most crucial step in improving your credit score. It's crucial to use your credit cards for small purchases and leave $1-$5 balances on them every month. However, if you currently have high balances and cannot afford to pay them off, make a plan to pay off a certain percentage of your paycheck each month. Credit card spending habits will significantly impact your credit score, so limiting their use is essential. Finally, credit card rates can be high, and it's important to budget your payments toward interest and principal.
Joe's Advice on Improving Your Credit Score
Managing a poor credit score is a common challenge that many of us face. However, if you take steps to improve your credit by making a sincere effort and dedicating the necessary time, you can experience significant changes in your credit score. Often, people with bad credit get stuck in a cycle of feeling hopeless about their credit situation. Don't let this be you - by prioritizing your credit and focusing on your spending habits, you can develop a great credit score. Begin by establishing a budget and working on any bad spending habits that you might have. These actions will have a direct impact on your credit score. For further information on credit management or help in repairing your credit, check out our website at www.asapcreditrepairusa.com.