It may come as a surprise to many, but there are actually 30 different levels of credit scores. However, when individuals look up the best credit score, they may receive a confusing array of answers from search engines like Google. This deluge of information can often create misunderstandings and lead people astray. My name is Joe Mahlow, and I have worked in the financial literacy and credit repair arena for more than 15 years. My aim is to provide straightforward advice on various topics, including credit scores. I have successfully aided over 20,000 clients in enhancing their credit ratings, and I hope to provide enough useful information here to help you achieve the same! So, let's dive right in.
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores: Ranges and Thresholds
Credit Score Required for Buying a House
Determining Credit Requirements for Buying a Car
Assistance in Raising Your Credit Score
Joe's Advice on Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage Models
Credit scores play a critical role in determining your eligibility for credit and the interest rates you receive. There are two primary credit scoring models: the FICO model and the Vantage model. Understanding both is crucial as they differ in how they calculate your credit score.
FICO Credit Score
The FICO scoring model is the most widely used among lenders. It has eight different versions that vary depending on the type of credit report used to calculate your score. For instance, a mortgage lender will most likely use the FICO 5 model for a home loan application while a credit card issuer will prefer FICO 8. The differences between these models lie in how they weigh various factors. For example, a FICO 5 mortgage report's scores will place a higher emphasis on previous mortgage history than other factors. Auto lenders, on the other hand, typically pull FICO 2 reports, where previous auto history carries greater weight.
Vantage Credit Score
The Vantage scoring model is a new entrant developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion. While credit monitoring websites in the US offer free Vantage scores, lenders widely use the FICO score. However, Vantage's popularity is increasing in some segments, such as personal loans and auto lending. It is accurate in providing a general idea of your creditworthiness, but it may not be as precise as FICO.
Why So Many FICO Scores?
Different credit reports have varying weights, meaning the factors critical to a lender will have a more significant impact on a credit score than less important ones. Thus, the weight given to previous mortgage, credit card, or auto history varies depending on the FICO model used. Using www.myfico.com to view your different FICO scores can help you understand why you have different scores and which areas you need to improve.
FICO vs. Vantage Scoring Models
Although the FICO model is currently the dominant scoring model, the Vantage model's accuracy in providing a general idea of your credit standing makes it a valuable tool. Lenders may widely use Vantage in the future due to its ability to provide the best scoring models based on current standards. The credit reporting agencies have the most comprehensive data on consumer credit, making their scoring models the most reliable sources. While the FICO scoring model may be outdated, it currently remains the most widely used, but using Vantage scores can help give you the best idea of where your credit stands.
Understanding Credit Scores: Ranges and Thresholds
Both FICO and Vantage credit scoring models use a scale of 350 to 850 to rate credit scores, with 850 being the best possible score. To achieve your goal of having the highest possible credit score, it's essential to know where you stand and what score thresholds you should aim for in your credit-building journey. Here's a breakdown of what various credit score ranges mean:
620 or below:
Scores in this range are considered bad credit. You may have a history of adverse credit, high-balance credit cards, or no credit cards at all. To improve your score, be sure to make timely payments and have ten active revolving credit accounts open. You can also consider using a Credit Builder Card or OpenSky Credit Card as these are secured credit cards that help build your credit. Reaching a score of 620 puts you in a position to qualify for an FHA home mortgage.
640-680:
Scores in this range are considered fair for good credit. You have established credit, but there may be some derogatory marks or accounts on your credit report. Pay down any high credit card balances, and be aware that newly opened accounts may temporarily drop your score. Don't worry; your score will return in due course.
740+:
A credit score over 740 is considered "super-prime." Congratulations if you have a score this high because you're part of the 20% of the U.S. population that do. A score this high will give you the absolute best interest rate for most loans. To maintain this score, keep up your good work of paying accounts on time and keeping revolving credit card accounts paid off.
Credit Score Required for Buying a House
The credit score required to buy a house varies depending on the type of mortgage loan you plan to qualify for. Various mortgage loans have different requirements and guidelines because of government backing and federal regulation. There are three common types of mortgage loans, such as conventional loans, FHA loans, and VA loans.
