It may come as a surprise to many that there are actually 30 different levels to credit scores. Considering the number of results that flood Google searches for the best credit score, it's understandable how this fact can easily go unnoticed. However, it's important to be aware of the intricacies of credit scores, as the information available can often be more confusing than helpful, and may even lead you astray. My name is Joe Mahlow, and I have dedicated the past fifteen years of my career to the field of financial literacy and credit repair. With my experience and expertise, I aim to provide you with honest and invaluable advice on credit scores, among other topics. Having assisted over twenty thousand clients in improving their credit scores, I am confident that my guidance and insights will be useful in aiding you to do the same. Let's delve into the topic at hand.
Contents:
Different Credit Scoring Models Explained
Understanding Good Credit Scores
What is Considered a Good Credit Score to Qualify for Mortgage Loans?
The Importance of Credit History When Buying a Car
Tips for Improving Your Credit Score
Joe's Tips for Improving Your Credit Score
Different Credit Scoring Models Explained
Understanding credit scores is essential for taking control of your finances. There are two main credit scoring models that you should know about: FICO and Vantage. Familiarizing yourself with both of these models is crucial as they calculate scores differently.
1. FICO Credit Score
The FICO credit scoring model is the most widely used credit scoring model. With eight FICO models available, each credit report's weight varies, affecting your credit score. When you make a credit application, different lenders will pull a different FICO report. For instance, if you are applying for a home, the mortgage lender will most likely look at your FICO 5 credit report.
2. Why So Many FICO Scores?
Each credit report has a different "weight." The factors of critical importance to a lender have more impact on your credit score than less-important ones. For example, FICO 5 mortgage reports weigh heavily on the individual's previous mortgage history. In comparison, FICO 8 reports, primarily used by credit card companies, are more impacted by previous credit card history. Vantage Score scores are gaining popularity among personal loan and auto lenders.
3. Vantage Credit Score
Developed by the three major credit reporting agencies, Vantage Score is a new credit scoring model compared to FICO, which has been used since the seventies. While it offers a free copy of your credit report, Vantage is not widely used for lending purposes and may not be as accurate as FICO.
4. How Accurate is Vantage Score?
Vantage Score is an accurate credit scoring model. However, its accuracy varies, depending on the credit report it uses. FICO currently dominates the lending sector, and Vantage is only a good way of obtaining a “general idea†of your FICO score. Nonetheless, due to its current reliability, the Vantage scoring model is poised to gain universal adoption in the next 5-10 years, replacing outdated credit scoring models.
In conclusion, credit reporting agencies play an essential role in providing the best scoring data, giving them an upper edge in providing meaningful credit scores. Visiting www.myfico.com gives you better visual representations of your credit scores.
Understanding Good Credit Scores
Both FICO and Vantage models rate credit scores ranging from 350 to 850, where 350 marks the lowest and 850 marks the highest score. It's important to comprehend your standing throughout the course of building your scores to set goals for achieving the best scores possible. Below are significant score thresholds to keep in mind:
620 or below:
Considered bad credit, this score range reveals a negative credit history, high-balance credit card accounts, or a lack of credit cards. To enhance your credit scores, it's crucial to make timely payments and keep ten active revolving credit accounts open. To build credit, secured credit cards like Credit Builder Card and OpenSky Credit Card are recommended. Once you reach the 620 credit score range, you qualify for FHA home mortgages.
640-680:
Fair credit scores, indicate established credit but may have derogatory marks, high balances, or newly opened accounts that statistically drop scores temporarily. An effective strategy is to pay off high balances and avoid opening new accounts.
740+:
Any credit score above 740 marks "super-prime" and entitles the best interest rates for most loans. The elite score category marks excellence in managing credit as only 20% of the American population falls under this criterion. Ensure you keep up with timely payments and maintain your revolving credit card accounts paid for a secure financial future.
What is Considered a Good Credit Score to Qualify for Mortgage Loans?
The minimum required credit score to buy a house depends on the type of mortgage loan you are applying for. The criteria and conditions for different mortgage loans may vary slightly based on federal regulations and government support. There are three popular mortgage loan types: conventional loans, Federal Housing Administration (FHA) loans, and Veterans Affairs (VA) loans.
