It may come as a surprise to many that there exist 30 different levels of credit scores. Often, when one types 'best credit score' into Google, an array of varying answers and information is presented. This not only can cause confusion but also lead individuals down a confusing path. My name is Joe Mahlow, and I have been working in the financial literacy and credit repair industry for more than fifteen years. My main objective is to provide insight into these areas, such as credit scores. Throughout my career, I have assisted over 20,000 clients in improving their credit scores. As an assistant, I hope to offer the same valuable information to you. So, let us dive in!
Contents:
What Are the Different Credit Scoring Models Used
Understanding Good Credit Scores
Choosing the Right Credit Score for your Mortgage Loan
Determining the Ideal Credit Score Range for Purchasing a Car
Tips on Improving Your Credit Score
Insights from Joe
What are the different credit scoring models used?
Understanding credit scoring models is essential, particularly for determining differences in credit score calculation. Two commonly used models are the FICO model and the Vantage model.
FICO Credit Score Model
The FICO credit score model is the most widely used and popular model. Eight different FICO models exist, ranging from FICO 2 to FICO 10. Each model produces a different credit score based on your credit report. In other words, the credit scores you receive for mortgages, credit cards, or auto loans will vary.
Why are there different FICO scores?
The different FICO scores are influenced by various factors deemed critical by the lender. For example, FICO 5 mortgage reports weigh heavily on previous mortgage history. Conversely, credit card companies primarily use the FICO 8 report, where the history of credit card payments affects the score the most. Similarly, Fico-2 reports are pulled by auto lenders, with previous auto history playing a decisive role in the user's credit score.
Vantage Credit Score Model
The Vantage Score is a relatively new credit score model developed by the three major credit reporting agencies. Though not as widely used in lending, Vantage is increasingly popular in some sectors, such as personal and auto loans. In addition, many credit monitoring websites offer a free copy of your credit report using the Vantage Score.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but since it's not widely used for lending purposes, it may not accurately represent your actual lending score. It's advisable to use the Vantage score as a “general idea†of your FICO score. Despite this, many experts believe that Vantage is likely to replace FICO as the most dominant credit score model within the next decade due to its ability to provide the best scoring models based on modern standards.
Understanding Good Credit Scores
Credit scores are measured on a scale of 350 to 850 for both FICO and Vantage models. A score of 350 represents the worst credit score, while 850 is recognized as the best. As you strive to attain the highest score, knowing where you are in your credit-building journey is crucial, with some critical score thresholds to consider:
1. Scores of 620 or below
A score of 620 or lower is classified as bad credit, indicating a negative credit history, high-balance credit card accounts, or no credit card usage. The ultimate way to improve your credit score is to ensure timely and consistent payments and have at least ten active revolving credit accounts. Secured credit cards, such as OpenSky Credit Card and Credit Builder Card, are highly recommended for establishing good credit. Once your credit score reaches 620, you will become eligible for FHA home mortgages.
2. Scores between 640-680
Scores ranging from 640-680 are considered fair for good credit and indicate an established credit history with a few derogatory marks or high account balances. Also, opening new accounts can temporarily lower your score, but with time, your score will return to its previous state.
3. Scores of 740+
A score of 740 or higher is regarded as "super-prime" and will qualify you for the most advantageous loan interest rates. If you have this score, you are part of the US population's top 20% with excellent credit. Maintaining consistent timely payments and offsetting revolving credit card accounts can help you keep these scores.
Choosing the Right Credit Score for your Mortgage Loan
The credit score needed to qualify for a mortgage loan depends on the type of loan you are seeking. Federal regulation and government sponsorship make most loan requirements similar, but different. Here are the three most common loan types and their unique requirements: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most widespread and economical loan option outside of VA. Conventional loans often produce better interest rates, along with a lower down payment requirement. PMI, or private mortgage insurance, is not necessary. PMI serves as a guarantee for the lender if a payment lapse occurs. The typical credit score qualification for conventional loans is 640 with no more than 43% debt-to-income ratio.
FHA Loans
FHA loans are designed for lower credit scores in the range of 580-619. It's essential to research loan programs since all present various options and requirements for a particular credit score. Typically, PMI is required and remains intact for 11 years. Prospective homebuyers can use FHA loans to purchase a house worth more than conventional loan limits with a higher debt-to-income ratio. The FHA loan requires a minimum down payment of 3.5%, and although interest rates may be higher, it's a great option for those with a limited budget.
