It's possible that you might not know this, but credit scores consist of 30 various levels. When people search for the top credit score, they might be baffled because various sources on Google offer different types of data. The information available online can be convoluted and sometimes even deceptive, leading you down an endless search. My name is Joe Mahlow, and I've been involved with financial education and credit fixing for more than a decade and a half. I aim to provide raw and honest advice on diverse topics, starting with credit scores. Throughout my career, I've aided over twenty thousand clients in boosting their credit scores, and my hope is that I can offer you enough information to do the same. So let's delve into the topic at hand.
Contents:
Understanding the Different Types of Credit Scores
Determining What Makes a Good Credit Score
Ideal Credit Scores for Different Mortgage Loans
Credit Score Requirements When Buying a Car
Tips for Improving Your Credit Score
Joe's Insights on Improving a Poor Credit Score
Understanding the Different Types of Credit Scores
Credit scores are important for individuals seeking to make a purchase with credit. The two most common credit scoring models are the FICO and Vantage models, and it is important to understand the differences between them.
FICO Credit Score
The FICO credit scoring model is widely used, with eight different models ranging from FICO 2 to FICO 10. Depending on the type of lender you use, your credit report may yield a different FICO score. This is because credit reports have a different "weight" for each factor critical to the lender. For example, a FICO 5 mortgage report weighs heavily on previous mortgage history, whereas a FICO 8 credit card report weighs more on your previous credit card history. This results in different scores for different lenders.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) and is often used by credit monitoring websites to provide free credit reports. While the Vantage score is accurate, it is not widely used for lending purposes, and its accuracy can vary compared to FICO. Instead, it is seen as a good "general idea" of your FICO score.
The Future of Credit Scoring
While FICO currently dominates the lending sector, the Vantage model is gaining popularity in some sectors such as personal loans and auto lending. It is predicted that Vantage will be more widely used in the next 5-10 years due to its ability to provide the best scoring models based on today's standards. With credit reporting agencies being the largest data collection agencies outside of social media companies, they will provide the best scoring data, period.
Determining What Makes a Good Credit Score
Credit scores derived from both the FICO and Vantage models are graded on a range of 350 to 850, with 850 being the best score attainable and 350 representing the least desirable. If you aspire to hold the highest credit score, it's helpful to comprehend how your ratings should be perceived. Vital score thresholds include:
1. 620 or below:
Anything below this is considered poor credit, which indicates potential negative credit history, exorbitant credit card balances, or an overall lack of credit accounts. You can better your score by ensuring your payments are on schedule and having at least ten active revolving credit accounts open. Consider Credit Builder Card or OpenSky Credit Card, which are secured credit cards that will assist your credit-building endeavors. When your credit score touches the 620 mark, you can avail an FHA home loan.
2. 640-680:
This is regarded as an equitable credit score range. If your score sits within this bracket, it usually shows that you have an established credit history, although there could be some derogatory accounts or marks that lower it. Balances on credit cards can also push down your score, so paying them off can help. Newly opened accounts can also temporarily decrease your score, but it will come up soon.
3. 740+:
When your score is over 740, it translates to "super-prime" and earns you the best interest rates for most loans. You belong in the 20% of the US population with this score. Congratulations! To maintain this excellent score, continue to pay your accounts on time and settle revolving credit card accounts to maintain your perfect standing.
Ideal Credit Scores for Different Mortgage Loans
To determine the optimal credit score for homeownership, you need to consider the specific mortgage loan you are applying for, as requirements and guidelines differ by loan type. Generally, there are three primary types of mortgage loans: conventional, FHA, and VA. Here's a breakdown of each:
1. Conventional Loans
Conventional loans are popular and tend to offer the best long-term savings option, outside of VA loans. Private mortgage insurance (PMI) is not required for conventional loans, which can save you money on downpayments and monthly payments. Moreover, these loans usually offer lower downpayment requirements and interest rates than other mortgages. The typical credit score for conventional loans is 640, with a debt-to-debt ratio that does not exceed 43%.
2. FHA Loan
FHA mortgage loans have lower credit score requirements, typically ranging from 580 to 619. But since loan programs differ, it is best to shop around for various lenders to pick the best financial option for you. Unlike conventional loans, FHA loans require borrowers to have PMI for at least 11 years, which can increase your mortgage payments. However, FHA loans have higher debt-to-income limits (up to 50%), enabling you to own more homes than conventional loans if you have a lower income. Finally, FHA loans have a low downpayment requirement of 3.5%, which can help you secure a mortgage with a smaller upfront payment. But this loan may come with a higher interest rate.
