It might surprise you to learn that your credit score can actually fall into one of 30 different levels. This is an important fact that many people are unaware of when they search for information about credit scores online. Unfortunately, finding reliable information on this topic can be tricky, as there is often contradictory advice and confusing jargon to navigate. That's where I come in - my name is Joe Mahlow and I've been working in the financial literacy and credit repair industries for over 15 years. It's my mission to cut through the noise and present you with clear, actionable advice. Over the years, I've helped more than 20,000 clients transform their credit scores, and I'm here to pass my expertise on to you. So, let's dive in!
Contents:
Understanding Credit Scores: FICO and Vantage Models
Determining a Good Credit Score
Understanding Credit Score Requirements for Home Buying
Credit Score and Its Effect on Car Purchase
What can I do to Increase my Credit Score?
Joe's Insights on Rebuilding Your Credit
Understanding Credit Scores: FICO and Vantage Models
Credit scores play a crucial role in various financial activities, such as applying for a loan or mortgage. Two types of credit scoring models exist: FICO and Vantage scoring models. To understand credit scores effectively, you need to have a clear understanding of these models and how they calculate credit scores.
FICO Credit Score
FICO credit scoring models are designed for specific lending purposes. With eight different FICO models, ranging from FICO 2 to FICO 10, you can receive different credit scores dependent on your credit report. Each lender uses a separate FICO report based on the type of loan or credit you are applying for. For example, a mortgage lender will likely pull your FICO 5 credit report, while a credit card company will use FICO 8.
Additional factors unique to different lending types are taken into account when calculated with FICO scoring models. Previous mortgage or auto history will have more impact on your score than other factors. Using a personal finance website such as myfico.com can help you track your various FICO scores.
Vantage Credit Score
Vantage Score models are a credit scoring model that seeks to compete with the FICO model. Developed by the three major credit reporting agencies (Equifax, TransUnion, and Experian), the Vantage Score is a relatively new scoring model compared to the FICO model. Due to being less widely used in lending, Vantage is more often used by credit monitoring websites and is regarded as a generalized way to understand one's credit score.
However, the Vantage Score is seen as increasingly credible, particularly in areas like personal loans and auto lending, and could become more prevalent in the coming years. In contrast, FICO scores are viewed by some as outdated and unrepresentative. As credit reporting agencies are a key source of data for both models, they hold a vital role in providing the best scoring information available.
Determining a Good Credit Score
The FICO and Vantage scoring models use a 350 to 850 score range where 350 represents the worst credit score, while 850 is the best credit score. When aiming to achieve a high score, it's crucial to understand your standing in the journey towards building a good credit score. Here are some crucial score thresholds to assist you:
1. 620 or below:
Falling into this category means you have bad credit, and chances are you have an unfavorable credit history, high balance credit card accounts, or no credit card at all. The best way to improve credit scores is to make timely payments and open ten active revolving credit accounts. The Credit Builder Card and OpenSky Credit Card are recommended secured credit cards that can help you build your credit. Achieving 620 credit score opens doors to qualify for an FHA home mortgage.
2. 640-680:
This category is considered fair credit. Falling within this range means you have established credit but may have some derogatory marks and high balances on your credit card that you need to pay down. Newly opened accounts are common and can temporarily affect your scores but will return shortly.
3. 740+:
Any credit score over 740 classifies as "super-prime" and gives you the best interest rates for most loans. If you fall under this category, congratulations! You belong to the top 20% of the US population with good credit scores, indicating that you pay off your accounts on time and keep your revolving credit card accounts paid. Keep up the great work!
Understanding Credit Score Requirements for Home Buying
Credit score requirements for buying a house depend on the type of mortgage loan you are looking for. Federal regulations and government backing ensure that the requirements for mortgage loans remain similar but could differ slightly. Here are the three most common types of mortgage loans.
1. Conventional Loans
Conventional loans are the most popular and affordable ones, outside of VA loans. This loan option does not require you to maintain private mortgage insurance (PMI), which means you won't have to pay anything extra to secure your loan if you stop making payments. Furthermore, conventional loans have a lower downpayment requirement and better interest rates than other types of mortgages. To qualify, you need a credit score of at least 640 and a debt-to-income ratio lower than 43%.
