It might surprise you to learn that there are actually 30 varying levels of credit scores. Despite many people's attempts to search for the best credit score, they are often faced with an array of conflicting information from sources like Google. Unfortunately, not all of this information is clear or accurate, and it can sometimes lead to confusion and frustration for those trying to improve their credit. That's where I come in. My name is Joe Mahlow, and I've spent over 15 years working in the financial literacy and credit repair industry. My goal is to provide you with straightforward advice on important topics like credit scores. With my help, more than 20,000 clients have been able to successfully raise their credit scores, and I hope to offer you the information you need to do the same. Let's dive in!
Contents:
Understanding Different Types of Credit Scores
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a Home?
Determining Your Eligibility for a Car Loan Based on Your Credit History Understanding the Ideal Credit Score Range for Buying a New Car
Steps to Increase Your Credit Score
Joe's Insights on Improving Your Credit Score
Understanding Different Types of Credit Scores
Credit scores are critical for determining your financial health. There are two main types of credit scoring models; the FICO model and the Vantage model. While both are important, it's essential to understand how they calculate your credit score because each lender will have a preference.
FICO Credit Score
The FICO model is the most widely used credit score model, and with eight different FICO models, it can be confusing. Each report has a different weight based on the lender's factors, weighing heavily on specific factors in your credit history. Each FICO model serves a specific purpose, such as obtaining a mortgage through FICO 5 or a credit card application using FICO 8. Your previous credit history is pivotal in determining your score, with the FICO score 2 used for auto lenders. You can get your FICO scores on www.myfico.com.
Vantage Credit Score
The three major credit reporting agencies in the United States developed the Vantage model as an alternative to FICO. Although less widely used, Vantage is gaining popularity in auto lending and personal loans. While the Vantage score is accurate, it may not reflect your actual lending score because it is not yet prevalent for lending purposes. However, using your Vantage score can give you a rough estimate of your overall score. There's a chance that lenders will start moving over to Vantage in the next decade, giving the best-score modeling based on today's standards.
Understanding Good Credit Scores
Both the FICO and Vantage models assess credit scores ranging from 350 to 850, with 350 being the lowest and 850 being the highest. Knowing where you stand and setting realistic goals is pivotal when working towards a higher credit score. Here are some essential score thresholds to keep in mind:
1. 620 or below:
Indicates bad credit resulting from adverse credit history, high-balance credit cards, or no credit cards. You can boost your score by making timely payments and having ten active revolving credit accounts. A Credit Builder Card or OpenSky Credit Card can help. When your score reaches 620, you qualify for an FHA home mortgage.
2. 640-680:
Considered fair-good credit, this range implies established credit but may feature some derogatory marks or high balances on credit cards. Temporary score drops may result from newly opened accounts.
3. 740+:
A score above 740 is considered super-prime since it opens up the option of the best interest rates for most loans. A score above 740 puts you among the 20% of the US population with this score. Ensure you stay on top of your accounts, make timely payments, and keep your revolving credit card accounts paid. Well done on keeping a good score!
What Credit Score Do You Need to Buy a Home?
The answer to this question depends on the mortgage loan you wish to qualify for. Mortgage loans require specific requirements and guidelines, especially considering federal regulations and government backing. The most common mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular option and considered the best “savings†loan outside of the VA loan. The credit score requirement for a conventional loan is typically 640 or above. In addition, there is no private mortgage insurance (PMI) required, allowing borrowers to avoid the added cost that can increase a downpayment or monthly payment. Furthermore, these loans usually have lower downpayment requirements and better interest rates than other mortgage loans.
2. FHA Loans
The FHA mortgage loan is best for lower credit scores that typically fall between 580 and 619. FHA loans can help you get a mortgage even if you do not have an excellent credit score. The downpayment requirements on an FHA loan are as low as 3.5% of the purchase price. Although this option allows for less money paid upfront, it typically results in higher interest rates, and borrowers must keep PMI for at least 11 years.
