It may come as a surprise, but there are actually 30 different levels of credit scores available. This often leads people down a confusing and misleading path when trying to search for the best credit score online. My name is Joe Mahlow, and I have spent over fifteen years working in the financial literacy and credit repair industry. I aim to provide valuable advice on various topics, including credit scores. Throughout my career, I have assisted more than twenty thousand clients in improving their credit scores. With my knowledge and expertise, I hope to provide you with enough information to achieve the same level of success. So, let's dive right in!
Contents:
Different Credit Scoring Models
Understanding Credit Scores
What Credit Score Do You Need to Buy a House?
Determining the Ideal Credit Score for Buying a Car
Tips to Improve Your Credit Score
Insightful Commentary from Joe on Credit Building
Different Credit Scoring Models
Understanding credit scores is important when it comes to managing your finances and making financial decisions. There are two commonly used credit scoring models- the FICO model and the Vantage model. Here is an in-depth look at what you need to know about these different credit scoring models:
1. FICO Credit Score
- The FICO credit scoring model is widely used and has 8 different models ranging from FICO 2 to FICO 10.
- Depending on the type of lender you use, you may get a different credit score as they will pull up a different FICO report. For example, a mortgage lender will most likely pull your FICO 5 credit report, whereas a credit card company would most likely pull your FICO 8 credit report.
- Each credit report has a different weight. This means that certain factors, like previous mortgage or credit card history, will have a more significant impact on your credit score than others. Different FICO scores get used for different lending purposes- for instance, FICO-2 reports are typically used by auto lenders.
- To get a better idea of your different FICO scores, visit www.myfico.com and sign up for an account.
2. Vantage Credit Score
- The Vantage Score is a relatively new scoring model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO.
- While not as commonly used for lending purposes, the Vantage model is gaining popularity in certain sectors like personal loans and auto lending.
- The Vantage Score is not as accurate as FICO when it comes to actual lending scores, but it can give you a general idea of your scores.
- Checking your Vantage score can give you a good idea of where your overall scores are.
In conclusion, credit reporting agencies have access to vast amounts of data, making them a vital source of information when it comes to scoring models. With time, lenders nationwide may start widely using the Vantage scoring model as it better reflects current standards.
Understanding Credit Scores
Both FICO and Vantage credit score models have scores that range from 350 to 850. Scores of 350 are considered the worst and 850 the best. Aiming for higher scores involves knowing where you stand and what efforts to take to improve them. Here are some essential score thresholds:
1. 620 or below:
This is considered a bad score and usually comes with negative credit history, high-balance credit card accounts, or no credit cards at all. Improvements can begin with timely payments and having ten active revolving credit accounts, such as the Credit Builder Card or OpenSky Credit Card, which can help you build your credit. A score of 620 opens the opportunity for qualifying for an FHA home mortgage.
2. 640-680:
This scoring range is considered fair for good credit, indicating established credit but possibly accompanied by derogatory marks or accounts, high balances on credit cards, and a temporary score drop from opening new accounts.
3. 740+:
A credit score exceeding 740 is considered "super-prime" and presents the best interest rates for most loans. If you have this score, you've joined the top 20% of the US population. Always pay accounts promptly, keep revolving credit card accounts paid, and stay in excellent credit shape.
What Credit Score Do You Need to Buy a House?
The answer to this question varies based on the mortgage loan type you are applying for. Mortgage loans have similar if not distinct, requirements and guidelines due to government support and federal regulation. The three most common forms of mortgage loans are FHA loans, VA loans, and conventional loans.
Conventional Loans
Conventional loans are the most often used mortgage loans and the best "savings" loan option in addition to the VA loan. Conventional loans do not mandate the maintenance of private mortgage insurance (PMI), which can add additional costs to the down payment or monthly payment. PMI is required by lenders as a protection measure in the event of payment default and can raise loan costs. Compared to other mortgages, conventional loans typically have lower down payment requirements and more favorable interest rates. Conventional mortgage loans usually call for a credit score requirement of 640 and a debt-to-debt ratio no greater than 43%.
FHA Loan
FHA mortgage loans are meant for lower credit scores, usually ranging between 580 and 619. It is important to keep in mind that all loan programs are unique, so if you fall within the credit score range, it is preferable to look for various lenders offering the best financial choice for you. FHA loans demand that you maintain PMI for at least 11 years, which can be an additional mortgage cost to consider, especially if you're on a tight budget. This loan product has a maximum debt-to-income ratio of up to 50%, allowing those on lower incomes to purchase more properties than with a conventional loan. Lastly, an FHA loan's down payment requirements are as low as 3.5% of the purchase price, allowing you to get into a mortgage with less money upfront than with a conventional loan. But, typically, you would have a higher interest rate.
