It may surprise you to learn that there are actually 30 different levels of credit scores. Many people are unaware of this fact and often encounter various conflicting search results when trying to determine their own credit score. Unfortunately, much of the available information can be misleading and only serve to confuse those seeking clear and concise answers. As someone who has dedicated over 15 years to promoting financial literacy and credit repair, my name is Joe Mahlow and my aim is to offer straightforward advice on topics like credit scores. Throughout my career, I've helped more than 20,000 clients improve their credit scores, and I hope that through this piece I can provide you with the knowledge you need to do the same. So without further ado, let's get started!
Contents:
Types of Credit Scores: FICO and Vantage
Understanding Credit Scores
What Credit Score is Required to Buy a House?
Determining the Credit Score to Purchase a Car
Ways to Improve Your Credit Score
Joe's Insight on Improving your Credit Score
Types of Credit Scores: FICO and Vantage
In the realm of credit scores, two models are commonly recognized: FICO and Vantage. As a borrower, understanding these models is important as they calculate credit scores differently.
FICO Credit Score
FICO is the more popular and widely-used model, with eight different versions from FICO 2 to FICO 10. Different FICO models result in different credit scores depending on your credit report. For example, if you are applying for a mortgage, your lender will most likely pull your FICO 5 credit report, while a credit card application may prompt them to use your FICO 8 credit report. Each credit report has a unique "weight" with more important factors impacting the score significantly. Thus, your previous mortgage history is highly considered for FICO 5 scores, and credit card history for FICO 8 scores.
Vantage Credit Score
Vantage Score, developed by Equifax, Experian, and TransUnion, was created as competition for FICO. Vantage is relatively new compared to FICO and is gaining popularity in some sectors, such as personal loans and auto lending. While it is accurate, Vantage is not widely used for lending purposes and is thus a better indicator of your overall credit score.
Accuracy of Vantage Score
Vantage Score is a good "general idea" of FICO score. It is challenging to know your FICO score without a lender pull or paying for it, but using your Vantage score can give you an idea of your overall scores. The Vantage Score is gaining traction in lending, providing the best scoring models based on up-to-date standards. Credit reporting agencies, such as Equifax, Experian and TransUnion, are data collection giants, and as they hold crucial data, their scoring data is sought after.
To view your different FICO scores, sign up for an account at www.myfico.com.
Understanding Credit Scores
Credit scores, whether by FICO or Vantage, range from 350 to 850, with higher scores being ideal. To help you set your goal, here are some vital score thresholds to keep in mind during your score-building journey:
1. 620 or below:
This range is usually considered bad credit, and if you find yourself here, it's likely you have some adverse credit history or no credit at all. Building your credit can be achieved using ten active revolving credit accounts, making timely payments, and using secured credit cards such as the Credit Builder Card or OpenSky Credit Card. Once you hit a 620 score, you can start qualifying for an FHA home mortgage.
2. 640-680:
This range is considered fair for good credit. While your credit is established, you may have derogatory marks, high balances, or newly opened accounts that may temporarily lower your score. However, once you pay down the balances, the scores will return.
3. 740+:
Any credit score over 740 is considered "super-prime" and opens you up to the best interest rates on loans. Congratulations if you fall in this range since you are part of the 20 percent of the US population with this score. Always pay your accounts on time, and keep your revolving credit card accounts paid to maintain your excellent score.
What Credit Score is Required to Buy a House?
The required credit score to buy a house depends on the mortgage loan type you want to qualify for. The regulations and guidelines for most US mortgage loans are either similar or different, owing to federal regulation and government support. The three most popular types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are a popular option because they are the best 'saving' loan alternative outside of VA loans. Conventional loans do not require private mortgage insurance (PMI), an additional cost that, when added to your down payment or monthly payment, can increase your expenses. PMI insulates the lender if you default on your loan. Conventional loans have lower down payment demands, better interest rates, and usually, a credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.
