It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? With the vast amount of information available on the internet, it can be overwhelming to determine the best credit score for your financial goals. Unfortunately, some of this information can even be misleading and lead you astray from your desired outcome. Allow me to introduce myself, my name is Joe Mahlow and I have been dedicated to financial literacy and credit repair for over fifteen years. My objective is to provide you with genuine advice on various topics, such as credit scores. Throughout my career, I have assisted over twenty thousand clients in transforming their credit scores and I hope to offer the same value to you. Now, let’s dive into the topic at hand.
Contents:
What are the different types of credit scores?
Guide to Understanding Credit Score Ranges
What Credit Score Do You Need to Buy a House?
Determining a Good Credit Score for Buying a Car
Tips for Boosting Your Credit Score
Tips from Joe on How to Improve your Credit Score
What are the different types of credit scores?
Credit scores can be calculated using different models. It’s important to understand these models, especially how they differ in calculating credit scores. The two main credit scoring models are the FICO model and the Vantage model.
FICO Credit Score
The FICO credit scoring model is the most widely used scoring model comprising different versions ranging from FICO 2 to FICO 10. These different versions are used by lenders depending on the context of credit, such as mortgage, credit card, etc. The score attributed to each report is based on a specific weight assigned to varying factors. The most important aspects to a lender carry more weight when calculating a FICO score.
Why so many FICO scores?
The reason for different FICO models is that each credit report carries a different weight in the formula for calculating scores. FICO 5, for example, will carry a heavier weight on mortgage history than FICO 8, which considers credit card history. Auto lenders commonly use FICO-2 reports, and scores are heavily weighted based on auto history.
To obtain a clear visual of different FICO scores, users can sign up with www.myfico.com for an account.
Vantage Credit Score
Vantage Score is a relatively new scoring system developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, in the mid-2000s to compete with FICO models. While FICO is the most widely used, Vantage Score has gained popularity in sectors such as personal loans and auto lending, and monitoring websites offer a free copy of reports based on Vantage scoring.
Is the Vantage Score accurate?
While accurate for general information, Vantage Score is less useful for obtaining a lending score. Its accuracy is dependent on lenders recognizing it as an accurate scoring model. Nevertheless, it provides a good "general idea" of an individual's credit score, particularly if obtaining FICO scores is difficult. The Vantage scoring model has the potential to become widely used in the next decade.
Credit reporting agencies, among the biggest data collectors globally, hold the upper hand in providing the most accurate scoring data. The FICO scoring model may be obsolete and may not provide a clear representation of credit scores.
Guide to Understanding Credit Score Ranges
The FICO and Vantage models use the same range of scores from 350 to 850, with 850 being the best and 350 being the worst. To help you understand where you stand when working towards a higher score, here are some score thresholds you should be aware of:
1. 620 or below
A score below 620 is considered bad credit. If you fall into this range, your credit history might contain adverse events, high-balance credit card accounts, or even no credit cards at all. To improve your score, you need to focus on timely payments and maintaining at least ten active revolving credit accounts. The Credit Builder Card or OpenSky Credit Card are secured options to help establish credit. Once you reach the 620 mark, you become eligible for an FHA home mortgage.
2. 640-680
Scores within this range are considered fair and could be considered good credit. It typically means that you have a credit history, but you may have derogatory marks or accounts, some high card balances, and newly opened accounts that may temporarily drop your score. Temporarily lowered credit scores are normal and not cause for concern.
3. 740+
Any credit score of 740 or above is considered "super-prime," and you will qualify for the best interest rates on most loans. If you possess a score of over 740, then you belong to an elite group that makes up 20% of the population. Excellent work! Always pay your bills on time, and maintain low balance revolving accounts. You will have great credit for life.
What Credit Score Do You Need to Buy a House?
The answer to this common question depends on the type of mortgage loan you are seeking. Due to government regulation and backing, requirements and guidelines for most mortgage loans will be similar or slightly different. The three most common loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are very popular and usually the best cost-saving option apart from VA loans. By choosing this loan type, you do not have to pay for private mortgage insurance (PMI), which may increase your monthly payments or downpayment. PMI is incorporated to protect loan lenders in case loan takers do not make payments. Conventional loans require a credit score of approximately 640 and a debt-to-debt ratio of up to 43%.