Conventional Loans
Conventional loans are a popular choice for buyers seeking a savings loan. They do not require you to maintain private mortgage insurance (PMI), which could add to your down payment or monthly payment, but conventional loans typically require credit scores no lower than 640 and a debt-to-debt ratio no higher than 43%. They usually require lower down payment amounts and attract better interest rates than other mortgages.
FHA Loans
An FHA loan could be an option for those with a lower credit score, such as between 580 and 619. However, you should still shop around for a lender and loan program that best suits your financial needs. An FHA loan is costlier as it requires you to keep PMI for at least 11 years. It has a higher debt-to-income limit, up to 50%, and low down payment requirements, usually at 3.5% of the purchase price.
VA Loans
VA loans are available to individuals who have served in the military for at least 181 days or served 90 consecutive days during wartime, or six years with the National Guard. There is no specific credit score requirement, but the VA will look into any previous defaulted loans and government-owed past-due debts. It typically has the best interest rates and does not require down payments. VA loans are an ideal way to honor veterans.
The Importance of Credit History When Buying a Car
When you're in the market for a car, your credit history is the key factor that determines what financing options you qualify for. While a high credit score is important, it's not the only factor that affects the interest rate you'll be charged. Financial institutions will examine your past and current credit history to evaluate the risk involved in lending you money to buy a car. Late payments on past auto loans or repossession put you at a higher risk of credit denial or more stringent terms for loan approval. Credit-challenged borrowers can still qualify for subprime loans; however, these types of loans come with additional criteria, such as higher deposits and fees to the dealership to mitigate any risk associated with the loan default. Dealerships often select cars with higher markups on such loans to cover the extended loan approval fees. Ultimately, having a down payment will help you negotiate better credit terms when purchasing a vehicle.
Credit Score Range for Auto Loans
Although there is no magic number that guarantees approval for a car loan, a credit score above 680 is optimal. Scores below this range usually result in higher interest rates due to the perceived risk to the lender. As this example shows, interest rates increase as credit scores go down:
1. A credit score of 720 or above results in an average of $5,500 paid in interest on the loan.
2. A credit score of 680 or above results in an average of $6,600 paid in interest on the loan.
3. A credit score of 650 or above results in an average of $8,100 paid in interest on the loan.
4. A credit score of 615 or above results in an average of $10,200 paid in interest on the loan.
5. A credit score of 580 or above results in an average of $13,900 paid in interest on the loan.
6. A credit score of 580 or below results in an average of $15,300 paid in interest on the loan.
This data underscores the benefits of a higher credit score, resulting in lower interest payments and ultimately a better credit score.
Tips for Improving Your Credit Score
Improving your credit score is a process that takes time, effort, and patience. Making irrational decisions when building credit can exacerbate problems, so it's important to take a proactive and thoughtful approach. Here are some things you can do right now to help boost your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit makes up 30-35% of your overall credit score, so having several credit cards can help maximize your score. If you have limited credit or need to rebuild your credit, opening a secured credit card like Open Sky or Credit Builder Card can improve your chances of approval. Make sure to pay your balance on time and keep it at $5-$10 per payment. Use the card for small purchases like gas or groceries.
2. Raise your limits
Request a credit limit increase for your credit cards to lower your credit utilization percentage. Each credit card company has different processes, so check your online portal or call the company and request a "Credit Limit Increase." They may require you to fill out some information, including your current income, before deciding whether to approve your request.
3. Pay down your balances
Keeping your balances low and close to zero is critical. You don't have to use your credit cards every month, so only use them for small purchases, and leave a $1-$5 balance on your card when paying your bill. If you have high balances, make a plan to pay them down each month. Limit your credit card usage to avoid high-interest rates and ensure you make progress on paying down your balance.
Joe's Tips for Improving Your Credit Score
We have all faced the challenge of having a less-than-perfect credit score at some point in our lives. However, it is essential to acknowledge your current credit situation and work consistently towards improving it. You can witness significant improvements in your credit score if you prioritize your credit status and invest time and effort into it. Don't fall into the trap of feeling helpless and believing that your bad credit score is permanent. To build a good credit score, you must be willing to work hard and prioritize your spending habits. Start fixing your bad spending behaviors by creating a budget to monitor your finances and keep track of all your expenses. This will directly impact your credit score as well. This article offers valuable insights into credit and how to better understand it. To receive assistance and guidance in repairing your credit score, contact my office at www.asapcreditrepairusa.com.