It may surprise you to learn that there are actually 30 distinct levels of credit scores. While many people search for the best credit score, they often find themselves overwhelmed with the varying and sometimes conflicting information they discover online. Unfortunately, this can lead to confusion and even misguided decisions. As someone who has spent more than fifteen years in the fields of financial literacy and credit repair, I aim to provide straightforward guidance on topics such as credit scores. With a track record of helping over 20,000 clients improve their credit scores, I hope to equip you with the knowledge you need to do the same. Let's dive in!
Contents:
Types of Credit Scores: FICO and Vantage Compared
Understanding Credit Scores
What Credit Score Do You Need To Buy a House?
What Credit Score Do You Need to Buy a Car?
Tips for Improving Your Credit Score
Joe's Insights on Achieving a Better Credit Score
Types of Credit Scores: FICO and Vantage Compared
When it comes to credit scores, there are two main models to keep in mind: the FICO model and the Vantage model. By understanding the differences between these two models, you can better understand how your credit score is calculated.
FICO Credit Score
The FICO model is the most widely used credit scoring model, with eight different FICO models currently in use. Each of these models calculates your credit score differently, depending on the factors most important to the lender in question. For example, if you're applying for a home loan, the lender will typically use your FICO 5 credit report, while a credit card company will use your FICO 8 report.
Why are there so many FICO scores? Each credit report has a different "weight," which means that certain factors will have a greater impact on your score depending on the type of loan you're applying for. For example, your previous mortgage history will be more heavily weighted for a FICO 5 mortgage report, while your credit card history will be most important for a FICO 8 report.
To obtain a visual representation of your different FICO scores, sign up for an account at myfico.com.
Vantage Credit Score
Developed by the three major credit reporting agencies, the Vantage Score is a newer credit scoring model designed to compete with FICO. While it's gaining popularity in certain sectors, such as personal loans and auto lending, it's not widely used for lending purposes.
Is the Vantage Score accurate? Yes, but it depends on the context. Since it's not widely used for lending purposes, it may not accurately reflect your actual lending score. However, it can be a helpful tool for getting a general idea of where your overall credit score stands.
While FICO currently dominates the lending sector, the Vantage model may become more widely used in the future as its ability to provide more accurate scoring data evolves over time. As credit reporting agencies continue to collect more data, they will be better equipped to provide the most accurate credit scores possible.
Understanding Credit Scores
Credit scores are an essential factor when it comes to borrowing money. FICO and Vantage models are the most commonly used, with scores ranging from 350 to 850. To work towards achieving the best scores, it's essential to know where you stand in building your credit. Here are some important score thresholds:
Poor credit (below 620)
Having a credit score below 620 is considered bad credit. It indicates that you may have adverse credit history, high-balance credit card accounts, or no credit cards at all. Improving your credit score starts with paying bills on time and having ten active credit accounts. A Credit Builder Card or OpenSky Credit Card is a good option to help build your credit. Once your credit score reaches 620, you can start qualifying for an FHA home mortgage.
Fair credit (640-680)
Scores in this range indicate established credit but may have derogatory marks or high credit card balances. A drop may occur temporarily if you have just opened a new account. Paying down credit card balances can help improve scores.
Super-prime credit (740+)
Credit scores above 740 are considered super-prime. This score range provides the best interest rates for most loans. This puts you among the 20% of the US population with this score. Keep up the good work by paying bills on time and maintaining revolving credit card accounts.
What Credit Score Do You Need To Buy a House?
The credit score required to purchase a home varies depending on the type of mortgage loan you are seeking. Mortgage loans are heavily regulated by the government, which means that the requirements and restrictions are almost the same across the board. The three most commonly used mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most sought-after and cost-effective loans available. You do not need to keep private mortgage insurance if you have a conventional loan. Conventional loans often have lower downpayment requirements and lower interest rates while requiring a minimum credit score of 640 and a debt-to-debt ratio of no more than 43%.
