There are actually 30 different levels of credit scores, but most people are not aware of this fact. When searching for the best credit score online, answers from different sources can be conflicting and even overwhelming. It's not uncommon for people to get lost in the sea of confusing and misleading information. As someone with over fifteen years of experience in financial literacy and credit repair, my name is Joe Mahlow, and my goal is to provide you with honest and unbiased advice on various topics. Today, we'll dive into the topic of credit scores. Thanks to my help, over twenty thousand clients have transformed their credit scores, and I'm excited to share valuable information with you so that you can do the same. So let's get started!
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
Understanding Credit Scores
What Credit Score is Necessary for Purchasing a House
Determining the Credit Score Required to Purchase a Car
Tips for Improving Your Credit Score
Tips From Joe to Improve Your Credit Score
Different Types of Credit Scores: Understanding FICO and Vantage Models
When it comes to credit scoring, there are two primary models: FICO and Vantage. It’s important to have a thorough understanding of both, particularly with regard to how they calculate credit scores.
1. FICO Credit Score
The FICO model is the most widely used model in the lending industry. There are 8 different FICO models that lenders could use for calculating credit scores, from FICO 2 to FICO 10, depending on the credit report. Although this can be confusing, the reason for the variety is to ensure that each lender receives the most appropriate credit information.
Different FICO scores are used for different types of credit applications, such as a FICO 5 mortgage report for applying for a home loan or FICO 8 credit report for a credit card. This is because different lenders weigh the importance of specific factors differently.
2. Vantage Credit Score
The Vantage model is a newer model that was developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion. Although it is not as common in the lending industry as FICO yet, it has gained popularity in some sectors, such as personal loans and auto lending. Many credit monitoring websites offer a free copy of your Vantage credit report.
While it is accurate, the Vantage score is not widely used for lending purposes, so it may not give you an accurate idea of your actual lending score. However, it can provide a good overall idea of your credit score.
In conclusion, as credit reporting agencies continue to explore new data collection and analytical tools, it is safe to assume that lending institutions will begin to rely more heavily on the Vantage model. Nonetheless, the FICO model continues to offer an accurate representation of the credit scoring system as it stands today.
Understanding Credit Scores
Credit scores are measured on a scale of 350 to 850 for both the FICO and Vantage models. The higher the score, the better, with 850 considered the best and 350 the worst possible score. It's essential to have a clear understanding of what score is considered good or bad as you work towards improving your score. Here are some critical score thresholds to keep in mind:
Credit Score of 620 or below
If your credit score falls in this range, it's considered poor, and it’s likely that you have a negative credit history, high-balance credit cards, or no credit cards at all. To help improve your score, aim to make timely payments and keep at least ten active revolving credit accounts open. Consider using secured credit cards like the Credit Builder Card or OpenSky Credit Card to begin rebuilding your score. Once your score reaches 620, you'll start to qualify for an FHA home mortgage.
Credit Score between 640-680
If your score falls in this range, it's considered fair for good credit. It means you've established credit, but you may have some derogatory marks on your credit or high balances on your credit cards that you need to pay down. Temporary drops in your score may also occur if you open a new account, be sure to maintain your timely payment and overall credit usage.
Credit Score of 740 or above
A score over 740 is considered "super-prime" and the best possible score. This score will qualify you for the best interest rates on most loans. If you've achieved a score of 740 or above, congratulations! You are among the top 20% of the US population. To maintain your status, always pay your accounts on time and keep your revolving credit card accounts paid. By doing so, you’ll continue to be in great shape!
What Credit Score is Necessary for Purchasing a House
The minimum credit score required to buy a house will depend on the type of mortgage loan you choose. Various types of mortgage loans have different requirements and guidelines set by federal regulation and government backing. These differences revolve around conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most prevalent loans and an ideal “savings†loan option (outside of the VA loan). With conventional loans, there is generally no need to maintain private mortgage insurance (PMI) which can be a supplementary cost that increases your down payment or monthly payment. PMI protects the lender when payments on your loan are stopped. Generally, conventional loans have lower down payment requirements and better interest rates compared to other mortgage loans. The typical credit score requirement for a conventional mortgage loan is 640, with a debt-to-debt ratio not exceeding 43%.
