It may surprise you to learn that there are actually 30 unique levels of credit scores. Despite this, many people remain unaware of the various factors that contribute to a "good" credit score. In fact, if you search online for advice on how to improve your credit score, you are likely to be inundated with a range of conflicting opinions and information. Unfortunately, not all of this information is helpful or accurate, and it can be difficult to navigate through it all. As someone who has spent over fifteen years working in the financial literacy and credit repair space, my aim is to provide you with reliable and practical guidance on topics like credit scores. Thanks to my experience and expertise, I have been able to assist more than twenty thousand clients in transforming their credit scores, and I hope to help you do the same. Let's dive in!
Contents:
Different Types of Credit Scores and How They Work
What Determines a Good Credit Score?
Qualifying Credit Score for Home Loans: Understanding the Difference between Conventional, FHA, and VA Loans
Credit Score's Impact on Car Financing
Tips for Improving Your Credit Score
Reframing Joe's Insights on Improving Credit Score
Different Types of Credit Scores and How They Work
Understanding the different credit scoring models, FICO and Vantage, is essential when it comes to comprehending how your credit scores are calculated. This article provides in-depth information on these models.
FICO Credit Score
The FICO credit scoring model is the most widely used and popular among lenders, with eight different models currently in use. Depending on the type of lender used, you may get a different credit score. For example, a mortgage lender would most likely pull your FICO 5 score, while a credit card company would pull your FICO 8 score.
Why so many FICO scores?
Each credit report is weighed differently, with the most important factors for the lender having a more significant impact on your credit score. For instance, a FICO 5 report for a mortgage heavily weighs your previous mortgage payment history.
Vantage Credit Score
The Vantage scoring model was developed by Equifax, Experian, and TransUnion to compete with FICO. It is a relatively new scoring model compared to FICO, which has been used since the seventies. While it's still not widely used for lending purposes, the Vantage model is becoming popular for personal loans and auto lending.
Is the Vantage Score accurate?
The Vantage Score is accurate but not widely used for lending purposes. It's a good "general idea" of your FICO score, and credit monitoring websites use Vantage to give free copies of your credit reports. However, FICO is the most recognized scoring model, and credit scores are only as accurate as your ability to obtain a loan.
In conclusion, credit reporting agencies are data collection agencies that are essential in providing the best scoring data based on today's standards. The Vantage score is a good way to keep track of your general credit score. However, the FICO scoring model remains dominant but is becoming outdated and may soon be replaced. To get a better idea of your FICO score, you can sign up for an account with www.myfico.com.
What Determines a Good Credit Score?
Credit scores are rated on a scale of 350 to 850 using both the FICO and Vantage models. A score of 350 is the worst, and 850 is the best possible credit score. To achieve high scores, it's crucial to understand where you stand and define some fundamental score thresholds.
1. Scores of 620 or lower
Scores of 620 or below are poor, indicating adverse credit history that may include high-balance credit card accounts or lack of credit cards. To improve credit scores, timely payment and ten active revolving credit accounts are recommended. Secured credit cards such as Credit Builder Card or OpenSky Credit Card can also help build credit. Once the score reaches 620, one can start qualifying for an FHA home mortgage.
2. Scores of 640-680
This score range indicates fair to good credit. It implies established credit with some derogatory marks or accounts on credit, and some high balances on credit cards that need payment. Newly opened accounts can result in temporary score drops. However, this isn't a cause for concern.
3. Scores of 740+
A credit score of 740 or above is "super-prime", offering the best interest rates for most loans. Being part of the 20% of the US population with this score is commendable. Maintaining timely payments and paying down revolving credit card accounts is key to sustaining the score. With this range, keep up the excellent work!
Qualifying Credit Score for Home Loans: Understanding the Difference between Conventional, FHA, and VA Loans
The minimum credit score required to buy a house will differ according to the type of mortgage loan you wish to qualify for. Depending on the type, requirements and guidelines may vary due to federal regulation and government backing. Conventional, FHA, and VA loans are the three most common loan types, and we'll consider each in turn.
Conventional Loans
Conventional loans are the most common and, besides VA loans, tend to be the best savings option. PMI isn't required for these loans, unlike other loan types that will require you to maintain a policy that safeguards lenders in case you default. Conventional loans have better credit score requirements of 640 and generally offer lower interest rates with lower down payment requirements and a debt-to-income ratio that is usually no more than 43%.
