It may come as a surprise that there are actually 30 varying levels of credit scores. Often when searching for the best credit score, the results can become muddled with conflicting information, leaving many to feel lost in a maze of confusion. As someone with over fifteen years of experience in financial literacy and credit repair, I aim to guide you with honest advice and insights on various topics, including credit scores. Having helped over twenty thousand clients elevate their credit scores, my hope is to empower you with enough knowledge to do the same. Join me as we delve into the intricacies of credit scores.
Contents:
Different Types of Credit Scores Explained
Determining a Good Credit Score
Credit Score Needed to Buy a House
Determining Your Creditworthiness When Buying a Car
Tips on Improving Your Credit Score
Insights from Joe on Improving Your Credit Today
Different Types of Credit Scores Explained
Credit scores are of two types: the FICO model and the Vantage model. It is essential to understand both as they have significance in determining your credit score.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used model regarding credit score. There are eight FICO models from FICO 2 to FICO 10, each of which may give a different credit score depending on your credit report. Different FICO scores depend on the credit report type pulled by various lenders. For instance, a mortgage lender is most likely to pull your FICO 5 credit report, whereas a credit card company will pull your FICO 8 credit report.
Why So Many FICO Scores?
Different credit reports have different weight and factors critical to lenders weigh more heavily on the score. This explains why, for example, a FICO 5 mortgage report gives more weight to a great payment history than to no history or negative history. Similarly, a FICO 8 report relies heavily on previous credit card history, while FICO 2 scores weigh heavily on previous auto history.
Vantage Credit Score
The Vantage Score scoring model was developed by Equifax, Experian, and TransUnion, the three credit reporting agencies that compete with the FICO scoring model. Vantage is relatively new compared to FICO, but it's gaining popularity in personal loans and auto lending. Credit monitoring websites across the United States rely on Vantage to offer free credit reports.
Is the Vantage Score Accurate?
The Vantage Score is a good general idea of your FICO score. However, it's not widely used for lending purposes, which means it may not be accurate when it comes to your actual lending score. Therefore, use your vantage score to give you the best idea of where your overall scores are. The FICO model may be outdated, and the Vantage model may soon replace it as the most recognized scoring model in the next 5-10 years.
For a better visual representation of your different credit scores, create an account on www.myfico.com. Remember, credit reporting agencies are significant data collection agencies capable of providing the best scoring data based on the most recent standards.
Determining a Good Credit Score
Credit scores are essential when applying for loans or credit cards. The two main models are FICO and Vantage, and both utilize a range of 350 to 850. With 350 being the worst score you can have and 850 being the best. Here are some vital score thresholds to consider on your journey when building your credit score:
620 or Below
Scores in this range are considered bad credit. If you fall below this threshold, you may have adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit score, make timely payments, and have ten active revolving credit accounts open. We recommend using the Credit Builder Card or OpenSky Credit Card to help you build your credit. Once you reach the 620 credit score range, you can begin to qualify for an FHA home mortgage.
640-680
Scores ranging from 640 to 680 are considered fair for good credit. While you have established credit, you may have some derogatory marks or accounts and high balances on your credit cards that require paying down. Also, newly opened accounts can cause temporary drops in scores. However, if you recently opened a new account and are in this range, don't worry because it's a temporary drop, and your score will recover.
740+
Credit scores that fall in the 740+ range are considered "super-prime" and offer the absolute best interest rates for most loans. If your score is over 740, then congratulations, you are part of the 20% of the US population with this score. Continuously pay your accounts on time and keep your revolving credit card accounts paid, and you will be in great shape.
Credit Score Needed to Buy a House
The credit score required to qualify for a mortgage loan depends on the type of loan being sought. Since most mortgage loans are federally regulated and backed by the government, their requirements are either similar or different from each other. The three main types of mortgage loans are conventional, FHA, and VA.