2. FHA Loans
FHA loans are designed for individuals who have lower credit scores, normally ranging from 580 to 619. However, not all lenders have the same credit score restrictions, so be sure to shop around. FHA loans usually require the borrower to maintain private mortgage insurance for at least 11 years. Although FHA loans have a higher debt-to-income limit of up to 50%, they typically require a downpayment as low as 3.5% of the purchase price. However, the interest rate on the loan is usually higher than conventional loans.
3. VA Loans
To qualify for a VA loan, you must have served for at least 181 days, served 90 consecutive days during wartime, served six years in the National Guard, or be a surviving spouse of a deceased veteran who died during active service. There is no specified credit score for the VA loan. However, they typically have the lowest interest rates available, and you do not have to make a down payment. VA loans provide veterans with a path to homeownership as an act of gratitude for their service to the country.
What Credit Score Do You Need to Buy a Car?
When it comes to buying a car, your credit history carries more weight than your credit score. Although having a good credit score is important, it is not the sole factor that determines your interest rate. Lenders evaluate your credit history, which includes your past and current credit behaviors, to assess the risk involved in extending credit. This means if you have previous auto loan late payments or a repossession on your record, you may have a more difficult time getting approved for a loan. Some lenders, particularly the ones that work with bad credit or special finance, may still approve you, but they may require you to meet certain criteria such as a higher down payment or additional fees. Dealerships may also charge additional fees to the higher-risk applicants to reduce their risk of default. Therefore, having equity or a down payment gives you more bargaining power when buying a vehicle on credit.
Despite the fact that there is no set credit score for loan approval, aiming for a credit score above 680 can improve your chances. A low credit score may result in higher interest rates due to the risk you pose to the lender. For instance, someone with a 720 credit score or more may pay an average interest of $5,500 on a car loan, whereas someone with a 580 credit score or more may pay an average interest of $15,300. It's evident that the higher your credit score, the less interest you will pay, which ultimately affects your credit utilization.
Tips for Improving Your Credit Score
Improving your credit score is an achievable goal that requires patience, time, and consistent effort. Rushing into quick fixes can lead to irrational decisions and more significant problems with credit. By following some straightforward tips, you can gradually increase your credit score. Here are the three most effective things you can do to improve your credit score:
1. Open revolving credit accounts
Revolving credit accounts, such as credit cards, can help you build your credit score faster. Applying for large loans can be challenging, especially if you're starting or rebuilding your credit, which is why a secured credit card might be a great option. Secured credit cards like Open Sky or Credit Builder Card focus on your ability to pay bills regularly rather than your credit score. By opening three to five credit card accounts, you stand a better chance of getting approved and might boost your credit score by 30-35% once the accounts are active for 2-4 months.
2. Increase your credit limits
Requesting a credit limit increase from your credit card company could lower your credit utilization percentage, provided you pay bills on time. Credit utilization percentage represents the amount of credit you're using compared to your overall limits. Most people tend to use their credit cards a lot, which can hurt their credit scores if utilized balances exceed 30% of overall limits.
3. Pay down your balances
Keeping your credit card balances low is crucial and can help you maintain a high credit score. Avoid maxing out your credit cards every month and use them sparingly, especially for small purchases like gas or groceries. Additionally, paying off your credit card balances regularly and having a small balance of $1-$5 is ideal. If you have high balances, create a plan to pay off your credit cards gradually. Limiting your credit card usage can help you build a solid payment history that can boost your credit score over time.
Joe's Insights on Achieving a Better Credit Score
It's not uncommon to have poor credit in today's world, but by taking a proactive approach to your credit situation, you can make significant improvements to your score in a short amount of time. Unfortunately, many individuals with bad credit fall into the trap of thinking that a good score is impossible to attain. However, it is possible to achieve a great credit score by creating a budget, identifying and addressing any poor spending habits, and making your credit a top priority. These efforts will have a direct impact on your overall credit rating. For those in need of additional guidance or assistance with credit repair, feel free to visit our website: www.asapcreditrepairusa.com.