FHA Loans
FHA mortgage loans are obtainable for those with lower credit scores between 580 and 619. Note that each loan program is unique, so if you are within the credit score limits, it is always best to shop around for different lenders that provide the optimal financial option for you. FHA loans often demand that you keep PMI for at least 11 years, adding a cost to your mortgage to be given serious consideration, especially if you're on a budget. This loan has a higher debt-to-income limit, up to 50%, which allows you to buy more houses than you would be able to with a conventional loan if your income is lower. Lastly, the down payment requirements for an FHA loan are as low as 3.5% of the purchase price. This could enable you to get into a mortgage with less money out of pocket than a conventional loan; however, you will typically have a higher interest rate.
VA Loans
In a technical sense, there is no credit score requirement with the VA loan, but they will look for past-due debts owed to the government and any defaulted loans when pre-qualifying you. To qualify for the VA loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years in the National Guard, or have had a spouse in the military who lost their lives during active duty. The VA loan usually has the best interest rates available compared to other mortgage loans, and down payment is generally not required. I adore the VA loan since I think it is a fantastic way to give back to our veterans.
Determining the Credit Score Required to Purchase a Car
When it comes to buying a car, having a good credit history is more important than simply having a high credit score. While a better credit score is advantageous, the interest rate you'll qualify for is determined by your credit history. Before agreeing to extend credit, lenders scrutinize your current and past credit records to assess the risk associated with it. For instance, if someone has a record of missing payments or loan defaults, obtaining loan approval will be more difficult. Special finance or subprime lenders may approve anyone for a loan but add certain qualifying criteria such as a higher down payment or dealership fees to mitigate risk. Surprisingly, dealerships often have to pay a fee before approving loans to customers. If you have poor credit and have dealt with dealerships, you may have experienced this as the dealerships' vehicle recommendations might have a higher markup to cover the extra fee. Also, making a down payment will give you greater leverage in purchasing a vehicle on credit.
New Car Credit Score Range
Although there is no precise credit score required for loan approval, underwriters consider various factors, including the above-mentioned credit history. A credit score over 680 is desirable, with scores less than this increasing the lender's perceived risk and potentially leading to higher interest rates. The examples below show how credit scores will dictate the interest charged on a loan. A credit score of 720 or more will cost around $5500 in interest on average, while a score of 680 or above will result in interest rates of about $6600. In contrast, scores of 580 and above can mean interest payments ranging from $13,900 to $15,300 depending on the score. As a result, a higher credit score implies lower interest rate payments, which eventually lowers the overall credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time and effort. It's essential to build it gradually and avoid making impulsive decisions that can have negative consequences. Here's what you can do right now to improve your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit offers an excellent opportunity to boost your credit score quickly. Start with a secured credit card that doesn't focus on your credit score, such as Open Sky or Credit Builder Card. Revolving credit makes up 30-35% of your overall credit score, so make sure to pay your balance on time and keep it between $5-$10.
2. Raise Your Limits
Requesting a credit limit increase is a quick and easy way to increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase," and they will decide if they are open to it. Each credit card company has different processes, and it typically requires 7-15 months of excellent payment history on a credit card.
3. Pay Down Your Balances
Keeping your balance low is essential. Try only to use your credit cards for small purchases and leave a $1-$5 balance on them each month. If you have high balances and are struggling to pay them off, create a plan to pay down your balance slowly each month. Your credit card spending habits play a massive role in your overall credit score, so make sure to limit your credit card usage. Most importantly, avoid running your balance back up.
Tips From Joe to Improve Your Credit Score
We have all faced tough times with our credit at some point in our lives. However, it is important to take your credit situation seriously and invest time and effort into improving it. Many people believe that having good credit is impossible, especially after experiencing a cycle of poor credit. Nonetheless, developing great credit requires consistent hard work, and those who choose to prioritize it and focus on responsible spending will reap the benefits. Here are some steps to take:
- Develop a budget to manage your finances effectively
- Work on improving your spending habits, which will have a positive impact on your credit score
If you are looking for additional guidance and support with your credit score or need credit repair assistance, please visit our website at www.asapcreditrepairusa.com.