Are you aware of the fact that credit scores consist of 30 distinct levels? It's a commonly overlooked detail, causing many individuals to become frustrated when trying to improve their credit scores. Often, people turn to search engines looking for guidance on how to achieve the best credit scores, only to find a slew of perplexing and sometimes misguiding suggestions. My name is Joe Mahlow, and for over fifteen years, I've operated in the financial education and credit repair industry. I aim to provide straightforward guidance and advice on various topics, beginning with this one: credit scores. I have delivered positive outcomes for more than twenty thousand clients by improving their credit scores, and I aspire to impart the knowledge necessary for you to achieve the same. So, without further ado, let's dive in.
Contents:
Different Types of Credit Scores Understanding FICO and Vantage Models
Understanding Credit Scores: A Guide to Goals and Ranges
What Credit Score Do You Need to Buy a House?
Ideal Credit Score to Buy a Car
How to Improve Your Credit Score
Joe's Insights on Rebuilding Credit
Different Types of Credit Scores: Understanding FICO and Vantage Models
When it comes to credit scores, there are two main models to know: FICO and Vantage. Each model calculates credit scores differently, and understanding their differences is crucial to managing your credit effectively.
FICO Credit Score
The FICO scoring model is the most popular and widely used credit scoring model, and there are eight different FICO models from FICO 2 to FICO 10. Depending on the credit report pulled by a lender, you may get a different FICO score. For example, if you apply for a mortgage, the lender will pull your FICO 5 credit report, while a credit card application will likely trigger a FICO 8 credit report. The reason for the various FICO models is that each credit report carries a different "weight" - critical factors to a lender have a more significant impact on a credit score than less important ones. For instance, a FICO 5 mortgage report weighs heavily on previous mortgage history.
Vantage Credit Score
The Vantage Score is a newer scoring model compared to FICO, developed by Equifax, Experian, and TransUnion to compete with FICO. While FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites often use Vantage to offer a free copy of your credit report. However, since the Vantage score is not widely used for lending purposes, it may not be accurate when it comes to your actual lending score.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, its accuracy depends on the context. Since FICO is the most recognized scoring model, Vantage's accuracy can vary. However, as a good "general idea" of your FICO score, Vantage can be helpful. If you sign up for an account at www.myfico.com, you can get a better visual representation of your different FICO scores.
The Future of Credit Scoring
The credit reporting agencies have a significant advantage in providing the best scoring data, and the FICO model may be outdated. In the next 5-10 years, lenders may widely use the Vantage scoring model because of its relevance to today's standards. Remember, a credit score is only as accurate as your ability to obtain a loan, and knowing both FICO and Vantage scores can help you manage your credit more effectively.
Understanding Credit Scores: A Guide to Goals and Ranges
Credit scores are measures analyzed by both the FICO and Vantage models, ranging from 350 to 850. The ideal score is 850, while 350 is the lowest and signals poor credit. To achieve your goal of scoring high, it's crucial to consider where you presently stand. Below are the significant thresholds to watch for:
1. 620 or below
A score below this threshold is considered bad credit, indicating a history of missed payments, possibly high-balance credit accounts, or a lack of credit. The most reliable approach to improving scores is to make timely payments and keep ten revolving credit accounts open. For a secured credit card to help build credit, I recommend the Credit Builder Card or OpenSky Credit Card. Once you reach the 620 threshold, you qualify for an FHA home mortgage.
2. 640-680
Scores within this range are considered fair for good credit. While you have established credit, derogatory remarks, high balances on credit, or new accounts can impact your score temporarily. If a new account has affected your score, don’t worry, as it's temporary.
3. 740+
Scoring over 740 is super-prime and gives the best interest rates for most loans. This score constitutes the upper 20% of the US population, so congratulations if you are in this group. To maintain this score, always pay your accounts on time, and keep revolving credit paid. This is an excellent position to be in!
What Credit Score Do You Need to Buy a House?
The answer to this question is dependent on the type of mortgage loan for which you intend to qualify. Mortgage loans are regulated federally with backing from the government. You'll find the requirements and guidelines for most mortgage loans to be similar or different. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and often the best "savings" loan option beyond the VA loan. These loans do not require you to maintain private mortgage insurance (PMI), which can be an additional cost that can increase your downpayment or monthly payment. PMI protects the lender in case you stop making payments on your loan. Conventional loans usually require lower downpayment amounts and have better interest rates than other mortgage loans. There is a typical credit score requirement of 640 with a debt-to-debt ratio no higher than 43% for conventional mortgage loans.
