It may surprise you to learn that there are actually 30 unique levels of credit scores. Unfortunately, many people are unaware of this fact and can be misled by conflicting information when searching for the best credit score. As an experienced financial literacy and credit repair expert with over 15 years of experience, I'm here to help cut through the confusion and offer valuable insights on topics like credit scores. My name is Joe Mahlow and throughout my career, I've assisted more than 20,000 clients in transforming their credit scores. As you read on, I hope to provide you with the knowledge you need to do the same!
Contents:
Exploring the Different Kinds of Credit Scores
Understanding Credit Scores
What Credit Score is Needed to Buy a House?
What Credit Score Do You Need to Buy a Car?
How to Improve Your Credit Score
Insights from Joe on Improving Your Credit Score
Exploring the Different Kinds of Credit Scores
Credit scores are a crucial aspect of anyone's financial health. With different credit scoring models, it's important to understand them to know how lenders determine a credit score. There are two major credit scoring models to consider: the FICO model and the Vantage model.
FICO Credit Score
The FICO credit scoring model has eight different models, ranging from FICO 2 to FICO 10. Each model produces a different credit score depending on the credit report. Different types of lenders pull different FICO reports. For instance, mortgage lenders use FICO 5, while credit card lenders use FICO 8. Each credit report has different weights, meaning certain factors affect credit scores more than others. For instance, a FICO 5 report weighs heavily on previous mortgage history, while FICO 8 focuses on credit card history.
Vantage Credit Score
The Vantage Score is a credit scoring model developed by Equifax, Experian, and TransUnion to compete with FICO. Credit monitoring websites typically use Vantage to provide a free credit report. Although FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending. However, Vantage scores aren't widely used for lending purposes, so their accuracy depends on the context of the credit score.
Is Vantage Score Accurate?
The Vantage Score provides a decent representation of a credit score. However, since FICO is the most recognized scoring model, Vantage's accuracy can vary depending on the loan. It's still an excellent tool to gauge the overall credit score. In this regard, the Vantage score can give a snapshot of the credit score without having to pay for the FICO score. Eventually, the Vantage model will become popular nationwide, as it provides better scoring models based on current standards. In contrast, FICO is outdated and doesn't provide a clear representation of credit scores. Credit reporting agencies hold the most data. Therefore, they provide the best scoring data.
To understand the different FICO scores better, an account with www.myfico.com is highly advisable.
Understanding Credit Scores
Credit scores are determined by both the FICO and Vantage scoring models and range from 350 to 850. The highest score, 850, is considered the best while the lowest, 350, is the worst. Keep in mind these critical score thresholds as you work towards improving your score:
Scores of 620 or below indicate bad credit
This suggests you may have negative credit history or high-balance credit card accounts or no credit cards at all. To improve your scores, aim to make timely payments, and have ten active revolving credit accounts open. Secured credit cards such as the Credit Builder Card or OpenSky Credit Card are recommended to build up your credit. Once you reach the 620 score range, you can qualify for an FHA home mortgage.
Scores between 640-680 indicate fair credit
You most likely have established credit and a few derogatory marks or accounts on your credit as well as high balances on your credit cards. Newly opened accounts can drop your score temporarily. Don't worry; this is just temporary, and your score will quickly return.
Scores of 740 or higher are considered "super-prime"
If you have this score, you are part of the 20% of the US population with this score and are well-positioned to receive the best interest rates on most loans. Continue to pay your accounts on time and keep revolving credit card accounts paid to maintain your excellent credit score.
What Credit Score is Needed to Buy a House?
The credit score you need to buy a house varies depending on the type of mortgage loan you are applying for. The federal regulations and government backing make most mortgage loan requirements and guidelines similar yet different. There are three types of loans: conventional loans, FHA loans, and VA loans.
Conventional Loans:
This is the most popular loan option and the best savings alternative outside of the VA loan. Conventional loans have no private mortgage insurance (PMI) requirement, which means no added cost to your downpayment or monthly payment. You usually have lower downpayment requirements and better interest rates. A credit score of 640 and a debt-to-debt ratio of no higher than 43% are typically required for conventional loans.