3. VA Loan
There's no official credit score requirement for VA loans. However, loan providers will scrutinize your previous defaulted loans and government-owed past-due debts when qualifying you. You must have served in the US military or be a surviving spouse of a service member to qualify. The VA loan usually has the best interest rates, and downpayments are often not required. If you're a veteran, this loan may be a perfect way to get started with homeownership.
Credit Score Requirements When Buying a Car
The credit score is not the only determinant in securing a car loan. The credit history of an individual plays a crucial role as well. The score is significant, but not as important when it comes to the interest rate. The lenders will scrutinize the credit histories of the applicants to determine the risks involved in extending credit. If there are credit issues, such as late payments or repossession of previous auto loans, it can make getting approved for a loan more challenging. Subprime lenders are likely to grant loans to applicants with the worst credit score but with criteria to meet such as additional fees to the dealership and a higher down payment to lessen risk. The vehicle you will be approved for may be selected by the dealership where they have a markup on the car to cover the fee. Additionally, having equity or a down payment can improve your chances when buying a vehicle on credit.
Ideal Credit Score When Purchasing a New Car
There is no definitive credit score that can guarantee approval, considering the various factors involved. Generally, having a credit score over 680 is beneficial. Anything lower than this score can increase the interest rate charged due to potential risk. The figures below demonstrate the expected interest payment based on credit scores.
1. Someone with a credit score of over 720 will pay around $5,500 in loan interest fees.
2. An individual with a credit score of over 680 will pay an average of $6,600 in loan interest fees.
3. A person with a credit score of 650 will pay around $8,100 in interest on a loan.
4. An applicant with a credit score of over 615 will pay approximately $10,200 in interest on a loan.
5. An individual with a credit score above 580 will pay an average of $13,900 in loan interest fees.
6. Someone with a credit score of 580 or above will pay about $15,300 in interest on a loan.
It is apparent that the credit score significantly impacts the loan interest amount, thereby affecting the overall credit score.
Tips for Improving Your Credit Score
Improving your credit score is achievable with some simple steps that require little effort. However, it's important to remember that the process takes time, and patience is necessary to avoid making irrational and bad decisions with your credit. The following are some things you can do to improve your credit score:
1. Open 3-5 credit card accounts
Revolving credit, such as credit cards, is one of the best options to help maximize your credit scores. If you have limited credit or want to rebuild your credit, a secured credit card like Open Sky or Credit Builder Card can be a good starting point, as they don't focus solely on your credit score. Revolving credit accounts make up 30-35% of your overall credit score, making it the best option to quickly improve your credit scores. Be sure to pay your balance on time and keep it at $5-10 each time you make a payment.
2. Request a credit limit increase
You can request a credit limit increase for your credit cards quickly, which can increase your overall credit limits and lower your credit utilization percentage. Most credit card companies allow you to do this online through your online portal or by calling them. Remember, a credit card company usually wants to see 7-15 months of excellent payment history on a credit card before they agree to increase your limits.
3. Pay down your balances
Keeping your balance low and close to zero is critical. If you currently have high balances, it's important to make a game plan to pay them down and ultimately stop using your credit cards. Leaving a $1-5 balance on your credit cards each month can be helpful, but avoid running up the balance again, as credit card spending habits play a significant role in your overall credit score. Be sure to limit your credit card usage and pay off your balances consistently.
Improving your credit score can take time, but following these tips will help you get on the right track.
Joe's Insights on Improving a Poor Credit Score
It's not uncommon to have a less than satisfactory credit rating. However, with dedication and effort, you can significantly improve your credit score in a short amount of time. Many individuals with bad credit resign themselves to a lifetime of financial instability and assume that good credit is out of their reach. But if you're willing to commit to fixing your spending habits and prioritizing your credit, you can turn your situation around. Start by creating a budget and identifying and addressing any negative spending patterns; this will positively impact your credit score. For more information on credit improvement strategies, check out this article. And if you need professional assistance with repairing your credit, don't hesitate to contact my office directly at www.asapcreditrepairusa.com.