It may surprise you to learn that there are actually 30 different levels of credit scores available to consumers. Despite a wealth of information on this topic available online, it's easy to feel overwhelmed by the sheer volume of conflicting advice and misleading tips. Fortunately, I'm here to help. My name is Joe Mahlow, and I've spent the past 15 years working in the financial literacy and credit repair industry. Through the course of my career, I've helped more than 20,000 people improve their credit scores, and I'm eager to share my knowledge with you. So, let's dive in and explore what you need to know about credit scores.
Contents:
Types of Credit Scores
Understanding Credit Scores: The Good, the Fair, and the Super-Prime
What is Considered a Good Credit Score to Purchase a Home?
The Importance of Credit History When Buying a Car
Tips for Improving Your Credit Score
Joe’s Reflection
Types of Credit Scores
There are two main credit scoring models: the FICO model and the Vantage model. It is important to understand the differences between these two models and how they calculate your credit score.
FICO Credit Score
The FICO model is the most widely used credit scoring model, with eight different FICO models ranging from FICO 2 to FICO 10. Each FICO model will give you a different credit score depending on your credit report. This is because your credit score is calculated based on the specific factors that are relevant to the lender. For example, if you are applying for a mortgage, the lender will most likely pull your FICO 5 credit report, which places a heavy emphasis on your mortgage payment history.
Why So Many FICO Scores?
Lenders use different FICO models to calculate credit scores because each credit report has a different "weight." Factors critical to the lender will have a more significant impact on a credit score than less important ones. For example, credit card companies primarily use the FICO 8 report, which places greater importance on your credit card payment history. Auto lenders typically use FICO-2 reports, which weigh your previous auto history more heavily than other factors.
Vantage Credit Score
The Vantage Score is a newer credit scoring model developed by the three major credit reporting agencies to compete with the FICO model. While not as widely used as FICO, Vantage Scores are used by credit monitoring websites throughout the US to provide free credit reports. The Vantage model is gaining popularity in some sectors, such as personal loans and auto lending.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, its usefulness depends on context. Since FICO is the most recognized credit scoring model, Vantage may not be as accurate for actual lending purposes. However, the Vantage Score can still give you a general idea of your FICO score. As lenders increasingly adopt the Vantage model, it may become a more accurate predictor of creditworthiness in the future.
Understanding Credit Scores: The Good, the Fair, and the Super-Prime
Credit scores can be measured through either FICO or Vantage models, both of which range from 350 to 850. The higher the credit score, the better and more promising your creditworthiness is. Here are some helpful score thresholds you should aim for:
620 or below
If your score is 620 or below, you have bad credit and may have some adverse credit history, high-balance credit card accounts, or no credit cards at all. The key to improving your score is to pay your debts on time and have ten active revolving credit accounts open. Secured credit cards like Credit Builder Card or OpenSky Credit Card can help you build your credit. With a credit score of 620, you can qualify for an FHA home mortgage.
640-680
This score range indicates fair to good credit. You've already established some credit, but you may have derogatory marks on your credit or accounts with high balances that you need to pay off. You may also have newly opened accounts that can cause temporary drops in your score, so don't panic. Your score will eventually bounce back.
740+
If you have a credit score of 740 or higher, congratulations! You are part of the 20% of the US population with a "super-prime" score and enjoy the absolute best interest rates for most loans. Keep up the good work by paying your debts on time and maintaining your revolving credit card accounts.
What is Considered a Good Credit Score to Purchase a Home?
When it comes to determining whether your credit score is good enough to obtain a mortgage loan, it depends on the type of loan you are interested in. Federal regulations and government backing usually result in the requirements and guidelines for most mortgage loans being similar, if not the same. The three most popular mortgage loan types are conventional, FHA, and VA loans.
Conventional Loans
Of these three types of loans, conventional loans are perhaps the most preferred option. They come with lower downpayment requirements and generally have better interest rates than other mortgages. You don't need to pay for private mortgage insurance (PMI) with conventional loans, an expense that can add to your monthly payment. Conventional mortgage lenders typically require a minimum credit score of 640 and a maximum debt-to-debt ratio of 43 percent.
FHA Loan
The FHA loan is usually the best option for those with lower credit scores, ranging from 580 to 619. However, it's important to note that all loan programs are different, so be sure to shop around for different lenders to find the best option for you. With an FHA loan, you are required to keep PMI for at least 11 years, which can increase your costs and affect your budget. However, you can purchase homes worth more than what you can afford through a conventional loan with a higher debt-to-income limit of up to 50 percent. FHA loans have lower downpayment requirements, typically only 3.5 percent of the purchase, which can be more affordable than conventional loans, but you'll need to pay a higher interest rate.