VA Loan
There is no definitive credit score requirement for a VA Loan; however, pre-qualification involves examining previous defaulted loans and outstanding government debts owed. To qualify for a VA loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or have a spouse who was in the military and died while on active duty. The VA loan typically has the best interest rates available, and borrowers typically do not have to put down a down payment. The VA loan is an excellent option for our veterans as it offers a form of gratitude for their service to our nation.
Determining the Ideal Credit Score for Buying a Car
When purchasing a vehicle, your credit history, rather than just your credit score, is the crucial factor in determining loan approval. While a higher credit score is important, it has less weight in determining your interest rate. When you apply for a car loan, lenders review your credit history to assess their risk in extending credit. Any credit issues like late payments, repossession, and current credit problems affect their decision more than your credit score. Although some lenders provide loans to those with a poor credit history, they require specific criteria like a higher down payment and additional fees to reduce their risk. Another hidden fee when purchasing a car may include the dealership fee to cover the risk of extending credit to a borrower who does not qualify. When financing a vehicle, it's beneficial to have equity or a down payment. Regarding credit score, anything above 680 is ideal for financing a new vehicle. A higher credit score means less interest payment, as shown in the example. The interest rate is higher for borrowers with low credit scores as lenders consider them risky. The examples illustrate the amount of interest payment expected for varying credit scores. In conclusion, it's best to maintain a higher credit standing to get approved and reduce interest payments while financing a new vehicle.
Credit Score Range for a New Vehicle
There is no exact credit score required for approval since several factors come into play. However, having a credit score over 680 is ideal for financing a vehicle. Borrowers with a credit score lower than 680 pay more interest due to their high-risk factor. The data shows the average interest amount paid by borrowers with varying credit scores. The examples reveal that higher credit scores incur lower interest payments, ultimately affecting the borrower's credit score.
Tips to Improve Your Credit Score
Building a good credit score takes time and effort. To improve your credit score, patience is key because impulsive decisions can worsen your situation. However, there are a few things you can do right now to increase your credit score.
Here are some tips:
1. Open 3-5 Revolving Credit Accounts
Revolving credit is an excellent option for maximizing your credit scores. It's easier to obtain approval for revolving credit, especially if you have limited credit or are looking to rebuild your credit. You can start by opening a secured credit card such as Open Sky or Credit Builder Card, which focus on your ability to pay the card on time rather than your credit score. Revolving credit contributes 30-35% to your overall credit score and is the best option to help you build credit quickly. Remember to pay your balance on time and keep it at $5-10 each time you make a payment.
2. Increase Your Credit Limits
Requesting a credit limit increase for your active revolving credit card accounts can help increase your overall credit limits and lower your credit utilization percentage. This is important because credit card balances should not exceed 30% of your overall limits. Contact your credit card company and request a "Credit Limit Increase" to begin the process.
3. Pay Down Your Balances
To keep your balance low and close to zero, only use your credit cards for small purchases. When paying your bill each month, leave about a $1-5 balance on your credit cards. If your balances are high, make a plan to pay them down using a percentage of your paycheck each month. This is important because credit card spending habits play a significant role in your overall credit score and interest rates on credit cards are high.
Insightful Commentary from Joe on Credit Building
Let's face it, many of us have gone through periods where our credit score wasn't exactly stellar. However, if you tackle your current credit situation with earnest effort, you will be amazed at how quickly you can turn things around. Unfortunately, most people with poor credit resign themselves to a lifetime of credit woes and feel that rebuilding their credit is beyond their reach. But the truth is, building a solid credit score takes hard work and dedication. Those who are determined to improve their credit ratings by prioritizing credit-building and focusing on spending habits, will ultimately emerge as winners. A good place to start is by mapping out a budget and working on breaking any bad spending habits. As you embark on this journey, remember that credit is a complex topic that requires some degree of understanding. If you require guidance and assistance with your credit score, or if you are seeking credit repairs, don't hesitate to contact my office at www.asapcreditrepairusa.com.
Key Takeaways:
Rebuilding credit takes dedicated effort and is not always easy.
Many individuals with poor credit give up altogether instead of undertaking the necessary work and effort.
Taking control of your spending habits and carefully managing your expenses can lead to significant improvements in your credit score.
Lastly, credit-building is a complex process that requires some degree of knowledge and expertise.
My office is available to offer guidance and support with all your credit-related concerns.