VA Loans
VA loans have no credit score requirements but will analyze any past government-related unpaid debts or default loans. VA loans do not require a down payment, and the interest rates are typically the lowest. Eligibility criteria include a minimum of 181 days of military service, 90 consecutive days of services during wartime, 6 years of National Guard service, and a deceased spouse who served in the military. VA loans are the ideal borrowing option for our veterans.
Determining the Ideal Credit Score Range for Purchasing a Car
When it comes to purchasing a car, the most crucial factor in determining your eligibility lies in your credit history rather than your credit score. While a higher credit score holds great importance, it plays a minor role in determining the interest rate at which you qualify for the loan. Let me explain why. Your credit history, both past and present, serves as a major determining factor in deciding the level of risk involved in extending credit to you. Therefore, if you have ever been late in paying off an auto loan or have faced repossession, your chances of securing a loan approval become more challenging compared to someone with a clean credit history. Despite this, even if you have a poor credit score, there are special finance lenders who will still qualify you for a loan, albeit with additional requirements such as higher down payments and dealership fees. The dealership fee mitigates the risk of defaulting on the loan and approves your application. However, such fees lead to a hike in prices where you might be selected for a vehicle with a higher markup. Lastly, it is suggested to have some equity or a down payment to leverage while purchasing a car through credit.
Range of Credit Score for Buying a New Vehicle
While there is no specific credit score range that guarantees loan approval, anything above 680 is considered an ideal score since anything below this range elevates the interest rate charged by the lender due to the assumed increased risk involved. To further support our observation, here's the average interest rate charged on loans for different credit scores:
1. A credit score of 720 or above, on average, will pay $5,500 in interest on a loan.
2. A credit score of 680 or above, on average, will pay $6,600 in interest on a loan.
3. A credit score of 650 or above, on average, will pay $8,100 in interest on a loan.
4. A credit score of 615 or above, on average, will pay $10,200 in interest on a loan.
5. A credit score of 580 or above, on average, will pay $13,900 in interest on a loan.
6. A credit score of 580 or above, on average, will pay $15,300 in interest on a loan.
From the above data, we can infer the higher the credit score, the lesser the interest rate, affecting the overall credit score of the borrower.
Tips on Improving Your Credit Score
Building a positive credit score takes time and patience. Unfortunately, many people make irrational and bad decisions with their credit, which only worsens their situation. However, you can take some steps to enhance your credit score quickly and with little effort. You can do the following:
1. Open 3-5 Revolving Credit Accounts
Revolving credit is an excellent option to help maximize your credit scores. With revolving credit, it's easier to obtain credit approvals, especially if you're looking to rebuild your credit or have limited credit history. To start, consider a secured credit card such as Open Sky or Credit Builder Card, which focuses more on your ability to pay your bills on time rather than your credit score. Revolving credit makes up 30-35% of your overall credit score and is an excellent option to build credit scores quickly. Always ensure you pay your balance on time, keep it at $5-10 each time you make a payment, and limit your card usage to small purchases like gas and groceries.
2. Request a Credit Limit Increase
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. Most people spend a lot using their credit cards, and exceeding 30% of your overall limits can hurt your credit scores. To avoid this, you can ask your credit card provider to increase your credit limit. Each credit card company has different processes. You can do it online or call in and request a "Credit Limit Increase." They will typically have you fill out some information, including your current income. A credit card company usually wants to see seven to fifteen months of excellent payment history on a credit card before they agree to increase the credit limit.
3. Pay Down Your Balances
Keeping your balance low and close to zero is an essential step to improve your credit score. Use your credit cards for small purchases and try to leave a balance of about $1-5 each month. If you currently have high balances, create a plan to pay them down. To keep your progress steady, limit your credit card usage and resist the temptation to run up your balances after paying them down. Your spending habits will play a significant role in your overall credit score, so keep them in check. Remember, rates on a credit card are incredibly high, and most of your payments will go towards interest and not principal.
Insights from Joe
It's common to experience a decrease in credit ratings at some point. However, if you are committed to improving your credit situation, there are steps you can take to improve your credit score quickly. Many consumers with credit problems find themselves stuck in a never-ending cycle of poor credit and feel that getting good credit is impossible. Building a good credit score requires significant effort, and those who are determined to prioritize their credit will ultimately succeed. Begin by developing a budget that will help you identify and correct any negative spending habits which can directly impact your credit score. This article provides valuable information about credit. For assistance with your credit score or credit repair needs, contact our office today at www.asapcreditrepairusa.com.