Were you aware that there are thirty distinct levels of credit scores? It's a widely held belief that when individuals look up top credit scores online, it can be a daunting task to obtain a clear answer. A plethora of information available on the internet can often be perplexing and sometimes, even lead you astray. I'm Joe Mahlow, and I've been involved in the financial literacy and credit repair industry for more than fifteen years. My aim is to provide unfiltered advice on various subject matters, such as credit scores. I've successfully helped over twenty thousand clients elevate their credit scores and I aspire to do the same for you. So, let's dive in!
Contents:
Different Credit Scoring Models: FICO and Vantage
Understanding Credit Scores: What You Need to Know
Determining the Ideal Credit Score for Homeownership
What Credit Score is Needed to Buy a Car?
Tips for Improving Your Credit Score
Joe's Insights on Managing Poor Credit
Different Credit Scoring Models: FICO and Vantage
Understanding credit scores is crucial when applying for credit. The two primary credit scoring models are the FICO model and the Vantage model. Although both models have some similarities, it is vital to understand their differences, particularly when calculating your credit score.
FICO Credit Score
The FICO scoring model is the most popularly used credit scoring model. There are eight types of FICO scores, ranging from FICO 2 to FICO 10. Each FICO model calculates different credit scores depending on your credit report, depending on the type of lender you use. For instance, a mortgage lender will likely pull your FICO 5 credit report, while a credit card company will probably use FICO 8. Each FICO score weighs different factors differently. The score is heavily influenced by critical factors related to a specific lending type. For example, a FICO 5 report for a mortgage lender weighs heavily on previous mortgage history.
Vantage Credit Score
The Vantage Score was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) and is becoming more popular for personal loans and auto lending. Vantage Score is a new credit scoring model compared to FICO, which has been in use since the 1970s. Although Vantage Score is accurate, it is not widely used for lending purposes, and therefore, it may not be accurate when applying for loans. Instead, it can give you a general idea of your FICO score.
Conclusion
Both credit scoring models, FICO and Vantage, are accurate scoring models, but they differ in how they calculate credit scores. It is important to understand the different models and their uses, with FICO being the most widely accepted scoring model for lenders. However, Vantage is an excellent general model to understand your creditworthiness. To see your different credit scores, sign up for an account with myfico.com. In the future, Vantage may become more widespread as users seek the best scoring data based on current standards.
Understanding Credit Scores: What You Need to Know
Credit scores, whether FICO or Vantage, range from 350 to 850, with the higher number indicating the best possible score. Here are key score thresholds to keep in mind as you aim for the highest scores in your credit journey:
1. 620 or Below:
This score is considered bad credit, indicating adverse credit history or high-balance credit card accounts or no credit cards at all. To improve your credit scores, make timely payments, and have ten active revolving credit accounts open. Consider applying for a Credit Builder Card or OpenSky Credit Card, as they offer secured credit cards to help you build your credit. Reaching the 620 credit score range makes you eligible for an FHA home mortgage.
2. 640-680:
Scores in this range are considered fair for good credit. It indicates established credit, but there may be some derogatory marks or accounts on your credit, or some high balances on credit cards that need paying down. New accounts can also affect your scores temporarily. Don't worry; with time, your credit scores will return to normal.
3. 740+:
Any credit score above 740 is considered "super-prime" and opens doors to the best interest rates for most loans. If you have over a 740 credit score, you are part of the 20% of the US population with this score – keep up the great work! Always remember to pay your accounts on time and maintain low balances on your revolving credit cards. You are in great shape!
Determining the Ideal Credit Score for Homeownership
The answer to the question of what a good credit score entails when purchasing a home is dependent on the type of mortgage loan you intend to qualify for. Due to federal regulations and government endorsement, you may find that the requirements and criteria for most mortgage loans are identical, if not varied. The three most common types of mortgage loans are: conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are the most sought-after loans and usually the best option for savings, apart from VA loans. Allowing for lower down payments, more favorable interest rates, and requirements for PMI, which protects the lender in case of default, are all some of the advantages of a conventional loan. Conventional mortgage loans necessitate a credit score of at least 640 and a debt-to-debt ratio less than or equal to 43%.