VA Loan
For a VA loan, there isn't a minimum credit score requirement. However, lenders will assess your previous defaulted loans and any past-due debts owed to the government during the pre-qualification process. To be eligible for a VA loan, you must have served in the U.S. military or National Guard for a minimum of 181 days or 90 consecutive days during wartime. Alternatively, spouses of military veterans who lost their lives during active duty are also eligible. VA loans typically offer the lowest interest rates and do not require a down payment, making them an ideal choice for eligible veterans.
The Importance of Credit History When Buying a Car
When purchasing a car, besides the obvious benefit of having good credit, your credit history is the most significant factor that determines your eligibility for a loan. Although a high credit score is crucial, it only plays a minor role in the interest rate you qualify for. When applying for a car loan and having credit problems, the lender will examine your previous and current credit histories to determine the risk associated with extending credit. If you have been late on a previous auto loan or have a repossession, getting approved for a loan will be challenging. If your credit is terrible, subprime or special finance lenders will qualify almost anyone for a car loan, but they will set specific criteria for approval, such as a larger down payment and additional fees to offset the default risk. Dealerships have to pay a fee to get you approved for a loan, so they may charge a higher selling price for the car. Finally, having equity or a down payment can give you more leverage when seeking a vehicle on credit.
What Credit Score Range is Needed to Buy a New Car?
As mentioned earlier, there is no exact credit score that guarantees you approval for a car loan, as numerous factors are taken into account. However, a credit score above 680 is considered ideal. If your score falls below this, it can increase the interest rates charged due to the risk you represent to the lender. Here is an example demonstrating how interest rates are determined based on credit scores:
A person with a credit score of 720 or above will pay, on average, $5,500 in interest on a loan.
A person with a credit score of 680 or above will pay, on average, $6,600 in interest on a loan.
A person with a credit score of 650 or above will pay, on average, $8,100 in interest on a loan.
A person with a credit score of 615 or above will pay, on average, $10,200 in interest on a loan.
A person with a credit score of 580 or above will pay, on average, $13,900 in interest on a loan.
A person with a credit score of 580 or above will pay, on average, $15,300 in interest on a loan.
The data above clearly indicates that the higher your credit score, the less interest you will pay, which affects your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score is a journey that requires patience and effort. It is important to remember that good credit score building takes time and is not achieved overnight. If you rush the process, you may end up making poor decisions that could worsen your financial situation.
Here are some steps you can take to improve your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit makes up a significant portion (approximately 30-35%) of your overall credit score. It is one of the best options to help build and maximize your credit score, especially if you have limited credit history or are looking to rebuild your credit. Start with a secured credit card, such as Open Sky or Credit Builder Card, which focuses on your ability to pay the card on time instead of your credit score. Use the credit card for small purchases, such as gas or groceries, and keep your balance at $5-$10 each time you make a payment.
2. Raise your credit limits
Requesting a credit limit increase for your active revolving credit card accounts can help increase your overall credit limits and lower your credit utilization percentage. This can positively impact your credit score as having high credit card balances compared to your overall limits can negatively affect it. Contact your credit card company and submit a request for a credit limit increase. They may require you to fill out a form with your current income and payment history.
3. Pay down your balances
Keeping your balance low and close to zero is critical. Use your credit cards for small purchases and leave a balance of $1-$5 each month. If you have high balances and cannot pay them off completely, create a repayment plan and allocate a percentage of your paycheck each month to pay off the debt. Limit your credit card usage to avoid running up your balance again.
Remember, building a good credit score takes time and effort. These steps will help you get started, and with patience and discipline, you can improve your credit score over time.
Joe’s Reflection
We’ve all been in situations where our credit was less than ideal. However, there’s hope, as long as you take your credit situation seriously. A little time and effort directed towards improving your credit can massively impact your credit score. Unfortunately, it’s common for people with bad credit to get stuck in this perpetual cycle, believing that good credit is unattainable. To achieve a great credit score, you need to be willing to dedicate yourself to making meaningful changes to your financial habits. Start by creating a budget and addressing any negative spending practices. These small steps can lead to significant improvements in your credit score. This article aims to provide insights on how to improve your credit. If you’re seeking guidance or assistance with credit repair, please visit www.asapcreditrepairusa.com.