It's an interesting fact that you might not know, your credit score consists of 30 different levels. The majority of people are unaware of this and might obtain several answers while searching for the best credit score on Google. However, a lot of this information is unclear and can sometimes mislead you, leading you down a path of confusion. My name is Joe Mahlow, and I have been specializing in financial literacy and credit repair for over 15 years. My ultimate goal is to provide you with valuable insights on credit scores, and I have been fortunate enough to help more than twenty thousand clients improve their scores over the years. So, let's dive into the topic of credit scores, and I will offer you some practical guidance to achieve similar results to my clients.
Contents:
What are the various credit scoring models?
Understanding Credit Score Ranges
What Credit Score Do You Need to Buy a House?
Determining What Credit Score You Need to Buy a Car
Tips for Improving Your Credit Score
Insights from Joe
What are the various credit scoring models?
Understanding the different credit scoring models: FICO and Vantage is crucial when calculating your credit score. The FICO model is the most popular and widely used credit scoring model, with eight different FICO models, ranging from FICO 2 to FICO 10. Depending on the lender and the type of credit you're applying for, they will pull a different FICO report. For instance, if you apply for a mortgage, the lender will most likely pull your FICO 5 credit report, and if you apply for a credit card, they would pull your FICO 8 credit report. Each credit report carries a different weight, with critical factors to the lender having a more significant impact on the score, explaining the reason for the number of FICO scores. On the other hand, the three major credit reporting agencies developed the Vantage Score primarily to compete with FICO, although it's gaining popularity in some sectors. While Vantage is accurate, it's not widely used for lending purposes, leading to varying accuracy. However, it provides an idea of the overall score, and as lenders may increase the use of Vantage Score in the future, it's vital to understand its features.
Understanding Credit Score Ranges
Credit scores are essential when applying for a loan or credit card. The FICO and Vantage models use a scale of 350 to 850, with 850 being the best score. To help you understand where you stand when building your scores, here are some critical score thresholds:
Bad Credit - 620 or below:
This range indicates adverse credit history, high balance credit card accounts, or no credit cards at all. If you want to improve your credit scores, make timely payments and have ten active revolving credit accounts open. Consider using Credit Builder Card or OpenSky Credit Card to build your credit. Once you reach a 620 credit score range, you will qualify for an FHA home mortgage.
Fair Credit - 640-680:
Scores in this range indicate established credit, but you may have derogatory marks or accounts, high balances on your credit cards, or newly opened accounts, which can temporarily drop your scores.
Super-Prime Credit - 740+:
Any credit score over 740 is considered "super-prime" and gives you the best interest rates for most loans. You are among the 20% of the US population with this score. Always pay your accounts on time, and keep your revolving credit card accounts paid, and you will remain in great shape!
What Credit Score Do You Need to Buy a House?
The credit score required for buying a house is determined by the mortgage loan you are applying for. All mortgage loans have specific guidelines that include a list of requirements due to federal regulation and government backing. Overall, there are three primary types of mortgage loans that you can choose from: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most common and best savings loan option aside from VA loans. Unlike other mortgage loans, conventional loans do not require you to have private mortgage insurance (PMI), which can increase your monthly payment and down payment. Conventional loans have lower down payment requirements and interest rates compared to other mortgage loans. The minimum credit score required is 640, and the debt-to-income ratio should not exceed 43%.
FHA Loan
The FHA loan is designed for lower credit scores, usually ranging from 580 to 619. However, each loan program is unique, so you must shop around for different lenders to secure the best financial option for yourself. FHA loans require PMI for at least 11 years, adding an extra cost to your mortgage. The maximum debt-to-income limit is set to 50%, giving you the chance to purchase more homes than with a conventional loan if you have a lower income. The down payment requirements for FHA loans are as low as 3.5% of the purchase price, which is helpful if you don't have enough money to pay for a conventional loan. However, FHA loans usually have higher interest rates.
VA Loan
The VA loan does not have a set credit score requirement, but they take into account if you have defaulted loans or any government-owed debts when pre-qualifying you. To qualify for a VA loan, you need to have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse must have lost their life during active duty. VA loans offer the best interest rates, and they don't usually require a down payment. Many people prefer VA loans since they provide great support to veterans.
