It may come as a surprise, but your credit score isn't just a single value. There are actually 30 different levels of credit scores that exist. This can be a confusing topic, especially when searching for the best credit score on Google. Unfortunately, misleading information can lead you down a dark rabbit hole. My name is Joe Mahlow, and I have spent more than fifteen years in the financial literacy and credit repair industry. My aim is to provide you with honest advice on various topics, including credit scores. With my guidance, I have been able to transform the credit scores of over twenty thousand clients. So, let me help you understand the complexities of credit scores and hopefully make a tremendous impact on your financial health. Let's dive in!
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
Guide to Understanding Credit Scores
What is a Suitable Credit Score to Purchase a House?
Determining Your Credit Score for Buying a Car
Tips on Improving Your Credit Score
Advice from Joe
Different Types of Credit Scores: Understanding FICO and Vantage Models
Credit scores play a crucial role in determining financial well-being. Two credit scoring models that one needs to be aware of are the FICO and Vantage models. FICO, with eight different models ranging from FICO 2 to FICO 10, is the most popular and widely used scoring model. Different lenders pull different FICO reports depending on the type of credit you apply for. For instance, if you are applying for a home, the mortgage lender will most likely pull your FICO 5 report, whereas, for a credit card, it could be FICO 8. Each FICO score has a different weight, meaning that features crucial to the lender will impact your credit score more than the less important ones. On the other hand, the three major credit reporting agencies developed Vantage Score to compete with FICO. The Vantage model is relatively new and currently gaining popularity in sectors like personal loans and auto lending. As it stands, FICO dominates the lending sector, and the Vantage score is not widely used for lending purposes. Nonetheless, the Vantage score is an accurate general idea of one's FICO score.
Guide to Understanding Credit Scores
Having a good credit score is essential when applying for loans or credit cards. Credit scores range from 350 to 850 for both FICO and Vantage models. A score of 350 indicates the worst credit score, while a score of 850 is the best. Here are some score thresholds to give you an idea of where you stand and how to improve your credit:
620 or below
A credit score below 620 is considered poor credit, indicating adverse credit history, high-balance credit card accounts, or a lack of credit cards. To improve your score, make timely payments and have at least ten active revolving credit accounts open. Consider applying for secured credit cards like the Credit Builder or OpenSky to build your credit. Once your score reaches 620, you can qualify for an FHA home mortgage.
640-680
A credit score in this range means you have established credit, but there may be some derogatory marks or accounts, and you may have high balances on your credit cards that you will need to pay down. Recently opened accounts can also temporarily drop your score. Pay your accounts on time, and your scores will return.
740+
Any score over 740 is considered "super-prime" and will grant you the best interest rates for most loans. Congratulations if you have this score, as only 20% of the US population has it. Keep up the great work of paying your accounts on time and maintaining your revolving credit accounts paid. You will be in good condition!
What is a Suitable Credit Score to Purchase a House?
The appropriate credit score to buy a house will depend on the mortgage loan type you want to qualify for. Mortgage loan requirements and guidelines are typically similar or different based on federal regulation and government backing. Some of the common mortgage loan types include Conventional loans, FHA Loans, and VA Loans.
1. Conventional Loans
These are the most popular loans and typically the best option for savings outside the VA loan. Conventional loans do not require borrowers to maintain PMI, which can be a significant cost that can increase downpayment or monthly payments. PMI safeguards the lender if you stop making payments on your loan. Conventional loans usually have lower downpayment requirements and better interest rates than other mortgage loans. The typical credit score requirement for conventional mortgage loans is 640, while the maximum debt-to-debt ratio is usually 43%.
2. FHA Loan
The FHA mortgage loan is ideal for people with lower credit scores, usually between 580 and 619. However, since different loan programs have different requirements, it is essential to shop around for different lenders that offer the most excellent financial option for you if you are within the credit score limits. FHA loans typically require borrowers to keep PMI for at least 11 years, which may be an added cost to your mortgage, especially if you're on a budget. This loan type generally has a higher debt-to-income limit, often up to 50%, allowing you to purchase more homes than with a conventional loan if your income is low. While the downpayment requirements on an FHA loan are low, as low as 3.5% of the purchase, the interest rates are usually higher.