FHA Loans
FHA loans have lower credit score requirements, usually ranging between 580 to 619. It's vital to keep in mind that loan programs vary, meaning different lenders may offer the best financial options within the credit score limits. An FHA loan will require you to keep PMI for at least 11 years, meaning your mortgage may come at a higher cost, but the loan offers a 50% debt-to-income limit, which allows you to purchase more homes than you might with a traditional loan if you have a lower income. FHA loans require a down payment as low as 3.5% of the purchase, making the loan option more accessible than traditional loans, but at a typically higher interest rate.
VA Loans
VA loans don't technically require a credit score, but the loan officer will establish past-defaulted loans and any previous government-owed debts when pre-qualifying you. To qualify, you must have either served in the US military for more than 181 days, served 90 consecutive days during a time of war, served six years with the National Guard, or had a spouse who lost their life during active duty. VA loans usually offer the best interest rates and don't require a down payment, making them a perfect way to give back to our veterans.
Credit Score's Impact on Car Financing
When financing a car, your credit history is more crucial than your credit score. Higher credit scores play a comparatively smaller role in determining your interest rate. The lender reviews your current and past credit history to assess the risk involved in extending credit. If you have defaults or late payments on your previous auto loan, or a repossession, you are more likely to face difficulty in getting approved for a loan. Special finance or bad credit lenders mostly approve anyone even with a repossession, but the approval process includes specific criteria that you must fulfill, such as higher down-payment and additional dealership fees to lessen the risk of defaulting on your loan. With a bad credit score, dealers may limit your car options to vehicles with higher mark-ups. Having equity or a down-payment can help you obtain leverage when applying for a vehicle on credit.
While there is no exact credit score for approval, having a credit score above 680 is ideal. Anything below this score increases the interest rate you are charged and poses a risk to the lender. The interest rate you acquire depends on your credit score and is evident in the following examples:
Examples:
- Someone with a credit score of 720 or above pays an average of $5,500 in interest on a loan.
- Someone with a credit score of 680 or above pays an average of $6,600 in interest on a loan.
- Someone with a credit score of 650 or above pays an average of $8,100 in interest on a loan.
- Someone with a credit score of 615 or above pays an average of $10,200 in interest on a loan.
- Someone with a credit score of 580 or above pays an average of $13,900 in interest on a loan.
- Someone with a credit score of 580 or above pays an average of $15,300 in interest on a loan.
Hence, the higher your credit score, the lower the interest you pay.
Tips for Improving Your Credit Score
Improving your credit score requires effort and patience, as building good credit takes time and is not an overnight achievement. To improve your credit score, consider the following tips:
Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, can significantly help you raise your credit scores, especially if you have limited credit or are rebuilding your credit. Open a secured credit card like Open Sky or Credit Builder Card. Make sure to pay your balance on time and keep the balance at $5-$10 each time you make a payment. Limit the use of the card to small purchases.
Raise your credit card limits:
Request a credit limit increase for your credit cards to increase your overall credit limits and lower your credit utilization percentage.
Pay down your balances:
Pay your credit card bill each month for small purchases and leave about a $1-$5 balance on your cards. Make a plan to pay off high balances and stop using them to limit your credit card usage.
Remember that revolving credit makes up 30-35% of your overall credit score, and credit card spending habits play a crucial role in your credit scores. Be patient and consistent with your efforts, and you will see your credit score steadily improve.
Reframing Joe's Insights on Improving Credit Score
It's no secret that we all have undergone declines in credit scores. The good news is that if you take responsibility for your current credit situation and put in enough time and effort to address underlying factors, you could witness significant improvements in your credit score within a short period. It's common for people with bad credit to keep struggling with their credit all through their lives, believing that achieving good credit ratings is impossible. However, with hard work, anyone can raise their credit scores to excellent levels by prioritizing their credit and monitoring their spending habits. Establishing a budget and rectifying any bad spending habits is a great place to begin, as this will positively impact your credit scores. This summary presents valuable insights into improving your credit. If you require guidance or assistance with credit repair, kindly get in touch with our office by visiting www.asapcreditrepairusa.com.
Key Takeaways:
- Accepting responsibility for your credit situation is the beginning of rebuilding.
- With enough work, improvements in credit scores are attainable.
- Focusing on credit and spending is key to developing good credit scores.
- Creating a budget and addressing spending habits could be the starting point for improving credit scores.
- Contacting Joe's office at www.asapcreditrepairusa.com will provide the guidance and assist you need to repair your credit score.