It's surprising to think that you might have 30 different credit scores! With so many options and conflicting information out there, it can be hard for people to understand what they need to know in order to improve their credit score. Whether you are searching for the best credit score or trying to repair your credit, it's important to understand what factors impact your credit score and how you can make it better. As someone who has worked in financial literacy and credit repair for over 15 years, I want to help you navigate through this topic. I have helped over 20,000 clients transform their credit scores, and I hope that I can provide you with useful knowledge to do the same. My name is Joe Mahlow, and my aim is to give you honest advice on topics like credit scores. So let's dive into it!
Contents:
What are the Different Types of Credit Scores and How Do They Differ?
Understanding Good Credit Scores
Determining the Ideal Credit Score for Homeownership
What Credit Score Do You Need to Buy a Car?
Tips for Improving Your Credit Score
The Importance of Prioritizing Your Credit
What are the Different Types of Credit Scores and How Do They Differ?
Credit scores range from traditional FICO models to the emerging Vantage model. Both scoring models are crucial to understand when it comes to calculating your credit score as they differ in the factors that are weighted.
FICO Credit Score
The FICO model is the most widely-used scoring model in the United States, with eight different models available. Depending on the type of lender you use, your score can differ as they may pull a different FICO report. For example, a mortgage lender typically pulls the FICO 5 report, while a credit card company usually pulls the FICO 8 report. Each of these models weighs heavily on specific factors critical to your lender, such as prior mortgage or credit card history, resulting in multiple FICO scores.
Vantage Credit Score
The Vantage model was developed by the three major credit reporting agencies - Equifax, Experian, and TransUnion - as a competitor to FICO. Although Vantage is a new scoring model, it has gained popularity in sectors such as personal loans and auto lending. Credit monitoring websites often offer a free copy of your Vantage credit report, but it is usually not used for lending purposes.
Is Vantage Score Accurate?
In terms of providing a general idea of your FICO score, the Vantage score is useful. However, it is not as widely recognized for lending purposes as FICO, so its accuracy can vary in that context. Nonetheless, as a more modern and representative scoring model, it is likely to become more widely used by lenders in the future. Remember, credit reporting agencies hold vast amounts of data, and their scoring models will provide the best possible data for users.
Understanding Good Credit Scores
Credit scores range from 350 to 850 under both FICO and Vantage models, with 850 being the highest and 350 being the lowest score. Building your credit score to the highest level requires knowing where you stand throughout the process; here are some critical score thresholds to keep in mind.
1. Scores of 620 or below
A credit score below 620 means bad credit and is usually the result of outstanding debts or lack of credit history. You can improve your score by paying on time and opening ten active revolving credit accounts. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can help build your credit score. Once you hit a score of 620, you can qualify for an FHA home mortgage.
2. Scores between 640-680
A credit score in this range is considered fair for good credit. It indicates the establishment of your credit, but derogatory remarks or high balances may hold it back. Newly opened accounts can also temporarily reduce your score. Focus on paying down high balances, and know that a recent decrease is most likely temporary.
3. Scores of 740 and above
A score above 740 is considered "super-prime," and puts you in the top 20% of the US population. With this score, you will get the best interest rates for most loans. This is the highest possible score, and a perfect credit payment history with revolving credit card accounts paid can help you reach this.
Determining the Ideal Credit Score for Homeownership
Your credit score requirements will largely depend on the mortgage loan type you intend to pursue. Each loan type has unique regulations and guidelines to meet, with conventional loans, FHA loans, and VA loans being the most popular.
Conventional Loans
Conventional loans are often the most preferred loan types. They offer competitive interest rates and minimum down payment requirements compared to other options, without the added burden of private mortgage insurance (PMI) fees. Conventional mortgage loans require a credit score of at least 640, and a debt-to-debt ratio no exceeding 43%.