3. VA Loan
The VA loan usually has the best interest rates available and it does not usually require a down payment. Technically there isn’t a credit score requirement; however, it will be essential to show no previous defaulted loans, bankruptcy, or any government-owed past-due debts when pre-qualifying you. This loan is for veterans, military service members, and their surviving spouses. To qualify, one must have served in the United States Military for at least 181 days, among other requirements. Overall, the VA loan is an excellent option for military personnel as it gives back to them.
Determining Your Eligibility for a Car Loan Based on Your Credit History
When it comes to obtaining a car loan, your credit history is more important than simply having a high credit score. Lenders take into account a variety of factors, including your past and current credit histories, to determine your creditworthiness and the interest rate you qualify for. For example, if you have a history of late payments or a repossession on your record, you may have a harder time being approved for a loan than someone with a good credit history. While some lenders will approve almost anyone for a car loan, even those with poor credit, they may require a higher down payment or additional fees to offset the risk. In some cases, dealerships may also have to pay a fee to extend a loan to a high-risk borrower. To improve your chances of being approved for a car loan and receiving a favorable interest rate, having equity or a downpayment can be advantageous.
Understanding the Ideal Credit Score Range for Buying a New Car
Although there is no exact credit score that guarantees approval for a car loan, a credit score of 680 or above is generally considered ideal. Any score below this range may result in higher interest rates due to the perceived risk of lending to the borrower. As shown in the examples above, even a slight difference in credit scores can significantly impact the amount of interest paid on a loan. Therefore, maintaining a good credit history and improving your credit score can go a long way in securing a preferred interest rate and saving money in the long run.
Steps to Increase Your Credit Score
A good credit score is not something that can be achieved overnight. It requires time, patience, and conscious effort to build and maintain. However, there are several things you can do right now to improve your credit score. Here are three important steps to follow:
1. Open Revolving Credit Accounts:
Obtaining 3-5 revolving credit accounts such as credit cards is an effective way to improve your credit score. For those with limited credit history or those rebuilding their credit, secured credit cards like Open Sky and Credit Builder Card are recommended. Revolving credit constitutes 30-35% of your credit score, so consistently making on-time payments and keeping balances at $5-10 is key. Limit the use of cards to small purchases like gas and groceries. It may take 2-4 months for the increase to reflect on your credit score.
2. Request a Credit Limit Increase:
Active cardholders can request a credit limit increase to lower their credit utilization percentage, which can significantly impact their overall score. Each company has their own process for requesting a credit limit increase, but most want to see a good payment history over 7-15 months.
3. Keep Your Balances Low:
While it is recommended to use credit cards for small purchases, keeping your balance low and close to zero is critical. Leaving a $1-5 balance on your credit card each month is advised and paying down high balances is important. Avoid running up balances again after paying them off, as credit card spending habits play a significant role in credit scores. Additionally, credit card rates are high, so most of your payment may go towards interest and not principal.
Joe's Insights on Improving Your Credit Score
It's a common experience to have bad credit, but it's important to take it seriously and work on improving it. Many people feel like they're stuck with bad credit for life, but it's possible to make significant improvements by putting in the time and effort to improve both your credit and your personal habits. Creating a budget and addressing any problematic spending behaviors is a great place to start, as it has a direct impact on your credit score. It may take considerable effort to build a strong credit score, but those who prioritize their credit and spending habits will eventually come out on top. If you need assistance with credit repair or advice on improving your credit score, feel free to contact my office at www.asapcreditrepairusa.com.
Key points:
- Bad credit is common, but it's important to take it seriously and work on improving it.
- Improving your credit and personal habits takes time and effort.
- Creating a budget and addressing bad spending habits is a great place to start.
- Prioritizing credit and spending habits leads to a stronger credit score.
- For assistance with credit repair or improving your credit score, visit www.asapcreditrepairusa.com.