It may surprise you to learn that there are actually 30 levels of credit scores available to you. Despite the widespread availability of information on this subject, many people become confused and frustrated by the multitude of conflicting answers they receive when seeking advice on how to improve their credit scores. As someone who has been working in the financial literacy/credit repair industry for more than 15 years, I understand that this confusion can be frustrating. That's why I am here to offer straightforward, honest advice on a range of topics, including credit scores. I have assisted over twenty thousand clients in improving their credit scores, and I hope that I can provide you with helpful information to achieve the same result. So, let's dive in!
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Credit Score Ranges
Choosing the Right Credit Score to Qualify for a Mortgage
Credit History Matters More Than Credit Score When Buying a Car
Ways to Improve your Credit Score
Joe's Insights on Credit Improvement
Different Types of Credit Scores: FICO and Vantage Models
Credit scores are crucial for providing a clear picture of your creditworthiness to lenders, and there are two scoring models that you should know about: the FICO model and the Vantage model. In this article, we will explore each model in detail to help you understand the differences in how they calculate your credit score.
FICO Credit Score
The FICO scoring model is the most widely used model and encompasses eight different models from FICO 2 to FICO 10. Depending on the credit report, you may receive a different credit score. For instance, if you applied for a mortgage loan, your mortgage lender would most likely pull your FICO 5 credit report, whereas if you applied for a credit card, they would most likely pull your FICO 8 credit report.
But why are there so many FICO scores? The answer is simple: each credit report carries a different "weight.". The factors that are critical to the lender will have a more significant impact on the credit score than the less important ones. Therefore, the scoring model that a lender uses depends on the type of credit you are seeking. For example, auto lenders typically pull FICO-2 reports that weigh heavily on your previous auto history.
If you want to get a better visual representation of your different FICO scores, you can go to www.myfico.com and sign up for an account.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO scoring model. Although new, Vantage is gaining popularity as a scoring model for some sectors, including personal loans and auto lending. Yet, FICO is the most recognized scoring model, and the Vantage Score is currently not widely used for lending purposes. Therefore, it may not be an accurate measure of your actual lending score.
However, the Vantage scoring model is still helpful as a good “general idea†of your FICO score, as it provides an idea of roughly where your overall scores stand. It is worth noting that lenders may start adopting the Vantage model in the next 5–10 years due to its ability to provide the best scoring models based on today's standards. The FICO scoring model is becoming outdated and does not give users a clear representation of their credit scores.
In conclusion, credit reports are an essential part of modern finance, and understanding the credit scoring models is crucial to obtaining loans and other financial products. Knowing how these models differ in weight and purpose can give you a better understanding of the credit scores that are most important to your financial goals.
Understanding Credit Score Ranges
Both FICO and Vantage scoring models use the 350 to 850 range to score individuals' creditworthiness. The higher the score, the better your credit. Below are essential score thresholds to help you as you work towards improving your score:
1. 620 or below
If your score falls in this range, you have bad credit. You may lack credit cards, have high-balance credit card accounts, or have some adverse credit history. To improve your credit, you should consider opening at least ten revolving credit accounts and making timely payments. Consider getting a Credit Builder Card or OpenSky Credit Card to help you build your credit. A 620 credit score can qualify you for an FHA home mortgage.
2. 640-680
Scores in this range are characterized as fair for good credit. You may have established credit but have some derogatory marks or accounts on your credit. Newly opened accounts could also be temporarily dragging down your scores. Ensure you pay your balances and bills on time, and that will help raise your scores.
3. 740+
Credit scores exceeding 740 are considered "super-prime" and have the best interest rates for most loans. If you have this credit score, congratulations! You are among the top 20% of Americans. Continue making timely payments and maintain low revolving credit card account balances to keep your scores in this range.
Choosing the Right Credit Score to Qualify for a Mortgage
Determining the ideal credit score for a mortgage hinges on the type of loan you're seeking. Depending on whether you are applying for conventional loans, FHA loans, or VA loans, there are varying requirements and guidelines.