Conventional Loans
Conventional loans are the most widely used and typically the most cost-effective option after VA loans. Generally, PMI is not required for conventional loans, making them an ideal choice for those seeking lower payments or down payments. Conventional loans usually have lower down payment requirements and better interest rates than other loans, with a typical credit score requirement of 640 and a debt-to-income ratio not exceeding 43%.
FHA Loan
The FHA loan is for lower credit scores, typically between 580 and 619. FHA loans require that borrowers keep PMI for at least 11 years, which may increase the total cost of the mortgage. However, the loan has a higher debt-to-income limit, up to 50%, allowing for more home purchases on a lower income. FHA loans require a downpayment of as little as 3.5% of the purchase price, which means that borrowers may be able to qualify for a mortgage with less money out of pocket, but typically pay a higher interest rate.
VA Loan
The VA loan has no official credit score requirement, but lenders pre-qualifying borrowers for the program will check for prior defaults and unpaid government debts. Generally, veterans or active-duty military service members and their spouses are eligible for this loan. The VA Loan typically offers the best rates and does not typically require a down payment, making it a great choice for veterans.
Determining Your Creditworthiness When Buying a Car
When purchasing a vehicle, your credit history is a more significant factor than your credit score in determining loan eligibility. While having a high credit score is advantageous, it plays a smaller role in qualifying for an interest rate. Loan providers assess the risk of lending based on a borrower's past and present credit history. Those who have been late on payments or faced repossession will have a harder time getting approved for a loan. Special finance lenders typically qualify almost anyone for a car loan, but with certain criteria, such as higher down payments or additional fees. Dealerships may charge a higher markup on the vehicle to cover the cost of approving a customer's loan. It's important to have equity or a down payment to leverage buying a vehicle on credit.
Credit Score Requirements for a New Car
Credit score requirements vary, and an exact score for loan approval cannot be defined. However, a credit score of 680 or higher is ideal for a car loan, as anything below that score may result in higher interest rates due to the risk involved. The amount of interest paid depends on the credit score, with a higher score resulting in less interest paid overall. For instance, a person with a credit score of 720 or above will pay an average of $5,500 in interest on a loan, while someone with a score of 580 or above will pay an average of $15,300 in interest on a loan. This data shows that maintaining a higher credit score is crucial to save on interest rates and optimize overall creditworthiness.
Tips on Improving Your Credit Score
Improving your credit score is a gradual process that requires patience. Rushing the process can lead to poor decisions that damage your credit further. The following actions can help boost your credit score:
1. Open 3-5 revolving credit accounts
Open 3-5 revolving credit accounts, such as credit cards, to build credit. Revolving credit makes up 30-35% of your score. Start with a secured credit card like the Open Sky or Credit Builder Card, which focuses on your ability to pay on time rather than your credit score. Keep the balance at $5-10 and pay on time.
2. Request a credit limit increase
Request a credit limit increase from your credit card company, either online or by phone. With active revolving credit, this can lower your credit utilization percentage and increase your overall credit limits.
3. Pay down your balances and keep your credit card usage limited
Pay down your balances and keep your credit card usage limited. Leave a balance of $1-5 each month or make a game plan to pay a percentage of your paycheck towards credit card debt each month until it's paid off. Avoid running up the balance again, as it can negate your progress.
Remember to have patience in building your credit score, and these actions will gradually improve it.
Insights from Joe on Improving Your Credit Today
Let's face it: many of us have experienced the burden of poor credit in the past. However, if you make a genuine effort to improve your credit and financial situation, you will be rewarded with significant improvements to your credit score in a relatively short amount of time. It's easy to feel overwhelmed and believe that we are destined to have bad credit forever, but this is not the case. Building a good credit score requires persistence and dedication, but it is entirely achievable with the right mindset. You can start by developing a realistic budget and pinpointing any areas where you tend to overspend. By taking these small steps, you can make meaningful improvements to your credit score. This article seeks to provide helpful insights on credit, while our website at www.asapcreditrepairusa.com can offer you guidance and support for your credit repair needs. Remember, taking action is the first step toward financial freedom.