FHA Loan
The FHA mortgage loan is intended for individuals with lower credit scores, usually between 580 and 619 but keep in mind that loan programs vary. Therefore, it is essential to shop around for different lenders that will provide the best financial options for you if you are within the required credit score limits. FHA loans require you to keep PMI for at least 11 years, which can be an added cost to your mortgage and something to consider if you are trying to manage your budget. These loans usually have a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan if you have a lower income. The downpayment requirement for an FHA loan can be as low as 3.5% of the purchase price, so it could allow you to get into a mortgage with less money out of pocket than a conventional loan. However, you will typically have a higher interest rate.
VA Loans
The VA loan has no specific credit score requirement. However, when pre-qualifying you, lenders are looking for previous defaulted loans and any government-owed past-due debts. You are eligible for VA loans if you served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or if your spouse was in the military and lost their life during active duty. The VA loan usually has the best interest rates available and does not usually require a down payment. The VA loan is an excellent option for veterans, and it gives back to them.
Ideal Credit Score to Buy a Car
When purchasing a car, your credit history is more important than your credit score in determining whether you qualify for a loan. While a higher credit score is important, it plays a lesser role in the interest rate you qualify for. When applying for a car loan with credit issues, lenders examine your past and present credit histories to assess the risk involved in extending credit. If you have missed payments on a previous auto loan or have a repossession on your record, it may be more challenging to get approved than someone who has a clean history. However, some lenders will approve anyone for a loan, even with poor credit, by increasing fees or demanding higher down payments. Maintaining equity or having a down payment can increase your purchasing power when buying a car on credit. Therefore, there is no specific credit score to guarantee loan approval, but a score of at least 680 is ideal.
Credit Score Range for New Car Purchases
Higher credit scores result in lower interest rates on loans, which is evident from these examples:
1. A person with a credit score of 720 or higher pays roughly $5,500 in interest on a loan on average.
2. A person with a credit score of 680 or above pays about $6,600 in interest on a loan on average.
3. A person with a credit score of 650 or above pays approximately $8,100 in interest on a loan on average.
4. A person with a credit score of 615 or above pays roughly $10,200 in interest on a loan on average.
5. A person with a credit score of 580 or above pays about $13,900 in interest on a loan on average.
6. A person with a credit score of 580 or above pays about $15,300 in interest on a loan on average.
This data demonstrates that a higher credit score results in a lower interest rate and affects your overall credit score.
How to Improve Your Credit Score:
Improving your credit score isn't something that will happen overnight. It requires patience and effort, but there are several things you can do right now to make a significant impact. To start, you'll want to open 3-5 revolving credit accounts (credit cards), which can help you build credit quickly. A secured credit card like OpenSky or Credit Builder Card is a good place to start. Revolving credit makes up 30–35% of your overall credit score, so it's essential to keep your balance low and make your payments on time. You can also raise your credit limits to lower your credit utilization percentage. Each credit card company has different processes to request a credit limit increase, so it's best to call your provider and ask. Finally, paying down your balances is crucial. Leave a small amount of balance each month, and make sure to limit usage to small purchases like gas or groceries. If you have significant debt, make a plan to pay it down systematically. By following these steps, you can build your credit score over time.
Here are the steps to improve your credit score:
1. Open 3-5 revolving credit accounts (credit cards) to build credit quickly. A secured credit card is a good option to start with, and it's essential to make payments on time and keep your balance low.
2. Request a credit limit increase to lower your credit utilization percentage. Each credit card provider has a different process for this, but calling their customer service line is a good place to start.
3. Pay down your balances systematically and limit your usage to small purchases like gas or groceries. Avoid running up your balance again once you've paid it down.
Joe's Insights on Rebuilding Credit
Rebuilding your credit can be a daunting task, especially if you're starting from scratch. But take heart, with the right attitude and commitment to the process, you can see significant changes in your credit score in no time. Too many people resign themselves to a life of bad credit and believe there is no way out. However, with patience and persistence, you can develop a great credit score that reflects your financial responsibility. A good starting point is by creating a budget and addressing any bad spending habits you may have. This will have a positive impact on your credit score. For a better understanding of credit and for those who need guidance with credit repair, Joe's office at www.asapcreditrepairusa.com is available to assist you.
Key Takeaways:
- Rebuilding credit takes effort but is achievable.
- Many people mistakenly believe bad credit is permanent.
- Prioritizing your credit score is necessary for success.
- Creating a budget is a good first step.
- Joe's office at www.asapcreditrepairusa.com can provide guidance and support for credit repair.