Conventional Loans
Conventional loans are the most favored option, next to VA loans, and exclude private mortgage insurance, which could potentially augment your down payment or monthly installments. It's also the most cost-effective loan type. With its lower down payment requirement and superior interest rates, borrowers must have a typical credit score of no lower than 640 and a debt-to-debt ratio of 43%.
FHA Loan
FHA loan identifies lower credit score applicants between 580 and 619. Note that the loan program requirements differ. Therefore, it's worth exploring different options that offer better financial packages within credit score limits. The loan requires PMI for 11 years, putting an additional burden on the budget. There is a debt-to-income limit of up to 50%, qualifying you to borrow more than conventional loans with low income. Interest rates are on the higher side, and there's a minimum down payment requirement set at 3.5%.
VA Loan
VA loans overlook credit score requirements but scrutinize the past record of defaulted loans and government debts before pre-approving applicants. Eligibility requires a minimum of 181 days of service in the US military, 90 days of consecutive military service in wartime, six years in the National Guard, or loss of military personnel during duty by a spouse. It offers the best interest rates without demanding a down payment. The VA Loan remunerates and supports our honorable veterans.
Credit History Matters More Than Credit Score When Buying a Car
When it comes to buying a car, your credit score is only part of the equation. Credit history plays a more significant role in determining what you qualify for. While a high credit score is essential, it has less impact on the interest rate you'll qualify for. Lenders will look at your past and present credit behavior to assess the risk of extending credit. Missed or late payments, repossession, or bankruptcy can make loan approval challenging. Even if you have bad credit, some lenders will qualify you for a car loan. Still, you may have to meet specific criteria, such as a higher down payment and dealer fees. If you're a high-risk borrower, the dealership may add an additional fee to expedite loan approval. To increase your chances of loan approval, you need equity or a substantial down payment.
Credit Score Range for a New Car
Ideally, you want a credit score above 680 to secure the best interest rates available. The lower your score, the more interest you'll pay. For instance, an individual with a 720 credit score may pay an average of $5,500 in interest, while someone with a score of 680 or above may pay $6,600. The interest goes up with a lower score: 650 ($8,100), 615 ($10,200), and 580 ($13,900-$15,300). Higher credit scores mean less interest to pay, which in turn affects your overall credit score.
What are some Ways to Improve your Credit Score?
Improving your credit score can be done through various strategies that require little to no effort. However, it's important to understand that building a good credit score takes time and requires patience. Without it, most people make irrational decisions that only worsen their credit problems.
Here are some things you can do to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit accounts, such as credit cards, make up a significant portion of your credit score (30-35%). Therefore, having 3-5 revolving credit accounts can help build credit scores quickly. To start with, consider opening a secured credit card with Open Sky or Credit Builder Card, which focuses more on your ability to pay the card on time rather than your credit score. However, it's important to keep the balance at $5-10 each time you make a payment and limit the use of the card to small purchases.
2. Request a credit limit increase:
Utilizing credit cards excessively can lead to low credit scores, especially if balances exceed 30% of your overall credit limits. Requesting a credit limit increase for your active revolving credit card accounts can help increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase," and they will usually assess your credit history and current income before granting the request.
3. Pay down your balances:
Keeping your balance low and close to zero is critical in maintaining a good credit score. If you can't pay your credit cards off, make a game plan to take an "x" percentage of your paycheck each month and pay the credit card down. Additionally, avoid running the balance back up, limit the use of your credit card, and leave a $1-5 balance on your credit card when paying the bills. Always keep in mind that high-interest rates can lead to most of your payments going towards interest and not principal.
Joe's Insights on Credit Improvement
It's no secret that many people have struggled with poor credit. However, by approaching your credit situation with diligence and dedication, you can make significant progress in a relatively short amount of time. Unfortunately, many individuals with bad credit feel trapped in a never-ending cycle of financial difficulty. But with effort and determination, it is possible to achieve a high credit score. The key is to prioritize your credit and address any bad spending habits. A good starting point is to create a budget and commit to making positive changes to your finances. By doing so, you'll see a direct impact on your credit score. If you need guidance or support as you work towards improving your credit, don't hesitate to contact my office at www.asapcreditrepairusa.com.