It may surprise you to learn that credit scores are not just a single number, but come in 30 different levels. Despite this fact, many people turn to Google to find out what credit score is considered good or bad, only to be met with a wealth of conflicting information. Navigating this confusing and often misleading terrain can be like going down a dark rabbit hole. As someone who has worked in the financial literacy and credit repair industry for over fifteen years, my name is Joe Mahlow and I aim to provide you with straightforward advice on important financial topics - like credit scores. With a proven track record of helping over twenty thousand clients improve their credit scores, I hope to give you the knowledge you need to do the same. Let's dive in!
Contents:
An Overview of Credit Scoring Models
What Constitutes a Good Credit Score?
What is the Credit Score Needed to Buy a House?
Determining the Ideal Credit Score to Secure a Car Loan
How to Improve Your Credit Score
Insights Shared by Joe
An Overview of Credit Scoring Models
Understanding credit scoring models is essential to managing your finances effectively, as they affect everything from loan approval to interest rates. Here, we'll take a closer look at the two primary credit scoring models.
FICO Credit Score
The FICO model is the most widely used and consists of several different variations, ranging from FICO 2 to FICO 10. The specific FICO model used to calculate your credit score will depend on the lender and the type of credit you're applying for. For example, mortgage lenders typically pull the FICO 5 model, while credit card companies use the FICO 8 report. Each model is weighted differently, with factors critical to the lender given more importance. For instance, your payment history on a previous mortgage will typically weigh more heavily on your FICO 5 score than on other models.
Vantage Credit Score
Developed by three major credit reporting agencies, the Vantage scoring model is a newer competitor to the FICO model. Though not yet widely used for lending purposes, it's gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites often use Vantage to provide free credit reports. While the Vantage score can be a useful guide, especially for those who want to check their credit scores free of charge, it may not be entirely accurate for lending purposes.
In conclusion, understanding credit scoring models is crucial to maintaining a healthy credit score and securing favorable loan terms. By knowing how the different models work, you can better monitor your credit history and make informed decisions about loan applications.
What Constitutes a Good Credit Score?
Your credit score should fall between the range of 350 to 850 for both FICO and Vantage models. The higher the credit score, the greater the chance of enjoying affordable interest rates and fast-track approval on loans. To help you establish a clear benchmark, here are some essential score ranges that you should know about.
620 or below
If your credit score falls in this category, you are likely to have a poor credit history with high-balance credit card accounts or overall no credit cards. Experts recommend opening ten active revolving credit accounts, paying timely payments, and using credit builder cards like the Credit Builder Card or OpenSky Credit Card. Once you reach the score range of 620, you can qualify for FHA home mortgages.
640-680
Credit scores within this range are considered fair to good credit. It generally means that you have an established credit history. However, you may have derogatory marks on your credit accounts and high credit card balances that need to be paid down. A temporary decline in scores may also happen due to newly opened accounts.
740+
Credit scores above 740 is considered "super-prime" and indicate that you have the best chance of securing low-interest rates on loans. With this score, you are already part of the top 20% of the United States population. To maintain a credit score above 740, ensure that you always pay accounts on time, pay revolving credit accounts on time, and avoid using too much credit at once. Congratulations if you already have over 740 credit score!
What is the Credit Score Needed to Buy a House?
To determine the credit score required to obtain a mortgage loan, the type of loan must be considered. Most mortgage loans have similar regulations and guidelines due to federal regulations and government backing. There are three popular types of mortgage loans: conventional, FHA, and VA loans.
Conventional Loans
The most common and cost-effective mortgage loan, aside from VA loans, is a conventional loan. PMI is not necessary for these loans, which can save money on the downpayment and monthly payments. These loans have lower downpayment requirements and interest rates. The credit score requirement for a conventional loan is 640 with a debt-to-debt ratio of no more than 43%.
FHA Loan
The FHA mortgage loan permits lower credit scores ranging between 580 and 619. Each program has unique loan requirements, so shopping for a lender that offers the best financial deal for your score is sensible. This loan requires 11 years of PMI, which increases the mortgage payment. However, it offers homebuyers lower downpayment requirements of 3.5% with a higher debt-to-income limit of 50%. The interest rate is usually high.
