It may come as a surprise, but did you know there are actually 30 levels to your credit score? It's not common knowledge, and many people find themselves overwhelmed with different resources, often turning to Google for answers. Unfortunately, this can lead to a lot of confusion and even misinformation that can steer you in the wrong direction. My name is Joe Mahlow, and I have spent the last 15 years in the financial literacy and credit repair industry. My mission is to provide you with practical and honest guidance on various topics related to credit, starting with credit scores. With my experience of helping over 20,000 clients improve their credit scores, I am confident in providing reliable insights that will help you do the same. So, let's dive in!
Contents:
Types of Credit Scores: FICO vs Vantage
Understanding Good Credit Scores
Good Credit Score Required to Purchase a House
What Credit Score Do You Need to Buy a Car?
How to Improve Your Credit Score
Insights from Joe
Types of Credit Scores: FICO vs Vantage
There are two types of credit scoring models that individuals should understand: the FICO model and the Vantage model. Both models are essential to comprehend, particularly when deciphering the differences in how they calculate your credit score.
1. FICO Credit Score
The FICO credit model is the most prevalent and widely-used score model. With eight different FICO models, like FICO 2 to FICO 10, your credit scores can differ, depending on your credit report. This might appear perplexing, but it's crucial to understand the distinctions.
When you make a purchase or apply for credit, the type of lender you use will determine the FICO report they pull. For example, if you're applying for a home loan, the mortgage lender will likely pull your Fico 5 credit report, whereas, for a credit card, they would most likely pull your Fico 8 credit report.
But, why are there so many FICO scores? Each credit report has a different "weight," meaning the essential lender factors have a more significant impact on the credit score than the less critical ones. So, for instance, a FICO 5 mortgage report will prioritize previous mortgage history. On the other hand, credit card companies primarily use the FICO 8 report, so your previous credit card history will impact this score significantly. For auto lenders, they usually pull Fico-2 reports, and your scores will weigh heavily on your previous car history.
2. Vantage Credit Score
The Vantage Score rating model was developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion. The Vantage score is relatively new compared to the FICO model, which has been utilized since the seventies. Credit monitoring sites in the United States frequently use Vantage to give you a free copy of your credit reports. Although FICO currently dominates the lending sector, the Vantage model is gaining popularity as a scoring model in some sectors, including personal loans and auto lending.
But, is the Vantage Score accurate? As the Vantage score isn't widely used for lending purposes, it may not be accurate. A credit score is only as accurate as your ability to obtain a loan, and since FICO is the most recognized scoring model, the accuracy of the Vantage score can vary. Nevertheless, it's an excellent "general idea" of your FICO score and gives you an idea of where your overall scores stand.
In conclusion, credit reporting agencies are enormous data collection agencies outside social media companies. If they have the data, they have the upper hand in providing the best scoring data, period. While FICO currently dominates the lending sector, the Vantage model is gaining popularity. The FICO scoring model may be outdated, so you may want to consider checking out your Vantage score at credit monitoring sites.
Understanding Good Credit Scores
Credit scores are measured by both the FICO and Vantage models and range from 350 to 850. The optimal credit score is 850, while a score of 350 is the worst. To have the best score, you'll need to understand where you stand while maintaining your journey to building your credit scores, so we have outlined the following score thresholds:
1. 620 or below
If you have a credit score of 620 or below, it is considered bad credit. Usually, this suggests that you have an adverse credit history, high-balance credit card accounts, or no credit cards in general. To improve your credit score, make timely payments and keep ten active revolving credit accounts open. Credit Builder Card or OpenSky Credit Card may be reliable options to build your credit. With a credit score of 620, you can start qualifying for an FHA home mortgage.
2. 640-680
A credit score between 640-680 is considered fair for good credit. With this score range, you most likely have an established credit, but you may have derogatory marks or accounts on your credit report, and you may have some high balances on your credit cards. Newly opened accounts may drop your score temporarily, but scores will return over time.
3. 740+
A credit score over 740 is classified as "super-prime" and can provide the best interest rates for most loans. About 20% of the US population has this score level. Congratulations if you have over a 740 credit score! Keep up the great work by making prompt payments on your accounts, settling revolving credit card bills, and maintaining excellent credit health.