Determining What Credit Score You Need to Buy a Car
When you are planning on buying a car, your credit history plays a bigger role in determining your loan eligibility than your credit score. Even though having a higher credit score is still vital, it affects the interest rate you will qualify for less. Lenders consider your past and present credit histories to evaluate how risky it would be to extend credit to you if you have credit issues. For example, someone who has been late on a previous or current automobile loan or has had repossessions may find it more challenging to get loan approval than someone who has not. Hardship financing or special financial institutions will approve almost anyone for a car loan, even those who have experienced repossessions, but they will impose specific approval requirements such as a higher down payment and additional dealership fees. Believe it or not, the dealerships must pay the fee to help minimize the risk of you defaulting on the loan and approve your request for the loan. You may have experienced this yourself if you have bad credit and have gone to a dealership where they will only approve you for a specific vehicle because they have a higher markup on that particular car to cover the fee. Lastly, having equity or a down payment gives you more leverage when buying a vehicle on credit.
Credit Score Requirements for a New Car Purchase
Again, there is no precise credit score that will indicate your loan approval because many factors determine it. However, a credit score of at least 680 is desirable. Anything lower than this score can increase the interest rate charged to you due to your risk level. Below is an example of how credit score affects how much interest you pay on your loan:
- A person with a credit score of 720 or more pays, on average, $5,500 in interest on a loan.
- A person with a credit score of 680 or more pays, on average, $6,600 in interest on a loan.
- A person with a credit score of 650 or more pays, on average, $8,100 in interest on a loan.
- A person with a credit score of 615 or more pays, on average, $10,200 in interest on a loan.
- A person with a credit score of 580 or more pays, on average, $13,900 in interest on a loan.
- A person with a credit score of more than 580 pays, on average, $15,300 in interest on a loan.
This data shows the correlation between credit scores and interest rates, with higher credit scores indicating lower interest rates and affecting your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score is a gradual process that requires patience. However, there are several things you can do right now to help boost your credit. Here are some tips:
1. Open 3-5 Revolving Credit Accounts (Credit Cards):
Revolving credit is an effective way to increase your credit scores quickly. A secured credit card that focuses on your payment history instead of your credit score can be an excellent option for someone with limited credit or looking to rebuild their credit. Make sure to pay your balance on time and keep it at $5-10 each time you make a payment. Also, limit the use of the card to small purchases.
2. Raise Your Limits:
Requesting a credit limit increase for your credit cards can help raise your overall credit limits and lower your credit utilization percentage. Each credit card company has a different process. You can either do it online through your account or by calling their customer service.
3. Pay down Your Balances:
Keeping your balance low and close to zero is crucial. If you have high balances, make a game plan to pay them down gradually. At the same time, leave about a $1-5 balance on your credit cards to maintain good credit.
- Open 3-5 Revolving Credit Accounts (Credit Cards): Revolving credit is an effective way to increase your credit scores quickly. A secured credit card that focuses on your payment history instead of your credit score can be an excellent option for someone with limited credit or looking to rebuild their credit. Make sure to pay your balance on time and keep it at $5-10 each time you make a payment. Also, limit the use of the card to small purchases.
- Raise Your Limits: Requesting a credit limit increase for your credit cards can help raise your overall credit limits and lower your credit utilization percentage. Each credit card company has a different process. You can either do it online through your account or by calling their customer service.
- Pay down Your Balances: Keeping your balance low and close to zero is crucial. If you have high balances, make a game plan to pay them down gradually. At the same time, leave about a $1-5 balance on your credit cards to maintain good credit.
Remember to limit your credit card usage, so you don't run up balances that you can't afford to pay off. Building good credit takes time, and you should avoid making impulsive decisions with your credit that could worsen your problems.
Insights from Joe
We have all faced times of struggling with our credit score. But if you take a sincere approach towards your current credit situation and invest time and effort in improving yourself and your credit score, you will witness an enormous transformation in a matter of time. Usually, people with low credit scores get trapped in the cycle of bad credit all their lives and assume that it's impossible to attain good credit again. However, to develop excellent credit, you need to put in a lot of work, and those who prioritize their credit and strive towards ameliorating their spending habits will succeed. Begin by creating a budget and address any bad spending habits, and you will see improvements in your credit score. This write-up aims towards bolstering your comprehension of credit. In case you require assistance in repairing your credit score or getting guidance, feel free to contact my office at www.asapcreditrepairusa.com.
Bullet points:
- Invest time and effort in improving your credit score
- Develop excellent credit by putting in substantial work
- Prioritize your credit and strive towards ameliorating your spending habits
- Begin by creating a budget
- Contact Joe's office at www.asapcreditrepairusa.com for help with credit repair and guidance.