Were you aware that there are actually 30 levels of credit scores? You might not have realized this, but when searching for the best credit score, online responses may be overwhelming since they provide varying information. Sometimes the data can be misleading and lead you astray. As someone who has been working in the field of financial literacy and credit repair for more than 15 years, my name is Joe Mahlow, and my objective is to provide you with straightforward guidance on topics such as credit scores. Over the years, I have successfully helped more than twenty thousand clients improve their credit scores, and I am hopeful that the information I can offer you will prove to be equally useful. So, let's dive into it.
Contents:
Different Credit Scoring Models: FICO and Vantage Scores
Understanding Credit Scores and How to Improve Them
Credit Score Requirements for Different Mortgage Loans
Determining a Good Credit Score for Buying a Car
Tips to Increase Your Credit Score
Final Thoughts from Joe for Improving Your Credit Score
Different Credit Scoring Models: FICO and Vantage Scores
Credit scoring models are algorithms used by lenders to assess a borrower's credit risk and determine their interest rates and credit limits. The two most widely used credit scoring models are FICO and Vantage scores. It is essential to understand the differences in how they calculate your credit score, as different lenders use different models.
FICO Credit Score
FICO is the most commonly used credit scoring model and offers eight different models, from FICO 2 to FICO 10. Each model calculates your credit score differently, depending on the lender who pulls the report. For instance, a mortgage lender will most likely pull your FICO 5 credit report, while a credit card company will use FICO 8. Each model has a different "weight" assigned to the factors that matter most to the lender, reflecting their individual risk assessment. For example, your previous mortgage history will weigh heavily in a FICO 5 mortgage report, while your previous credit card history will impact FICO 8 scores more. You can check all your different FICO scores at www.myfico.com.
Vantage Credit Score
Vantage Score is a newer credit scoring model developed by Equifax, Experian, and TransUnion to compete with FICO scores. While FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites all over the United States use Vantage to offer free credit reports to consumers. While Vantage scores are accurate, they are not widely used for lending purposes. As such, they provide a general idea of your FICO score and may not be an accurate representation of the credit score lenders use to assess your creditworthiness.
Outdated FICO?
The FICO scoring model has been around since the seventies and does not always provide a clear representation of your credit score. While Vantage offers a more nuanced approach, access to credit data remains a primary factor in developing an accurate credit score. Credit reporting agencies collect vast amounts of data, giving them a significant competitive edge in providing the best scoring data. With lenders increasingly adopting Vantage scores and their ability to provide the best scoring models based on modern standards and data, Vantage may well become the more widely accepted alternative to the FICO scoring model.
Understanding Credit Scores and How to Improve Them
Credit scores, whether measured by FICO or Vantage models, range between 350 and 850, with 850 being the best score and 350 being the worst. It's important to be aware of where you stand in your journey of building credit. Below are some score thresholds that are vital to keep in mind:
1. 620 or below
Any score below 620 is considered bad credit, and likely indicates adverse credit history, high-balance credit card accounts, or no credit cards at all. The best way to improve your score is to make timely payments and have at least ten active revolving credit accounts open. Try using secured credit cards like the Credit Builder Card or OpenSky Credit Card to build your credit. Once you reach a score of 620, you can start qualifying for an FHA home mortgage.
2. 640-680
A score in this range is considered fair for good credit. Although you have established credit, you may have some derogatory marks or accounts, and you may still have high balances on your credit cards that you need to pay down. Opening new accounts can also temporarily drop your score.
3. 740+
A credit score over 740 is considered "super-prime" and will result in the best interest rates for loans. Congratulations if you have a score higher than 740 because you are part of the top 20% of the US population with this score. Keep paying your accounts on time and keeping your revolving credit cards paid to maintain your excellent credit.
Credit Score Requirements for Different Mortgage Loans
The credit score needed to qualify for a mortgage loan varies based on the type of loan. The three most popular types of mortgage loans are conventional loans, FHA loans, and VA loans. Here are the requirements and guidelines for each type:
1. Conventional Loans:
Conventional loans are the most popular type of mortgage loan and are usually the best option for those who have good credit scores. These loans don't require private mortgage insurance and have lower down payment requirements and interest rates than other loan types. To qualify for a conventional loan, you need a credit score of 640 or higher and a debt-to-debt ratio no higher than 43%.
