It may come as a surprise to many individuals, but there are actually 30 different levels of credit scores available. While searching for the best credit score, individuals are often presented with various answers from Google search results. Unfortunately, some of this information can be misleading and confusing. As someone who has been involved in financial literacy and credit repair for more than fifteen years, I understand how important it is to provide raw advice on different topics such as credit scores. Having helped over 20,000 clients improve their credit scores, my objective is to share relevant information that can help you achieve similar results. So, let's dive in and explore how you can enhance your credit score.
Contents:
Different Credit Scoring Models: Understanding FICO and Vantage Scoring Models
Understanding Credit Scores: What Makes a Good Credit Score?
What's a Good Credit Score for Buying a Home?
Credit History vs. Credit Score When Buying a Car
How to Increase Your Credit Score
Joe's Tips on Improving Your Credit
Different Credit Scoring Models: Understanding FICO and Vantage Scoring Models
1. FICO Credit Score
- The FICO credit scoring model is the most widely used scoring model, with eight different FICO models from FICO 2 to FICO 10 that are used depending on the type of lender you apply to.
- Credit reports have various weights and different FICO models are used to emphasize the factors most important to particular lenders.
- For example, FICO 5 mortgage report places great weight on previous mortgage history, whereas FICO 8 report primarily emphasizes credit card history.
- To see your different FICO scores, you may visit www.myfico.com.
2. Vantage Credit Score
- The Vantage Score scoring model was developed by three major credit reporting agencies to compete with FICO scoring models.
- It is newer than FICO scoring models and is mainly used for free credit monitoring services.
- The Vantage Score is gaining popularity in sectors like personal loans and auto lending.
- While Vantage Score is accurate, it may not be as reliable as FICO when it comes to lending score accuracy.
- Using the Vantage Score as an indicator of FICO score is advised.
3. FICO vs. Vantage
- While the FICO scoring model is still dominant in the lending sector, Vantage Score is gaining more recognition.
- The Vantage Score might become widely used by lenders in the next five to ten years because of its ability to provide better scoring models based on today's standards.
- It provides a clearer representation of credit scores.
- Credit reporting agencies possess significant data collection capabilities and are best positioned to provide the best scoring data.
Understanding Credit Scores: What Makes a Good Credit Score?
Credit scores are usually measured on a scale of 350-850 for both FICO and Vantage models, with the former being the most widely used credit scoring system in the US. A higher credit score indicates good creditworthiness, while lower scores suggest the opposite. Here are some score ranges to assess your standing:
1. 620 or below Poor Credit
A score of 620 or below suggests that you may not have a credit history or have a negative credit history with high-balance credit card accounts. To improve your scores, you must make timely payments and maintain ten active revolving credit accounts. Two recommended ways to build credit are by using a Credit Builder Card or OpenSky Credit Card, which are both secured credit cards. Once your score reaches the 620 range, you can qualify for an FHA home mortgage.
2. 640-680: Fair Credit
A score between 640-680 signifies that you have established credit but may have some derogatory marks or high credit balances that need to be paid down. Additionally, opening new accounts can cause a temporary score drop. Don’t be alarmed if you see a sudden decline in your scores; they will return once the new account is established.
3. 740+: Super-Prime Credit
A score of 740 or higher is considered super-prime, reserved for the top 20% US population. This score permits the best interest rates for almost all loans, making you an attractive candidate for loan providers. To maintain this excellent score, always pay your accounts on time and keep your revolving credit card accounts paid.
What's a Good Credit Score for Buying a Home?
The credit score required to purchase a home will depend on the type of loan you wish to qualify for. Since the federal government closely regulates and backs most mortgage loans, you will discover similar, if not different, loan requirements and guidelines. Conventional loans, FHA loans, and VA loans are the three most popular types of mortgage loans.
1. Conventional Loans
Conventional loans, being the most commonly used, tend to be the best "savings" loan option after VA loans. With conventional loans, private mortgage insurance (PMI) isn't required, thereby reducing the down payment or monthly payment. It acts as protection for lenders in the event of missed loan payments. Conventional loans have lower downpayment requirements and offer better interest rates than other mortgage loans. A typical credit score requirement for a conventional mortgage loan is 640 with a debt-to-debt ratio no higher than 43%.