VA Loans
While there is no specific credit score requirement for VA loans, previous default loans, and government-owed past-due debts are examined before pre-qualifying. To qualify for a VA loan, a person must have invested time in the United States Military, in the National Guard for six years, or served at least 181 days in active duty. The VA Loan offers the best interest rates and requires no down payment. This loan prioritizes veterans' comfort, making it an excellent choice for them.
Determining the Ideal Credit Score to Secure a Car Loan
When it comes to purchasing a car, your credit history holds greater importance than your credit score. Although a higher credit score is beneficial, it plays a smaller role in determining the interest rate for which you qualify. During your car loan application, lenders consider your past and present credit histories to evaluate the associated risks of extending credit to you. Late payments on current or previous auto loans or repossession of a vehicle can make it challenging to qualify for a car loan. Specialist lenders will offer car loans to nearly everyone, including those who have experienced repossession in the past. However, their approval comes with specific conditions such as increased down payments and additional dealership fees. This fee reduces the lender's risk of your loan default and steers your loan to the dealership's preferred car models, where they enjoy a higher markup. Additionally, equity or a down payment provides more leverage when buying a car on credit.
The Ideal Credit Score Range for Purchasing a New Vehicle
Several factors come into play when determining loan approval. Hence no specific credit score guarantees your approval. However, a credit score higher than 680 is ideal to increase your chances. Scores lower than this increase the lender's risk and raise your interest rate. Let's look at how credit scores affect interest rates. Borrowers with a credit score of 720 and above pay an average of $5,500 in interest, while those with a 680-719 credit score pay an average of $6,600. For a credit score of 650-679, the average interest cost is $8,100, and a score between 615-649 attracts an interest of $10,200. As expected, low credit scores incur high interest charges. With a credit score below 579, borrowers pay an average of $13,900 and $15,300 in interest, further demonstrating the importance of a high credit score.
How to Improve Your Credit Score
Improving your credit score is possible with some effort on your part. Keep in mind that increasing your credit score is a gradual process, and requires patience to succeed. Without being patient, you may end up making irrational decisions that can worsen the situation. Here are some things you can do to improve your credit score:
Open 3-5 Revolving Credit Accounts
Opening revolving credit accounts such as credit cards can help you maximize your credit score. It's easier to obtain approval for a credit card than a large loan, particularly if you have limited or bad credit. You can start by opening a secured credit card that is not focused on your credit score, like Open Sky or Credit Builder Card, as they focus on your ability to pay the card on time. The use of revolving credit accounts makes up 30-35% of your credit score, and this is the best way to build your credit score quickly. However, it may take about 2-4 months for the increment to reflect on your score, so it's essential to ensure timely payments each month and keep the balance at $5-$10 only.
Raise Your Limits
Many credit cardholders exceed the credit utilization rate of 30%, which adversely impacts their credit score. You can request a credit limit increase to lower your credit utilization percentage. You need to call your credit card company to request a credit limit increase citing your current income for approval. Generally, it is advisable to have excellent payment history for about 7-15months before requesting a limit increase.
Pay Down Your Balances
It is critical to keep your balance low and close to zero. You are not obligated to use your credit cards each month, so it's prudent to use them for small purchases only. For the monthly bill, leave about a $1-$5 balance on your credit cards. If you have high balances, make a game plan to pay them down using a percentage of each paycheck each month. Furthermore, limit your credit card usage as this will significantly impact your credit score as high interest rates will accrue.
Insights Shared by Joe
We have all experienced financial difficulties where our credit scores took a hit. However, if you are determined to take your credit rating seriously and invest your time and efforts in improving it, you can witness a significant improvement in your credit score sooner than you think. Unfortunately, most people having poor credit ratings believe that good credit is unattainable and remain trapped in a vicious cycle of bad credit throughout their lives. Building a great credit score requires hard work, and those willing to prioritize their credit and spending habits will ultimately succeed. Beginning with drafting a budget and addressing any poor spending patterns will directly influence your credit score. This article is designed to provide clarity on credit ratings. If you require guidance and assistance with credit repair, reach out to us today at www.asapcreditrepairusa.com.