It may come as a surprise to learn that there are actually 30 different levels of credit scores. Despite this fact, many individuals who seek out information on improving their credit score are met with inconsistent responses from search engines like Google. Unfortunately, much of this information can be overwhelming and even misleading. My name is Joe Mahlow, and I have spent over 15 years working in the financial literacy and credit repair space. My aim is to provide straightforward advice on a range of topics, including credit scores. Having already assisted over 20,000 clients in improving their credit scores, I am confident that I can provide you with the necessary information to do the same. So, let's dive right in!
Contents:
Exploring Different Types of Credit Scores
Determining a Good Credit Score
What is a Good Credit Score to Qualify for a Mortgage?
Ideal Credit Score Range for Purchasing a Car
Tips on Increasing Your Credit Score
Joe's Perspective
Exploring Different Types of Credit Scores
Credit scores are essential aspects of anyone’s credit history, and it is important to know the different credit scoring models used. Understanding how different credit scores such as the FICO and Vantage models calculate credit scores is very important.
FICO Credit Score
The FICO credit scoring model is the most widely used credit scoring model with eight different FICO models, from FICO 2 to FICO 10, each used depending on specific factors. Differences exist as to the type of lender who uses them, and factors considered in the calculation of credit scores. For instance, a mortgage lender will most likely use an Fico 5 credit report while a credit card company uses the FICO 8 report. The different FICO models are due to the fact that each credit report has a different “weight,†meaning factors critical to the lender have a more significant impact on credit scores than the less important ones.
Vantage Credit Score
The Vantage Score is a relatively new credit scoring model developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion. Its major advantage is that it’s gaining popularity as a scoring model in various sectors like personal loans and auto lending. The Vantage Score is useful as a “general idea†of the FICO score, and offers a free copy of credit reports.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, its accuracy is determined by context. Since the Vantage score is not widely used for lending purposes, it may not be accurate when it comes to the actual lending score. FICO is the widely recognized scoring model in the lending sector. Nonetheless, the Vantage scoring model offers a good idea of where the overall scores lie. Credit reporting agencies are the most significant data collection agencies aside from social media companies. Therefore, the Vantage scoring model's accuracy will improve over time, providing the best scoring data based on today's standards.
Determining a Good Credit Score
Credit scores are crucial numbers that can determine many aspects of your financial life. Different score models like FICO and Vantage have a range of 350 to 850, with 850 being the best possible score. It is essential to know where you fall on the credit score spectrum and what it means when setting goals to achieve higher scores. Here are some of the vital credit score thresholds to keep in mind:
1. 620 or below:
This is a bad credit score range that can negatively affect your financial standing. A poor score could be due to high-balance credit card accounts, adverse credit history, or no credit accounts at all. Making timely payments and having ten revolving credit accounts can help improve your score. Secured credit cards such as Credit Builder Card or OpenSky Credit Card can help you build your credit score. Reaching 620 credit score range can qualify you for an FHA home mortgage.
2. 640-680:
This range is considered fair for good credit, and you most likely have established credit. However, there might be derogatory marks, high balances on credit cards, or newly opened accounts temporarily dropping your score. Paying down balances, and waiting for a score return can help address these temporary drops.
3. 740+:
Having a credit score over 740 is considered "super-prime" and excellent. It puts you in the top 20% of the US population with the best possible interest rates for most loans. Continually paying accounts on time, and keeping revolving credit card accounts up to date can help you maintain or improve your score. Congratulations on having a fantastic score!
What is a Good Credit Score to Qualify for a Mortgage?
The credit score required to obtain a mortgage will depend on the type of loan. While there are variations in the requirements and guidelines for most mortgage loans, due to federal regulation and government backing, the three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular mortgage loans outside of VA loans. They are the best "savings" option because they typically don't require private mortgage insurance (PMI), which can be an added expense that increases your downpayment or monthly payment. Conventional loans generally have better interest rates and lower downpayment requirements than other types of mortgages, but a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loan
FHA loans are designed for lower credit scores, typically between 580 and 619. While requirements may vary among lenders, keep in mind that PMI will be required for at least 11 years. This loan type has a higher debt-to-income limit of up to 50% which can enable you to buy a more expensive home if you have lower income. With FHA loans, downpayment requirements can be as low as 3.5%, but interest rates are usually higher compared to conventional loans.