FHA Loan
This loan type is most ideal for potential borrowers with lower credit scores, usually between 580 -619. However, loan programs differ, so shopping around for the best lenders that suit your financial status is a great option. FHA loans require PMI for at least 11 years, which may increase the cost of your mortgage. Additionally, FHA loans have higher debt-to-income limits up to 50%, which means that borrowers can purchase more homes than conventional loans if they have lower income. You can incur a lower downpayment of up to 3.5% on an FHA loan, so it may allow you to purchase a mortgage with less money out of pocket, but the interest rate typically is higher.
VA loan
VA loans technically do not require a credit score, but they'll look into your defaulted loans history and government past-due debts upon pre-qualifying you for a loan. You must have served in the U.S Military for at least 181 days, served 90 consecutive days during wartime, been in the National Guard for 6 years, or have a spouse in the military who lost their life during active duty. VA loans offer the best interest rates available, and the down payment is usually not required. Notably, VA loans are great for veterans.
Determining a Good Credit Score for Buying a Car
When purchasing a car, your credit history is more critical than your credit score in determining what you qualify for. While a higher credit score is beneficial, it plays a smaller role in the interest rate you qualify for. To evaluate the risks of extending credit to you, auto lenders scrutinize your credit history. Thus, even if your credit score is high, being late on a previous or current auto loan or having a repossession can make it challenging to get approved for a loan. Some lenders who specialize in special finance or work with borrowers with bad credit will qualify almost anyone for a car loan, but you'll need to meet specific requirements, such as a higher down payment and additional fees. The dealership may also have to pay a fee to approve you for the loan. To have bargaining power when financing a vehicle, you need equity or a down payment.
Credit Score Range for a New Vehicle
An exact credit score that guarantees approval doesn't exist since many variables come into play. Nonetheless, a credit score of over 680 is considered optimal. Anything below this score can increase your interest rate due to the risk you pose to the lender. As an example, someone with a credit score over 720 would pay an average of $5,500 in interest on a loan, whereas someone with a score below 580 would pay an average of $15,300. Thus, the higher your credit score, the lower the interest you will pay, affecting your overall credit score.
Tips for Boosting Your Credit Score:
Raising your credit score takes time, and there are several things you can do right now to help increase it with little effort. However, building a good credit score requires patience, which is essential to avoid irrational decisions that can worsen your problems.
Here are some steps you can take to improve your credit score:
1. Open 3-5 Revolving Credit Accounts:
Revolving credit, such as credit cards, is an excellent option to help maximize your credit score. It's easier to get approval for a credit card than a large loan, particularly if you have limited credit or need to rebuild it. Start with a secured credit card that focuses on your ability to pay on time and has no bankruptcy history in the last two years and current income. Revolving credit makes up 30-35% of your overall credit score and is the best way to build it quickly. Pay your balance on time and keep it at $5-10 each time you make a payment.
2. Raise Your Limits:
You can request a credit limit increase for your credit card accounts to increase your overall credit limits and lower your credit utilization percentage. Most people use credit cards a lot, and if your credit card balances exceed 30% of your overall limits, it can hurt your credit score. To avoid this, you can increase your credit limits to help lower your utilization percentage. Each credit card company has a different process, so call and request a “Credit Limit Increase†and be prepared to provide your current income.
3. Pay Down Your Balances:
Keeping your balance low and close to zero is critical. Use credit cards for small purchases, and leave about a $1-5 balance when paying your bill each month. If you can't pay off your credit cards, make a plan to take a percentage of your paycheck each month to pay down the balance. Avoid running your balance back up. Limit your credit card usage and keep in mind the high-interest rates that will make most of your payments go towards interest, not principal.
Tips from Joe on How to Improve your Credit Score
It's common for people to have poor credit at some point in their lives. However, with the right mindset, time, and effort, you can see significant changes to your credit score. Many individuals with poor credit find it hard to break the cycle and believe good credit is unattainable. Building a good credit score takes hard work and dedication, but those who are serious about their credit can succeed. Start by creating a budget and improving your spending habits; this will positively impact your credit score. If you would like to learn more about credit and need guidance or assistance with credit repair, contact my office at www.asapcreditrepairusa.com. Remember, taking action now can result in a better financial future.
Key Points to Consider:
- It's possible to improve your credit score with the right mindset and effort
- Develop good spending habits and create a budget to see a positive impact on your credit score
- Seeking guidance or assistance with credit repair can be beneficial in the process