2. FHA Loan
FHA loans are mainly for those with a credit score of 580 to 619. While different loan programs may vary, ensure to shop around for lenders that offer the best deal within your credit score limit. This loan could keep you paying PMI for up to 11 years, adding extra cost towards your mortgage. However, with a debt-to-income limit of up to 50%, you can afford to purchase more homes than a conventional loan, especially with a lower income. The downpayment requirements are as little as 3.5% of the value of the house. However, interest rates are critical with this option, as you may have to pay more.
3. VA Loan
The VA loan does not have a minimum credit score requirement. However, you may be prequalified with factors such as defaulted loans or any government-owed past-due debts. If you have served in the United States military, either 181 days or served 90 consecutive days during wartime, then you could qualify. The VA loan offers the best interest rates, and in some cases, you may not need a down payment. The VA Loan is an attractive option, especially for veterans.
Credit Score and Its Effect on Car Purchase
When purchasing a car, credit history holds more weight than credit score, although a good score is still crucial. It determines the interest rate, affecting loan approval and terms. Late payment and repossession on previous loans negatively impact the chances of getting approved. Even with bad credit, subprime lenders are willing to offer loans but under specific criteria, such as a higher down payment and dealership fees. Having equity or a downpayment increases the leverage when buying on credit.
Credit Score Range for Buying a Car
Although many factors affect loan approval, a score over 680 is ideal for getting the best interest rates. A lower score increases the interest rate due to the risk to the lender. The table below shows the correlation between credit score and interest rate:
1. 720 and above: average interest on a loan of $5,500
2. Between 680-719: average interest on a loan of $6,600
3. Between 650-679: average interest on a loan of $8,100
4. Between 615-649: average interest on a loan of $10,200
5. Between 580-614: average interest on a loan of $13,900
6. 579 and below: average interest on a loan of $15,300
As seen from the data, a higher credit score significantly reduces the interest rate, ultimately affecting the overall score.
What can I do to increase my credit score?
Increasing your credit score may seem daunting, but there are many simple steps you can take to make it happen. Keep in mind that building good credit takes time, and it won't happen overnight. Being patient is crucial, as making rash decisions with your credit can only make your situation worse.
Here are a few things you can do right now to start improving your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit is one of the best ways to maximize your credit scores. This is especially true if you have limited credit or are looking to rebuild your credit. It may be challenging to build credit by obtaining a large loan, so securing a credit card is a viable option. You can start with a secured credit card like Open Sky or Credit Builder Card. These options focus more on your ability to pay your credit card on time rather than your credit score. Revolving credit makes up 30-35% of your overall credit score and can help you build your credit score quickly. Making sure you pay your balance on time and keeping it between $5-$10 each time you make a payment is the most crucial aspect of building good credit.
2. Increase your credit card limits:
Requesting a credit limit increase for your active revolving credit accounts can help increase your total credit limits and lower your credit utilization percentage. High credit card balances exceeding 30% of your overall limit can hurt your credit score. You can raise your credit limits by contacting your credit card company. It is recommended to have 7-15 months of excellent payment history before requesting an increase.
3. Pay down your balances:
Keeping your balance low and close to zero is vital. You may choose not to use your credit cards each month; small purchases are ideal. Leave a balance of around $1-$5 on your credit cards when paying your bills each month. If you have high balances and can't afford to pay them off, allocate a percentage of your paycheck each month to pay them down. Remember to avoid running up your balances immediately after paying them off. It's essential to limit your credit card usage, as credit card interest rates are usually high, and most of your payments will go toward interest, not the principal amount.
Joe's Insights on Rebuilding Your Credit
No one is immune to having poor credit. However, if you take your current credit situation seriously and commit time and effort to self-improvement and credit repair, you will witness significant improvements in your credit score rather quickly. Many consumers with bad credit feel trapped in a never-ending cycle of credit issues, believing that restoring their credit to good standing is impossible. But building great credit takes effort, and those who prioritize their credit and spending habits come out on top. Begin by tracking your expenses and addressing any negative spending behaviors; this will inevitably reflect positively in your credit score. Seeking guidance and support for your credit needs, including repair, can start by visiting my office at www.asapcreditrepairusa.com.