3. VA Loan
The VA loan targets veterans and does not require a credit score, but instead, it considers previous defaulted loans and overdue government debts when pre-qualifying you. To qualify, you must have served in the United States military for at least 181 days, served 90 consecutive days during a war, served six years with the National Guard, or had a spouse in the military who lost their life during active duty. The VA loan typically offers the best interest rates and may not require any down payment, making it an excellent option for those who qualify. As an added bonus, it is a fantastic way to give back to our veterans.
Ideal Credit Score Range for Purchasing a Car
When it comes to buying a car, your credit history holds more weight than your credit score. While having a high credit score remains important, it's not the sole determiner of the interest rate you qualify for. Prior and present credit histories are doing the heavy lifting when lenders assess credit risks for loan approval.
To elaborate further - lenders scrutinize credit histories of those who apply for car loans to determine the likelihood of extensions being paid back. Thus, someone with delinquencies on their credit reports, say for vehicle loans they've previously taken or are currently taking, or repossession of a car, will face difficulty getting loan approval compared to someone with a clean credit history. However, sub-prime or worst credit lenders can give approval for car loans to almost anyone irrespective of past non-payments. But there are specific requirements needed to meet approval, such as higher down-payment, and additional fees paid by the dealership handling your loan. Yes, some dealerships pay higher marks since these fees mitigate the lender’s risk, and they approve loan applications. If you've ever visited a dealership with poor credit, you've probably been offered a car that comes with a higher markup that the dealership will only approve you for. Finally, it's essential to build equity or have a downpayment to increase your bargaining power while exploring auto credit options.
Credit Score Ranking for New Vehicle Purchases
There's no magic credit score that signals approval for car loans as multiple factors are weighed in, as mentioned above. However, a minimum credit score of 680 is recommended. Debtors with a below-average score are perceived as high risks by lenders, and this might warrant more interest rate charges.
Here's a breakdown of the influence credit scores have on the interest rates paid by borrowers for various vehicle loans:
720 or over: Average loan interest of $5,500
680 or over: Average loan interest of $6,600
650 or over: Average loan interest of $8,100
615 or over: Average loan interest of $10,200
580 or over: Average loan interest of $13,900
580 or less: Average loan interest of $15,300
From the info above, higher credit scores lead to lower interest payments for borrowers, influencing their overall credit score positively.
Tips on Increasing Your Credit Score:
Improving your credit score does not happen overnight. However, taking a few steps now can help boost your score with little effort. Patience is key when it comes to building credit. Hasty decisions often make matters worse. Here are some things you can do right away to improve your credit:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit makes up 30-35% of your overall credit score and can help you maximize your credit score quickly. If you have limited credit history or are looking to rebuild your credit, obtaining a large loan to build credit is not easy. Instead, a secured credit card such as Open Sky or Credit Builder Card is a good option to start with. These cards evaluate your ability to pay the bills on time rather than focus on your credit score. Using your credit cards for small purchases like gas or groceries and paying your balance on time can also help increase your credit score.
2. Ask for a credit limit increase
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. Credit card balances that exceed 30% of your overall limits can negatively affect your credit score. To avoid this, contact your credit card company and request a "Credit Limit Increase." Make sure you have an excellent payment history on your credit card for 7-15 months before doing so.
3. Pay down your balances
Leaving a balance of $1-$5 on your credit cards and paying your bill on time can help keep your balance low and close to zero. If you have high balances and cannot pay them off right away, create a plan to pay a fixed percentage of your paycheck each month. Limit your credit card usage since your spending habits will affect your credit score greatly. Keep in mind that the high interest rates on credit cards mean that most of your payment will go towards interest and not principal.
Joe's Perspective
Many of us have experienced situations where our credit isn't at its best. However, if you are committed to improving both your credit and your habits, you can expect to see an impressive increase in your score in no time. Unfortunately, too many people feel that good credit is unattainable, which leads to a vicious cycle of credit woes. Nonetheless, a little hard work goes a long way when it comes to building a pristine credit score. Particularly, it is important to prioritize your credit and spending habits. To do this, start by creating a budget that works for you and then identify and correct any reckless spending behavior you might have. By following these steps, you will see a positive change in your credit score. For more help and guidance or credit repair services, please visit www.asapcreditrepairusa.com.
In summary:
- Many people find themselves in a situation with bad credit.
- Improving your score is possible and achievable.
- A focus on your credit and spending habits is paramount.
- Start by creating a budget and correcting any reckless spending.
- You can visit www.asapcreditrepairusa.com for credit repair services.