It may come as a surprise to many, but did you know that there exist as many as 30 different levels of credit scores? Often, when people try to search for the best credit score, they tend to receive a plethora of varying answers on Google. Unfortunately, this wide range of information can often be confusing, misleading, and ultimately lead individuals down a disorienting path. My name is Joe Mahlow, and I have been involved in the fields of financial literacy and credit repair for over fifteen years. My aim is to provide you with honest insights into various topics, such as credit scores. Having assisted over twenty thousand clients to improve their credit scores, I wish to empower you with the necessary knowledge to achieve the same. So without further ado, let's dive right in!
Contents:
Different Types of Credit Scores
Understanding Good Credit Scores
Credit Score Required to Qualify for Different Types of Mortgage Loans
What Credit Score Do I Need to Buy a Car?
Assistance with Improving Your Credit Score
Joe's Advice on Credit Improvement
Different Types of Credit Scores
Credit scores determine your eligibility for loans and impact the interest rates you receive. There are two main credit scoring models, the FICO and Vantage models, that you should understand for their different ways of calculating credit scores.
The FICO Credit Score
With eight different FICO models (FICO 2 to FICO 10), you will get a different credit score depending on the credit report used. Lenders pull different FICO reports depending on the type of credit you apply for. For instance, if you seek a mortgage, the lender will most likely pull your FICO 5 credit report, while a credit card application will require a FICO 8 report. Each FICO model has a different "weight," meaning that the factors critical to the lender impact the credit score more than the less important factors. For example, a FICO 5 mortgage report focuses more on payment history, while a FICO 8 report primarily considers your credit card history.
The Vantage Credit Score
The Vantage Score is a newer scoring model developed by Equifax, Experian, and TransUnion to compete with FICO. Credit monitoring websites typically use Vantage to give you a free copy of your credit reports. While FICO dominates the lending sector, Vantage is gaining popularity in some sectors for assessing credit risk for personal loans and auto lending. While Vantage is a reliable scoring model, its accuracy varies as it is not widely used for lending purposes.
The Future of Credit Scores
The Vantage Score is gaining momentum, and it may become the preferred scoring model in the next 5–10 years. The FICO scoring model is regarded as outdated and may not provide the best representation of credit scores. The credit reporting agencies have extensive data on credit scores, making them the best data providers for credit scores.
Understanding Good Credit Scores
Credit scores for both FICO and Vantage models vary between 350 and 850, with 850 being the best score while 350 is the worst. It's crucial to know where you stand when building your scores towards your goals. Below are some score thresholds that are important to keep in mind:
620 or below:
This is considered bad credit. A low score means that you have some adverse credit history, outstanding high-balance credit card accounts, or no credit cards at all. The best way to improve your credit score is to make timely payments and have ten active revolving credit accounts open. Credit Builder Card or OpenSky Credit Card can help you build your credit score. Once you reach 620, you can qualify for an FHA home mortgage.
640-680:
This score range is considered fair or good credit. Having credit established, even with some derogatory accounts, gives you scores in this range. You may have high balances on your credit cards and some newly opened accounts that can temporarily bring down your credit score. Don't worry; it's a small setback, and they will bounce back.
740+:
Any credit score over 740 is considered super-prime. This score range will get you the most favorable interest rates for most loans. If you have a credit score of 740 or greater, congratulations, you're among 20% of the US population who have this score. Keep it up! Pay your accounts timely, and maintain your revolving credit card accounts in good standing. You're in excellent shape!
Credit Score Required to Qualify for Different Types of Mortgage Loans
Different types of mortgage loans have different credit score requirements that you need to meet to qualify for each. There are three main types of mortgage loans, conventional loans, FHA loans, and VA loans. The credit score requirements and debt-to-debt ratio (DTI) for each are different.
Conventional Loans
Conventional loans are the most popular loans and have a credit score requirement of 640 with a DTI not exceeding 43%. These loans typically have lower downpayment requirements and better interest rates than other mortgage loans. To get the best financial option, shop around for different lenders that provide the best savings.
FHA Loans
FHA loans are for lower credit scores, usually between 580 and 619. Compared to a conventional loan, they require a higher percentage as down payment, but the rate is typically higher. You will also need to pay PMI for at least 11 years, which can increase your monthly payment. FHA loans have a higher DTI limit of 50%, making them a better option for those with a lower income.
VA Loans
VA loans do not technically have a credit score requirement but they will look into your previous defaulted loans and any government-owed past-due debts when reviewing your pre-qualification. The VA loan, which is available to veterans, has the best interest rates and usually does not require a down payment.
What Credit Score Do I Need to Buy a Car?
When purchasing a car, your credit history is the most critical factor in determining your eligibility, rather than just your credit score. While a good credit score is crucial, it plays a relatively smaller role in the interest rate you qualify for. Creditors assess your past and current credit history to determine how much risk they are undertaking when extending credit to you. This means that even if you have a higher credit score, having a history of delayed payments or a repossession can affect your eligibility for a loan. Auto dealerships often work with special finance lenders who qualify almost anyone for a car loan, but you may be required to meet certain criteria, such as a higher down payment and additional dealership fees to reduce the risk of you defaulting on the loan. A down payment can help you negotiate more effectively when purchasing a vehicle on credit.
New Vehicle Credit Score Range
It's difficult to determine if you qualify for a loan based on your credit score alone. Several factors, such as your repayment history, are critical indicators of your eligibility to obtain approved loans. However, a credit score of 680 or higher is ideal, as anything below this score may increase your interest rate, perceived by the lender as higher risk. Based on current examples, an individual with a credit score of 720 or higher will pay an average of $5,500 in interest on a car loan, while someone with 580 or above may pay $15,300 in interest. As this data shows, a higher credit score can significantly influence the amount of interest you pay on a loan.
Assistance with Improving Your Credit Score
Improving your credit score requires time and effort, but there are several things you can do right now to make positive progress. Building good credit requires patience, and irresponsible credit decisions will only exacerbate any issues. Taking the following steps will help you improve your credit:
- Acquire 3-5 revolving credit accounts (credit cards) - this option maximizes your credit score potential and helps increase the chances of approval. Newcomers or those rebuilding their credit should start with secured credit cards.
- Request a Credit Limit Increase - this action helps to increase your overall credit limits and lower your credit utilization percentage. You can quickly increase limits with a simple phone call or application.
- Manage your Balances - maintaining a low to zero balance is key, and using your credit cards for small purchases ensures that balances remain manageable. Interest rates on credit cards are high, so payments should primarily go towards the principal.
By following these steps, you can develop a strategy for progress while avoiding the mistakes that negatively impact credit scores.
Joe's Advice on Credit Improvement
Everyone experiences a less than perfect credit score at some point in their lives. However, the good news is that things can change pretty quickly if you make an effort to improve your credit. Unfortunately, many people with poor credit give up and assume that they will never have good credit again. Yet, it takes dedication to readjust your spending habits and develop a solid credit score. Despite this, those who make credit a priority will succeed. Start by creating a budget and working on any bad spending habits you may have. Positive changes in your spending habits will directly impact your credit score. For more insight on re-establishing your credit score, refer to this article. If you need guidance or help repairing your credit, contact my office at www.asapcreditrepairusa.com.
Key points to remember:
- Bad credit does not have to last forever.
- Improving your credit score takes effort and time.
- It is essential to prioritize your credit and pursue healthy spending habits.
- The article provides valuable insights on understanding credit.
- Contact Joe's office for assistance with credit repair.