FHA Loan
FHA loans offer flexibility by setting a lower credit score requirement that ranges from 580 to 619. Shopping around for lenders that cater to such borrowers is crucial. FHA loans, however, require PMI fees for at least 11 years, and the debt-to-income limit goes up to 50%. Nevertheless, FHA loans have minimal down payment requirements, allowing you to purchase a home with as little as 3.5% down payment.
VA Loans
VA loan eligibility is dependent on your previous credit history concerning any defaulted loans and government debts. To qualify, you must have been in the US military for at least 181 days, served 90 consecutive days during wartime, or served six years with the National Guard. Spouses of military personnel who lost their lives during active duty are also eligible. VA loans boast attractive interest rates, and it typically doesn't require a down payment. It is worth considering as it serves as a great way to help the nation's deserving veterans.
What Credit Score Do You Need to Buy a Car?
When purchasing a car, your credit score is not the only deciding factor when it comes to loan approval. Your credit history plays a more significant role in determining your eligibility and interest rate. While having a higher credit score is still crucial, it is not the only factor in securing a loan. Lenders examine your credit history, especially past and present auto loans, late payments, and repossessions, in assessing the level of risk involved before extending credit. Subprime or special finance lenders may approve individuals with poor credit or repossession records, but strict loan criteria must be met, such as a higher down payment and additional fees to the dealership. The dealership, too, has to pay a fee, thus, increasing the car's price. In short, having a down payment or equity gives you leverage when purchasing a car on credit.
Although there is no exact credit score to guarantee loan approval, a score above 680 is ideal, and anything below this score may lead to a higher interest rate. As shown in the example below, the credit score also affects the interest paid over the loan's lifespan. A 720 credit score or above pays an average of $5,500 in interest, while a 580 credit score or above pays an average of $15,300 in interest. The lower your credit score, the higher the interest you pay, which can negatively affect your overall credit score.
Example of loan interest rates based on credit scores:
- A credit score of 720 or above pays $5,500 in interest on a loan.
- A credit score of 680 or above pays $6,600 in interest on a loan.
- A credit score of 650 or above pays $8,100 in interest on a loan.
- A credit score of 615 or above pays $10,200 in interest on a loan.
- A credit score of 580 or above pays $13,900 in interest on a loan.
In conclusion, while having a good credit score increases the chances of loan approval, a good credit history, down payment, or equity is also crucial.
Tips for Improving Your Credit Score
Boosting your credit score may require time and effort, but there are practical things you can do right now to get started. One of the most important things to keep in mind is patience, as rushing the process can lead to impulsive financial decisions that can actually worsen your credit history. Here are some steps that can help:
Consider opening 3-5 revolving credit accounts to improve your credit score.
Revolving credit is easier to obtain than a large loan and it makes up 30-35% of your overall credit score. It can take a few months to see increases in your score, but maintaining timely payments and keeping your balance around $5-$10 can help quickly improve your score.
Request a credit limit increase for your active revolving credit card accounts.
This can increase your overall credit limits and lower your credit utilization percentage, which is important because high balances on your credit cards can hurt your credit score. Call your credit card company and request a "Credit Limit Increase." They will likely want to see a history of excellent payment before granting your request.
Pay down your balances and keep your debt under control.
Leave a $1-$5 balance on your credit cards and avoid running up large balances. If you have high balances, make a plan to pay them down over time and consider limiting your credit card usage to small purchases like gas or groceries. Remember that your credit card spending habits significantly impact your overall credit score.
A Reflection by Joe
It’s not uncommon to struggle with poor credit. However, if you are committed to making a change and improving your credit situation, you can achieve significant results in a short amount of time. Unfortunately, many people with bad credit feel trapped and think they will never be able to improve their situation. Achieving an excellent credit score requires effort and commitment, but it is an attainable goal for those who prioritize their credit and adjust their spending habits. Developing a budget and working diligently to eliminate poor spending practices can directly impact your credit score. This article provides insight into the world of credit and offers valuable guidance. If you need help with credit repair or improving your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com.
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