FHA Loan
The FHA mortgage loan is best suited for lower credit scores ranging between 580 and 619. Bear in mind that all loan programs vary, so if you're within the credit score limits, look for lenders who offer the best financial option. With an FHA loan, you must retain PMI for at least 11 years, which can be an added expense to your mortgage and something to consider, particularly if you're on a tight budget. This loan type typically has a higher debt-to-income cap of up to 50%, which means you can purchase more housing than with a conventional loan if your income is low. Finally, down payment demands as low as 3.5% of the purchase price may allow you to get into a mortgage with less out-of-pocket expenses than a conventional loan, but you typically will face higher interest rates.
VA loan
The VA Loan does not technically require a credit score, but qualifying for a pre-approval involves checking for previous defaulted loans and any past-due debts to the government. You must have served in the US Military for at least 181 days, 90 consecutive days during a war period or six years in the National Guard, or be a surviving spouse of a lost military service member. This type of loan usually offers the best available rates, and down payments are usually unnecessary. I love the VA Loan as it generously rewards our veterans.
Determining the Credit Score to Purchase a Car
When purchasing a car, your credit history, rather than just your credit score, is the key factor that determines your eligibility. A higher credit score is important, but it plays a smaller role in the interest rate for which you are eligible. When applying for a car loan, lenders take a close look at your past and current credit history to assess the risk of extending you credit. Individuals who have been delinquent on previous car loans or have had repossessions will have a more difficult time securing a loan compared to those with a clean history. Although bad credit or special finance lenders will qualify almost anyone for a loan, they will impose additional criteria that must be met, such as higher down payments and extra fees to the dealership. Therefore, to negotiate better terms, having equity or a down payment is useful.
Ideal Credit Score Range for New Car Buyers
Exact credit score requirements are not set in stone, but a credit score of 680 or higher is ideal. Scores lower than this can lead to higher interest rates as you pose a higher risk to the lender. Referencing a case where a credit score determines the amount of interest charged, a person with a credit score of 720 or above pays an average of $5,500 in interest on a loan, while someone with a score of 580 or above pays an average of $15,300. The higher your credit score, the less interest you pay, which will ultimately improve your overall credit score.
Ways to Improve Your Credit Score
Improving your credit score requires patience and effort, and there are plenty of things you can do now to boost it. Here are some tips to keep in mind:
1. Open several revolving credit accounts:
For individuals with limited or poor credit history, obtaining a loan to build credit can be difficult. Instead, consider opening 3-5 revolving credit accounts like credit cards to increase your chances of approval. Secured credit cards like Open Sky or Credit Builder Card are great options because they focus more on your ability to pay the card on time instead of your credit score. Repaying balances regularly and maintaining a low balance are crucial steps to increase your credit score.
2. Request higher credit limits:
High credit card balances can undermine your credit score. To reduce your credit utilization percentage, request a credit limit increase so you can decrease the amount of credit you are using. Contact your credit card provider through their online portal or phone to inquire about the exact process.
3. Pay down balances:
Keeping your balance low is important. Avoid high balances and pay off balances each month entirely if possible. Otherwise, make it a priority to pay at least a $1-5 balance to maintain a low credit usage. If you have high balances, create a payment plan and allocate some of your paycheck to repay the credit card. Once paid off, limit your credit card usage to avoid running up balances again.
By following these steps, you can effectively improve your credit score and set yourself up for better credit opportunities in the future.
Joe's Insight on Improving Your Credit Score
We all have gone through the phase of having less-than-perfect credit at some point in our lives. However, if you genuinely want to improve your credit situation, you must invest your time and effort into it. With dedication and the right approach, you can witness significant changes in your credit score in no time. Many people believe that having good credit again is not possible after having to deal with credit issues for an extended period. But, with proper efforts, you can achieve a great credit score. To succeed, it is essential to prioritize your credit and work on your spending habits. Start by creating a budget that reflects your expenses, and address any bad spending habits that you might have; this will directly impact your credit score. This article aims to provide better insights into the world of credit and guide you to improve your credit score. For those who need assistance or guidance with their credit repair, feel free to reach out to my office at www.asapcreditrepairusa.com.