Good Credit Score Required to Purchase a House
Qualifying for a mortgage loan depends on which type of loan you are applying for. The criteria and guidelines for mortgage loans are similar in general, however, federal regulation and government backing make them distinct. You will encounter three common mortgage loan types: Conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most prominent loan type popular among borrowers and are typically the best savings option other than the VA loan. They do not require borrowers to maintain PMI, thereby reducing the down payment or monthly payment amount. The credit score requirement is usually 640, and the debt-to-debt ratio should not be higher than 43%. Interest rates and down payment requirements are lower in conventional loans than other loan types.
2. FHA Loans
FHA loans are ideal for borrowers with lower credit scores, usually between 580 and 619. The loan program is different, so borrowers must shop around to select different lenders to provide the best financial option. The debt-to-income limit for FHA loans is usually 50%, which helps borrowers purchase more homes with low income. The down payment requirements on this loan are only 3.5%, with a higher interest rate than conventional loans. Moreover, borrowers must maintain PMI for at least 11 years, making it an added cost to their mortgage.
3. VA Loans
There is technically no credit score requirement for VA Loans, but they monitor previous defaulted loans and government-owed debts before pre-qualifying an applicant. Borrowers interested in VA loans must have served the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or their spouse should have lost their life during active duty. VA loans typically have the best interest rates and do not require a down payment. This loan is perfect for our veterans and their families.
What Credit Score Do You Need to Buy a Car?
Your credit history, not just your credit score, plays a significant role in determining what you qualify for when buying a car. While a high credit score is essential, it is not the only factor in deciding the interest rate you qualify for. When you apply for a car loan, lenders examine your credit history, including any previous or current credit issues, to assess the risk of extending you credit.
Subsections:
- Those with a poor credit history, such as late payment or repossession, will face more significant challenges getting approved for a loan compared to someone with a clean credit record.
- Special finance lenders may qualify anyone for car loans, but with higher down payment and additional dealership fees.
- To negotiate the best deal on credit for a vehicle, have some equity or a downpayment.
Although there's no exact credit score that guarantees approval, as multiple factors determine eligibility, a score over 680 is ideal. Anything below this score will likely attract higher interest rates.
Consider these recent statistics to gauge the impact of your credit score on interest rates:
- A score of 720 or higher will result in an average of $5,500 in interest on a loan.
- A score of 680 or higher will result in an average of $6,600 in interest on a loan.
- A score of 650 or higher will result in an average of $8,100 in interest on a loan.
- A score of 615 or higher will result in an average of $10,200 in interest on a loan.
- A score of 580 or higher will result in an average of $13,900 in interest on a loan.
- A score of 580 or above will result in an average of $15,300 in interest on a loan.
Based on the above data, it is evident that a higher credit score will generally attract less interest and garner a better overall credit score.
How to Improve Your Credit Score
There are many things you can do to improve your credit score, but it takes time and patience. Rushing the process can lead to bad decisions that worsen your situation. Here are some actions you can take right now to start building your credit:
1. Open 3-5 revolving credit accounts (credit cards):
Revolving credit makes up 30-35% of your overall credit score. Opening credit cards with lower requirements is easier for limited or rebuilding credit situations. Start with secured credit cards like Open Sky or Credit Builder Card, which focus on your ability to pay the card on time.
2. Raise your limits:
Requesting a credit limit increase for active revolving credit card accounts can lower your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase," filling out some information, including your current income.
3. Pay down your balances:
Keep your balance low and close to zero, leaving about a $1-5 balance on your credit cards when paying your bills. If you have high balances, use a portion of your paycheck each month to pay down the credit card and ultimately stop using them. Limit credit card usage since spending habits play a massive role in your overall credit score.
Insights from Joe
Let's face it, we've all experienced less than perfect credit at some point. However, if you are committed to improving your credit situation and dedicate time and effort to yourself and your credit, you can expect to see significant improvements in your credit score in a short amount of time. Many people with poor credit stay stuck in a vicious cycle and resign themselves to a lifetime of credit issues, but it is possible to achieve a stellar credit score with hard work. The key is to prioritize your credit and focus on improving your spending habits. Begin by creating a budget and addressing any negative spending habits you may have; positive changes in your credit score will follow. This article provides a valuable insight into credit. If you need guidance or assistance with credit repair, contact us today at www.asapcreditrepairusa.com.