2. FHA Loan
FHA loan is designed for low credit scores ranging between 580 and 619. Bear in mind, loan programs vary, so scout around for different lenders who provide the best financial options within the credit score limits. With FHA loans, PMI is required for at least 11 years, increasing your mortgage costs, so it's wise to factor that in when budgeting. This type of loan has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than you would with a conventional loan if you earn less. You can get into a mortgage with as little as 3.5% of the purchase amount, making it possible with less money out of pocket than with a conventional loan. The downside is that you'll typically have a higher interest rate.
3. VA Loan
Technically, there's no credit score requirement with VA loans. However, pre-qualification entails scrutinizing past-due debts and defaulted loans owed to the government. To qualify, you should have served in the military for at least 181 days or served 90 consecutive wartime days, served six years in the National Guard, or have a spouse who died while serving. Generally, VA loans offer the best available interest rates and usually don't require a downpayment. The VA loan is a fitting tribute to our veterans, and I love it for that.
Credit History vs. Credit Score When Buying a Car
When you're in the market for a new car, it's important to know that your credit history holds more weight than your credit score in determining what you're eligible for. While a high credit score is important, it's not the sole factor in the interest rate you'll be approved for. When you apply for a car loan, lenders look at your credit histories, both past and present, to gauge the risk of extending credit to you.
If you have a poor credit history, such as late payments or previous auto loan delinquencies, you'll have a harder time getting approved. However, even if you have a history of repossession, there are still lenders that may qualify you for a car loan. Keep in mind that they may require a higher down payment and additional fees as conditions of approval.
Additionally, having equity or a down payment will give you more leverage when negotiating the terms of your loan.
As for credit scores, a score above 680 is considered ideal for a new car loan. The lower your score, the higher the interest rate will be. For instance, someone with a 720 credit score pays an average of $5,500 in interest, while someone with a score of 580 or below pays an average of $15,300 in interest. Therefore, maintaining a high credit score should be a priority to minimize the cost of your car loan.
How to Increase Your Credit Score
Improving your credit score involves taking certain steps, but it takes time. If you rush the process or make impulsive decisions, it can backfire and leave you worse off than you started. To build your credit score over time, you can take the following actions:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Having a credit card is a great way to build credit and increase your credit score. If you have limited credit, it can be hard to secure a large loan, but revolving credit cards offer a better chance of approval. Consider applying for a secured credit card from OpenSky or Credit Builder Card that focuses on your ability to pay the bill on time rather than your credit score. Revolving credit makes up 30-35% of your overall credit score, and keeping your balance around $5-10 and making timely payments can quickly raise your score.
2. Raise your Limits
Another way to increase your credit score is to request credit limit increases for your existing credit accounts. By doing so, you can reduce your credit utilization percentage and increase your overall credit limit. Credit card companies have different processes for this, but contacting them directly and requesting a credit limit increase is the best place to start. Typically, they will review your payment history and assess your creditworthiness before approving you for a credit limit increase.
3. Pay Down your Balances
Paying down your balances is critical to improving your credit score. Leave a small balance on your credit cards each month and aim to pay off as much of the balance as possible. If you can’t pay off your balance, create a plan of action to pay off a certain percentage of your credit card balance each month. High credit card balances can cause your credit score to drop significantly, so it’s essential to stay on top of them.
Improving your credit score takes time, but following these steps can help you get there more quickly. By establishing good credit behaviors and maintaining timely payments, you can start increasing your credit score and opening up new financial opportunities.
Joe's Tips on Improving Your Credit
We've all found ourselves in a less-than-optimal credit situation at some point in our lives. However, there's no need to despair because, with some dedication and effort, you can make significant strides in a short timeframe. It's common for those with bad credit to believe that turning things around is impossible and that they'll be stuck with poor credit for life, but this doesn't have to be the case. Building a strong credit score takes consistent hard work, and those who prioritize their credit by improving their spending habits will ultimately win. Start by creating a budget and identifying any problem areas that need fixing, and you'll begin to see an improvement in your credit score. Our article provides you with valuable credit insights, and if you require guidance or credit repair assistance, please contact our office today at www.asapcreditrepairusa.com.