1. Conventional Loans
With a typical credit score requirement of 640, conventional loans are popular, and being the best "savings" loan option, they do not require private mortgage insurance (PMI), which ultimately increases your monthly payment or down payment. Conventional loans have better interest rates and lower down payment requirements than other mortgage loans, with a debt-to-debt ratio not exceeding 43%.
2. FHA Loan
FHA loans are designed for lower credit scores ranging from 580 to 619. With the FHA loan's debt-to-income limit up to 50%, you can purchase more homes than conventional loans if you have less income, but the loan requires you to maintain PMI for at least 11 years, potentially adding to your mortgage's overall cost. The down payment required on an FHA loan is as low as 3.5%, allowing you to have a higher interest rate but less money out of your pocket for your mortgage purchase.
3. VA loan
VA loans usually have the best interest rates, don't require a down payment, and don't have specific credit score requirements. However, to qualify for this loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse lost their life while on active duty. Also, the VA loan pre-qualification process typically examines previous defaulted loans and past-due debts owed to the government. The VA loan is an excellent option for veterans as it is designed to give back to them.
Determining Credit Requirements for Buying a Car
When it comes to buying a car, having a strong credit history is more important than just having a high credit score. Although a high credit score does play a role in getting a car loan, it is not the determining factor of the interest rate you will qualify for. The lenders will assess your credit status, past and present, to decide the risk involved in extending you a car loan. If they find any credit issues like late payments, repossession, or any other issues, you may face difficulty in loan approval. Although some lenders will qualify almost anyone for a car loan regardless of their credit score, they may require additional criteria to meet, such as higher down payment and additional fees to extend the loan. To be successful in buying a car on credit, you must have equity or a down payment.
Credit Score Requirements for a New Vehicle
There is no specific credit score required to get approval for a car loan as various other factors are at play. However, a credit score of over 680 is an ideal score. If you have a score below this, you are considered to be high-risk and may be charged higher interest rates. Recent data indicates that individuals with higher credit scores pay less interest on car loans compared to those who have lower credit scores. For instance, an individual with a 720 or above credit score may pay an average interest of $5,500 on a loan while an individual with a score of 580 or above may pay an average of $15,300 in interest. Therefore, it is vital to maintain a good credit score, as it can impact your overall credit history affecting your future purchases.
Assistance in Raising Your Credit Score
Improving your credit score requires effort and patience as it takes time to build a good credit history. To help increase your credit score, here are some things you can do right now:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is a great option to maximize your credit score as it is easier to obtain than a large loan. If you have limited credit or are looking to rebuild your credit, it is best to start with secured credit cards like those offered by Open Sky or Credit Builder Card. This type of credit makes up 30-35% of your credit score. The key to improving your credit score through revolving credit is to ensure you pay your balance on time and limit your purchases to small expenses like gas and groceries ($5-$10).
2. Raise your credit limits
One way to increase your credit score is to request a credit limit increase on your active revolving credit cards. You can do this online or by calling your credit card company and requesting a "Credit Limit Increase." Credit card companies usually require 7-15 months of excellent payment history before they approve a credit limit increase. By increasing your credit limits, you lower your credit utilization percentage, which is a major factor in your credit score.
3. Pay down your balances
Keeping your balance low and close to zero is essential. If you have high balances, make a plan to take a percentage of your paycheck each month and pay down your credit card balances. It is crucial to limit your credit card usage as your credit card spending habits play a significant role in your overall credit score. Additionally, most of your credit card payments go towards interest and not principal, making it essential to pay down your balances consistently.
Joe's Advice on Improving Your Credit Score
We have all faced the challenge of having subpar credit scores at some point. However, if you are serious about improving your credit situation, there are steps you can take to turn things around quickly. Many people fall into a never-ending cycle of credit issues that seem insurmountable. However, those who are willing to dedicate themselves to improving their credit and spending habits will reap the rewards. Start by creating a budget and making a conscious effort to correct bad financial habits. Doing so will have a direct impact on your credit score. This article provides valuable insights into credit management. If you need assistance in improving your credit score or require credit repair services, contact our office today at www.asapcreditrepairusa.com.
Key takeaways:
- Improve your credit score by prioritizing your finances and developing good spending habits.
- Create a budget and eliminate bad spending habits to see an immediate improvement in your credit situation.
- Seek professional help for credit repair services if needed.