FHA Loan:
The FHA mortgage loan is designed for borrowers with lower credit scores between 580 and 619. Lenders have different financial options, so you need to explore different loan programs to get the best deal. For FHA loans, PMI is a requirement for at least 11 years, which increases your mortgage costs. Higher debt-to-income ratios up to 50% allow low-income earners to purchase more homes. With as little as 3.5% downpayment, you can get into a mortgage with minimal cost. However, the interest rate is usually higher.
VA Loan:
The VA loan has no credit score requirement, but pre-qualification checks previous defaulted loans and government-owed past-due debts. Eligibility requires serving in the United States Military for at least 181 days, serving 90 consecutive days during wartime, serving 6 years with the National Guard, or your spouse’s death during active duty. VA loans usually have the best interest rates and no downpayment requirements. This loan supports veterans and their well-deserved benefits.
What Credit Score Do You Need to Buy a Car?
While having a higher credit score is important when buying a car, what ultimately determines your eligibility is your credit history. Lenders will take into account both your current and previous credit histories when deciding whether or not to extend credit to you. Factors such as late payments on previous auto loans or repossession can make it more difficult for you to obtain a loan. However, even if your credit score is low, there are bad credit or special finance lenders that will qualify just about anyone for a car loan, albeit with additional requirements such as a higher down payment and dealership fees. It's important to have equity or a downpayment when buying a car on credit to maximize your leverage.
As for credit score range for a new vehicle, there's no exact number that guarantees approval, but having a credit score over 680 is ideal. A lower credit score can increase the interest rate you are charged due to the risk you pose to the lender. To illustrate this, a borrower with a credit score of 720 or above would pay around $5,500 in interest on a loan, while someone with a score of 580 or above would pay an average of $15,300 in interest. As you can see, the higher your credit score, the less interest you will pay, ultimately improving your overall credit score.
How to Improve Your Credit Score
Improving your credit score can be achieved through several actionable steps that can be taken with minimal effort. However, it's important to understand that building a good credit score takes time; it's not an overnight process. Therefore, patience is essential during the process of building up your credit score as making impulsive decisions can backfire and make the situation worse.
Outlined below are some proven ways to improve your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit accounts, such as credit cards, can significantly boost your credit score. This option is especially suitable for individuals looking to rebuild their credit or those with limited credit. It may take a lot of effort to build credit through a large loan, but revolving credit accounts offer a higher chance of approval. A secured credit card, such as Open Sky or Credit Builder Card, may be an excellent place to start. They focus on your ability to pay the card on time, rather than your credit score. Revolving credit accounts make up 30-35% of your overall credit score, making it the best option to build credit scores quickly. It may take 2-4 months to see the results, but the key is to ensure you pay your balance on time and keep it between $5-$10 with each payment. You should limit the use of the card to small purchases such as gas or essential groceries.
2. Raise your limits!
Requesting a credit limit increase is an easy way to lower your credit utilization percentage and boost your overall credit score if you have active revolving credit card accounts. Most people use their credit cards a lot, making it crucial to monitor and avoid exceeding 30% of your credit card balances to evade hurting your credit score. To avoid this, you can increase your credit limits, lowering your utilization percentage in the process.
3. Pay down your balances!
Paying down your credit card balance helps maintain a low and close-to-zero balance, which is crucial in improving your credit score. You're not obligated to use your credit cards each month; therefore, using them for small purchases and leaving a $1-$5 balance is recommended. If you have high balances and are not in a position to clear them all at once, make a game plan to pay an 'x' percentage of your paycheck monthly to offset the balance. The worst decision you could make is to pay down your credit card only to run up the balance again. High credit card usage can negatively impact your overall credit score, not to mention the incredibly high-interest rates that go towards payment of interest rather than the principal.
Insights from Joe on Improving Your Credit Score
We have all been in a situation where our credit score is not up to par. However, by taking your credit situation seriously and dedicating time and effort, you can witness significant improvements in your credit score in a short span of time. Many people with bad credit accept this as their fate and lose hope in restoring their credit to a respectable level. But the truth is that developing an excellent credit score requires hard work and commitment, and those who prioritize their credit and adopt better spending habits will ultimately succeed. Start by formulating a budget and identifying and addressing any poor spending habits that might impact your credit score negatively. This article aims to provide better insight into credit and its workings. Reach out to my office at www.asapcreditrepairusa.com if you need any help improving your credit score or require credit repair services.