2. FHA Loans:
FHA loans are designed for lower credit scores, typically between 580 and 619. You are still required to pay private mortgage insurance, which is an added cost that could increase your monthly payment. Additionally, FHA loans typically have higher debt-to-income limits of up to 50%, allowing you to purchase more properties if you have a low income. The down payment requirements are as low as 3.5%, but keep in mind that the interest rates can be higher.
3. VA Loans:
VA loans are available to military personnel who meet certain criteria. There are no specific credit score requirements, but any history of defaulted loans or past-due debts owed to the government will be evaluated. This loan typically has the best interest rates and requires no down payment. If you're a qualifying veteran, the VA loan could be the best option for you.
Determining a Good Credit Score for Buying a Car
When purchasing a car, your credit history, not just your credit score, plays a crucial role in determining loan qualification. While a higher credit score is important, it is only one aspect among many that affect the interest rate you receive. Car loan providers assess your prior and current credit histories to determine creditworthiness, particularly in terms of risk. An individual with a troubled credit history, such as a record of late or missed payments, or a car repossession, is less likely to obtain a loan than someone with a clean history. Subprime or unfavorable credit score lenders usually approve car loans for nearly anyone but expect higher down payments and addition fees. Dealerships are charged with fees to reduce the risk of loans that may default, which affects the vehicles available for purchase. Having equity or a down payment is critical to ensure the best bargaining power when buying a vehicle on credit.
Credit Score Range for a New Vehicle
It is not possible to pinpoint an exact credit score to indicate loan approval as many variables influence this outcome. However, having a credit score above 680 is desirable because anything below this level poses a higher risk to the lender and can lead to higher interest rates. For example:
1. A credit score of 720 or higher typically results in approximately $5,500 in interest payments on a new car loan.
2. A credit score of 680 or higher can result in an interest payment of around $6,600 on a new car loan.
3. A credit score of 650 or higher can pile up an interest payment of approximately $8,100 on a new car loan.
4. A credit score of 615 or higher can lead to around $10,200 in interest payments on a new car loan.
5. A credit score of 580 or higher typically results in about $13,900 in interest payments on a new car loan.
6. A credit score of 580 or higher can result in an interest payment of approximately $15,300 on a new car loan.
From this information, it is evident that the higher your credit score, the lower the interest rates and potential savings over time, which can affect your credit score significantly.
Tips to Increase Your Credit Score
Improving your credit score takes time; therefore, patience is essential to building your credit score and making rational decisions about using your credit. Here are a few recommended actions to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, is one of the best ways to build credit scores. It will be challenging to build credit with a large loan, especially if you have limited credit or are rebuilding your credit. To increase your chances of approval, start by opening a secured credit card such as Open Sky or Credit Builder Card, which focuses on your payment history and income rather than your credit score. Revolving credit contributes 30-35% to your overall credit score, making it the best option to improve your credit score quickly. Make regular payments and keep your balance between $5-10 each time – limit your usage to small purchases like gas or groceries.
2. Request Credit Limit Increase
If you have active revolving credit card accounts and you're responsible for paying, you can request a credit limit increase. This can help improve your credit limit, lower your credit utilization percentage, and help improve your credit score.
3. Pay Down Your Balances
It is critical to keep your balances low or close to zero. You can use your credit cards for small purchases, and when paying your bill, leave a $1-5 balance on your credit cards. However, if you have a high balance that you cannot pay off, make a plan and set aside a certain percentage from your paycheck each month to pay it off gradually. It's crucial not to run your balances back up after paying it off, and limiting your credit card usage is essential. Credit card rates are high, and mostly, payments go towards interest and not the principal.
Remember, building your credit score takes patience and deliberate steps toward building your credit history.
Final Thoughts from Joe for Improving Your Credit Score
It's not uncommon to experience less-than-perfect credit. However, with dedication and effort, it's possible to make significant improvements to your credit score in a relatively short period of time. Many people with bad credit fall into a cycle of poor credit for their entire lives, believing it's impossible to have good credit again. Developing a great credit score takes hard work and prioritizing your credit and spending habits. To start, create a budget and focus on fixing any bad spending habits. This will have a direct impact on your credit score. This article aims to clarify credit and credit repair options. If you're looking for guidance and support to improve your credit score, visit us at www.asapcreditrepairusa.com.