FHA Loan
For FHA mortgage loans, those with credit scores ranging from 580 to 619 are eligible. If you fall within the credit score limits, remember that all loan programs are different and it's worthwhile to shop around for various lenders that will provide the best financial option for you. PMI is typically required for FHA loans for at least 11 years, which can add to your mortgage costs and may be worth considering, particularly if you are on a budget. This loan typically has a higher debt-to-income allowance of up to 50%, allowing those with lower incomes to purchase more homes than would be feasible with a conventional loan. Moreover, an FHA loan usually requires a smaller down payment of only 3.5% of the purchase price, enabling you to obtain a mortgage for less out of pocket than a conventional loan. On the downside, interest rates on FHA loans are usually higher.
VA Loan
While there isn’t a specific credit score requirement for the VA loan, the pre-qualification process considers previous defaulted loans, along with any overdue debts owed to the government. To be eligible for a VA loan, you must have served the US military for at least 181 days, served for 90 consecutive days during wartime, served six years with the National Guard, or have a spouse who lost their life during active duty. The VA loan typically has the most favorable interest rates available, and a down payment is usually not required, making it an excellent option for veterans.
What Credit Score is Needed to Buy a Car?
When purchasing a car, your credit history holds more weight in terms of determining your eligibility than just your score. Nevertheless, it's still important to maintain a good credit score when buying a vehicle, as this will affect the interest rates offered to you. Lenders review your credit history to determine creditworthiness, assessing the risk of extending credit. If you've had issues in the past, such as late payments or repos, it can hurt your chances of securing a car loan. However, even the worst credit or special finance lenders will qualify you for a loan with particular criteria such as a higher down payment and additional dealership fees attached. A dealership may also charge you a fee to help minimize risk and approve your loan. To improve your leverage when buying a vehicle on credit, it's advisable to have equity or a downpayment.
The credit score range for a new car:
It's impossible to identify an exact credit score requirement to qualify for a car loan. Nevertheless, having a credit score over 680 is preferable, with a lower score resulting in higher interest rates. The following table shows how interest rates differ with various credit scores:
720+ credit score pay an average of $5,500 in interest on a car loan
680+ credit score pay an average of $6,600 in interest on a car loan
650+ credit score pay an average of $8,100 in interest on a car loan
615+ credit score pay an average of $10,200 in interest on a car loan
580+ credit score pay an average of $13,900 in interest on a car loan
Below 580 credit score pay an average of $15,300 in interest on a car loan
This data highlights that maintaining an excellent credit score can significantly impact the interest rates offered.
Tips for Improving Your Credit Score
Improving your credit score is possible with some simple strategies that don't require a lot of effort. However, it's important to realize that a good credit score takes time to build and won't happen overnight. Building credit requires patience because impulsive decisions can worsen your problems. Here are some things that you can do immediately to improve your credit score:
1. Open 3-5 revolving credit accounts
Revolving credit, such as credit cards, is an excellent option to maximize your credit score. Secured credit cards like Open Sky or Credit Builder Card are suitable for someone with limited credit because they don't focus on your credit score but on your ability to pay on time. It takes 2-4 months for the increase in credit scores to reflect, but paying your balance on time and keeping it at $5-10 each time is crucial. Small purchases like gas or groceries should be the limit of your usage.
2. Raise your Limits
To decrease your credit utilization percentage, increase your credit limits by requesting a "credit limit increase" on your credit cards. The process differs for every credit card company, but if you're unsure, call your credit card company and ask. Typically they'll ask for your information, including your current income history, and they look for at least 7-15 months of outstanding payment history.
3. Pay down your balances
Keeping your balances close to zero is essential. Small purchases are recommended. However, leaving a $1-5 balance on your credit card each month when you pay the bill demonstrates good activity. If you currently have high balances, make a plan to pay your credit cards off monthly. Limiting your credit card usage will play a massive role in your overall credit score.
Joe's Insights on Managing Poor Credit
We've all found ourselves in a situation where our credit isn't up to par. However, it's important to recognize the seriousness of our credit situation and commit the time and effort to improve it. Sadly, many individuals with bad credit fall into a vicious cycle, feeling as though good credit is an unattainable ambition. Developing a solid credit score takes dedication and a willingness to prioritize better spending habits. A great first step toward achieving this is by creating a realistic budget and focusing on fixing poor spending habits. Through consistent effort, it's possible to witness a substantial improvement in your credit score. For more information and assistance with credit repair, please don't hesitate to contact my office at www.asapcreditrepairusa.com.
Here's a summary of the main points:
Acknowledge and take seriously the state of your credit.
Avoid getting stuck in a cycle of bad credit.
Good credit requires dedication and prioritization of better spending habits.
Creating a budget and fixing poor spending habits are crucial steps in fixing your credit score.