3. VA Loan
While there is technically no credit score requirement for the VA loan, the pre-qualification process focuses on the borrower's previous defaulted loans and any past-due debts owed to the government. The eligibility requirements for VA loans include having served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was in the military and lost their life during active duty. VA loans have the best interest rates on the market and usually do not require a downpayment. The VA loan option is an excellent way to give back to our veterans.
Determining Your Credit Score for Buying a Car
When it comes to buying a car, your credit history is more important than your credit score. While having a good credit score is helpful, it's your credit history that plays a large role in determining the interest rate you'll qualify for. When you apply for a car loan, lenders will look at your credit histories to assess the risk involved in extending credit. Late payments on previous auto loans or repossession can make it tough to get approved for a loan. However, even if you have bad credit or have experienced a repossession, specialized finance lenders may still qualify you for a car loan with certain requirements, such as a higher down payment or additional fees. Keep in mind that the dealership may have to pay a fee to cover the risk of you defaulting on the loan, which results in a higher markup on the car you're approved for.
In terms of credit score
There's no magic number that guarantees approval for a car loan. Generally, a credit score over 680 is desirable, but a score below this threshold can lead to higher interest rates. The amount of interest you pay is more about your credit score than the overall interest rate. For example, someone with a credit score of 720 or above will pay an average of $5,500 in interest on a loan, while someone with a score of 580 or above will pay an average of $15,300 in interest. The higher your credit score, the less interest you'll pay, which impacts your overall credit score.
Tips on Improving Your Credit Score
Improving your credit score takes time and patience. Although it can be tempting to make impulsive decisions with your credit, it is essential to remain calm and make calculated moves. Here are some immediate steps you can take to improve your credit score:
Open 3-5 revolving credit accounts
Revolving credit accounts like credit cards are an excellent way to maximize your credit score. Particularly, for individuals with limited credit or looking to rebuild their credit, obtaining a large loan can be challenging. Open a secured credit card like Open Sky or Credit Builder Card that focuses more on your ability to pay on time than your credit score. It usually takes 2-4 months to show improvement in your credit score through revolving credit. Remember to keep a balance of $5-10 each time you make a payment and pay your balance on time. Limit the usage of your card to small purchases like groceries or gas.
Raise Your Limits
Request a credit limit increase for your revolving credit accounts. Each credit card company has a different process, so call your credit card company to request a “Credit Limit Increase.†Typically, the company looks for outstanding payment history for 7-15 months on a credit card before offering a credit limit increase. This increases your overall credit limit and decreases your credit utilization percentage.
Pay down your balances
Keep your balance low and close to zero by using your credit card only for small purchases. Leave a $1-5 balance on your credit cards when paying your bill each month. Create a game plan to pay credit cards down if you currently have high balances. Limit your credit card usage since your credit card habits will impact your overall credit score. Additionally, credit card rates are considerably high, and most payments go towards interest and not principal.
Advice from Joe
It's common to have poor credit at some point in life, but it's crucial to take it seriously and put in the effort to improve. Many people with bad credit get stuck in a cycle that they believe is impossible to break out of. However, developing an excellent credit score requires hard work and prioritizing credit. Start by creating a budget and correcting any unhealthy spending patterns. This will have a direct impact on your credit score. If you need assistance with credit repair or guidance on improving your credit score, contact my office at www.asapcreditrepairusa.com. This article aims to enhance your understanding of credit.
To sum up:
Poor credit is common but requires effort to improve
Fixing your spending habits reflects positively on your credit score
Prioritizing credit is essential for gaining a good score
Contact Joe's office at www.asapcreditrepairusa.com for credit repair assistance