It may come as a surprise to many that there are actually 30 different levels of credit scores. While most people search for the best credit score online, the search results can often be confusing and even misleading. As someone who has been working in the financial literacy and credit repair industry for over fifteen years, my name is Joe Mahlow and I'm here to provide unfiltered advice on the topic of credit scores. In fact, I have helped over twenty thousand clients improve their credit scores and I hope to do the same for you. So, let's dive in!
Contents:
Exploring the Various Types of Credit Scores
Understanding Credit Scores: Ranges and Thresholds to Keep in Mind
Determining an Appropriate Credit Score to Secure a Home Loan
Determining a Suitable Credit Score for Purchasing a Car
Tips to Increase Your Credit Score
Tips from Joe for Improving Your Credit Score
Exploring the Various Types of Credit Scores
Understanding credit scores is quintessential for effective financial management. There are two essential credit scoring models - the FICO model and the Vantage model. It is crucial to become familiar with both models since they calculate your credit score differently.
FICO Credit Score
The FICO credit scoring model is predominantly used as it is the most popular one. There are eight different FICO models, ranging from FICO 2 to FICO 10. Each of these models will give you a different credit score depending on your credit report. These models have different weights, meaning that some of the critical factors to the lender will have a more significant impact on your credit score than the less important ones. The FICO 5 model is popular among mortgage lenders, the FICO 8 model is primarily used by credit card companies, and the FICO-2 model is used by auto lenders.
Vantage Credit Score
The Vantage Score scoring model was developed by three significant credit reporting agencies in the United States - Equifax, Experian, and TransUnion. It was introduced to compete with the FICO model, which has been used since the seventies. Although FICO remains the most commonly used scoring model, the Vantage model is gaining popularity in other sectors, such as personal loans and auto lending. Credit monitoring websites in the US frequently use Vantage to provide users with a free copy of their credit reports.
Accuracies of the Vantage Score
The Vantage score is accurate, but the accuracy question depends on the context. Since the Vantage score is not widely used for lending purposes, its accuracy varies from the actual lending score. Therefore, one should use their Vantage score to provide a general idea of their FICO scores. Lenders will most likely widely use the Vantage scoring model in the next 5–10 years due to its ability to provide the best scoring models based on today's standards. This introduces a clear representation of credit scores and their overall scores. Credit reporting agencies are the most significant data collection agencies outside social media companies. As long as they have access to data, they have the ultimate power to provide the best scoring data. To obtain a more visual representation of your scores, one may sign up for an account on www.myfico.com.
Understanding Credit Scores: Ranges and Thresholds to Keep in Mind
The FICO and Vantage credit scoring models use a range of 350 to 850, with 350 being the lowest and 850 being the highest score possible. If you aim to achieve a high credit score, it’s crucial to keep track of your progress. Here are some score thresholds to consider:
1. Scores of 620 or below are considered bad credit.
In this range, you may have an adverse credit history or high-balance credit card accounts, or no credit cards. To improve your scores, make timely payments, and have at least ten active revolving credit accounts. Consider using a secured credit card, such as the Credit Builder Card or OpenSky Credit Card. When your score reaches 620, you can start qualifying for an FHA home mortgage.
2. Scores between 640 and 680 are considered fair to good credit.
This means you have established credit but may have some derogatory marks or high balances on your credit cards. Newly opened accounts can also drop your scores temporarily. Don't worry; this is just a temporary drop.
3. Scores above 740 are considered “super-primeâ€
and will give you the best interest rates for most loans. Congratulations, if you have a score over 740, you are part of the top 20% of the US population with this score. Keep paying your accounts on time and keep your revolving credit card accounts paid. You will be in great shape!
Determining an Appropriate Credit Score to Secure a Home Loan
The preferred credit score required for obtaining a mortgage varies depending on the type of loan you apply for. The majority of mortgage loans have similar requirements and regulations, though there may be slight variances. The three most common types of mortgages are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are a highly-favored option for potential homeowners and prove to be one of the most advantageous loan options, with the exception of VA loans. Conventional loans do not necessitate private mortgage insurance (PMI), and therefore you will not have to increase your downpayment or monthly payment. Generally, conventional loans have low downpayment requirements and better interest rates than other mortgages. An individual is typically required to have a minimum credit score of 640 and a debt-to-debt ratio that does not exceed 43%.
FHA Loan
FHA loan qualifications are different, but the minimum credit score is between 580 to 619. Nevertheless, you must be aware that different lenders offer varying loan programs, so if you fall within the credit score range, research different lenders and their respective finance options. For an FHA loan, PMI will need to be paid for a period of 11 years and is therefore an added fee for the borrower. Also, the debt-to-income limit is typically higher at up to 50%, which allows you to purchase more homes than with a conventional loan if your income is lower. Finally, the downpayment requirement is as low as 3.5% of the purchase, making it possible to acquire a mortgage with limited cash but with a higher interest rate.
VA loan
While a credit score expectation is not technically required for the VA Loan, they do consider previously defaulted loans or any government debts owed before pre-qualifying borrowers. To qualify for VA loans one must be either a Retired Military Personnel who served for a minimum of 181 days, served 90 consecutive days during wartime, served six years in the National Guard, or be a widow of a military service member who lost their lives during active duty. Interest rates are generally lower for VA loans, and a down payment is often not required. It's an ideal option for veterans, and I love the fact that it honors their service.
Determining a Suitable Credit Score for Purchasing a Car
When it comes to buying a car, your credit score isn't solely the determining factor in what you qualify for; lenders examine credit history as well. Though a high credit score is essential, it plays a minor role in the interest rate you qualify for. To assess the risk involved in extending credit, lenders assess your credit records, past and present, when you apply for an auto loan. For instance, if you have late payments or repossession in your credit history, obtaining approval for a loan may be more challenging than it would be for someone who has had no such issues.
The least reputable lenders
will approve almost anyone for a car loan, including those who've had vehicles repossessed in the past. However, to qualify, they would need to meet additional requirements, such as making a higher down payment and agreeing to pay additional fees to the dealership. To cover the risk of you defaulting on the loan, dealerships will also pay a fee to approve you. This, in turn, means that they may select a vehicle for you that has a higher markup. Finally, when purchasing a vehicle on credit, having equity or a down payment provides you with the most bargaining power.
Credit Score Range for Acquiring a New Vehicle
Again, since several aspects determine if you will get approved, there is no precise credit score that will make you eligible. However, any credit score above 680 is desirable. A credit score below this may result in a higher interest rate because of the risk you pose to the lender.
A credit score is instrumental in determining the amount of interest you will pay, as seen in the data below:
- Someone with a 720 credit score or higher will pay, on average, $5,500 in interest on a loan.
- Someone with a 680 credit score or higher will pay, on average, $6,600 in interest on a loan.
- Someone with a 650 credit score or higher will pay, on average, $8,100 in interest on a loan.
- Someone with a 615 credit score or higher will pay, on average, $10,200 in interest on a loan.
- Someone with a 580 credit score or higher will pay, on average, $13,900 in interest on a loan.
- Someone with a credit score equal to or above 580 will pay, on average, $15,300 in interest on a loan.
Consequently, the higher your credit score, the lower your interest rate will be, affecting your overall credit score.
Tips to Increase Your Credit Score
Improving your credit score requires effort and time because it is not feasible to achieve the desired score overnight. Impatience can lead to irrational decisions with your credit, resulting in further problems. However, you can take several important steps to enhance your credit score now, which are explained below.
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, is one of the most effective ways to maximize your credit scores. If you have limited credit or want to rebuild it, obtaining a large loan to build credit will be difficult. Instead, focused on credit cards, as they offer the best chance of approval. Having revolving credit accounts contributes 30-35% of your overall credit score. Open Sky and Credit Builder Card are recommended secured credit cards, focusing on your ability to pay the card on time.
2. Raise Your Limits
Requesting a credit limit increase is an easy and quick way to raise your overall credit limits, contributing to lowering your credit utilization percentage. A high credit card balance can adversely affect your credit score, particularly if it exceeds 30% of your total limits. Call your credit card company and ask for a “Credit Limit Increase." The process typically involves a credit check by the company to assess if the request is viable. Nonetheless, companies generally require seven to fifteen months of outstanding payment history to increase the credit limit.
3. Pay Down Your Balances
Paying down your balances is crucial to maintaining a low balance close to zero. You do not have to use your credit cards each month. To promote interest and payment toward your principal balance, spend on small purchases and leave a balance of $1-$5 on your credit cards when making monthly payments. If you have a high balance that cannot be resolved in the short term, create a game plan to pay a percentage of your paycheck each month towards paying down your credit balance. Monitor your credit card usage regularly to avoid running up balances.
Tips from Joe for Improving Your Credit Score
Bad credit is a common problem that many of us face at some point in our lives. However, by taking your credit situation seriously and putting in effort to improve your habits, you can quickly see positive changes in your credit score. Don't fall into the trap of believing that bad credit will be a lifelong issue because, with dedication and a willingness to learn, you can turn things around. The key is to prioritize your credit and focus on developing healthy spending habits that reflect positively on your score. Start by creating a budget and identifying any areas where you can cut back on expenses. This article aims to provide you with a better understanding of how credit works. If you need assistance or guidance in repairing your credit, please contact my office at www.asapcreditrepairusa.com.
Key Takeaways:
- Improving your credit score takes time and dedication.
- Don't give up hope - with effort, anyone can improve their credit.
- Prioritize your credit and focus on developing healthy spending habits.
- Start by creating a budget and cutting back on unnecessary expenses.
- If you need guidance with credit repair, reach out to Joe's office at www.asapcreditrepairusa.com.