It may surprise you to learn that there are actually 30 different credit score levels. Many people seeking the best credit score are often inundated with conflicting information from various sources. Unfortunately, much of this information can be confusing or even misleading, making it difficult to navigate. With over fifteen years of experience in the financial literacy and credit repair industry, my name is Joe Mahlow and my aim is to provide straightforward advice on a range of topics - such as credit scores. Through my work, I've helped over twenty thousand clients transform their credit scores and my hope is to provide you with the information needed to do the same. So, without further ado, let's dive in.
Contents:
Different Credit Scores: FICO and Vantage Models
Determining a Good Credit Score
What is the Minimum Credit Score Required to Qualify for a Mortgage?
Ideal Credit Score for Buying a Car
Tips for Boosting Your Credit Score
Joe's Insights on Credit Score Improvement
Different Credit Scores: FICO and Vantage Models
There exist two credit scoring models: FICO and Vantage, both important to comprehend to understand how they calculate credit scores.
1. FICO Credit Score
The FICO model is the most widespread credit scoring model, consisting of eight different FICO models ranging from 2 to 10. A different credit score is usually attained depending on the credit report. This is due to the different FICO reports pulled by different types of lenders. For example, a mortgage lender will likely pull the FICO 5 credit report while a credit card company will most probably pull the FICO 8 credit report.
A. Multiple FICO Scores
Multiple FICO scores exist because each credit report has different weights, meaning that significant factors have a greater impact on a credit score than less important ones do. For instance, on a FICO 5 mortgage report, previous mortgage history greatly impacts the credit score. Conversely, on a FICO 8 credit card report, previous credit card history carries more weight.
B. FICO Scores for Lending
Auto lenders generally use FICO-2 reports, and the scores depend heavily on the previous auto history. To check multiple FICO scores, sign up for an account on www.myfico.com.
2. Vantage Credit Score
Equifax, Experian, and TransUnion, the three credit reporting agencies, developed the Vantage model to compete with the FICO model. Vantage, a new scoring model, is smaller than the FICO model which has been in use since the seventies. Go-to credit monitoring websites in America often use Vantage to give people free credit reports. Although FICO dominates the lending sector currently, Vantage is gaining traction in specific sectors such as auto lending and personal loans.
A. Accuracy of Vantage Scores
While the Vantage score is accurate, its accuracy depends on the context of the question. Unlikely to be accurate regarding the actual lending score since it is not widely used for lending purposes. However, Vantage can offer a good general idea of the FICO score. It's, therefore, advisable to use Vantage scores to get an approximate idea of overall scores since it's hard to determine a FICO score without paying for it or allowing a lender to pull the credit report.
It's expected that within the next 5-10 years, lenders across the country will widely use the Vantage scoring model due to its provision of the best scoring models based on today's standards. The FICO model is outdated and doesn't provide a clear representation of credit scores. Besides, credit reporting agencies are major data collection agencies outside social media companies and have all the necessary data to offer the best scoring data.
Determining a Good Credit Score
Credit scores are calculated using both the FICO and Vantage models, with a range from 350 to 850. A score closer to 350 indicates poor credit health, while 850 signifies excellent credit. It's crucial to stay informed about your credit score and progress when working towards achieving high scores. Below are vital score thresholds to consider:
620 or less:
This is considered "bad credit," and if your score falls under this threshold, you may have adverse credit history, high-balance credit card accounts, or no credit cards. To improve your score, make timely payments, and aim to have ten active revolving credit accounts open. Secured credit cards such as the Credit Builder Card or OpenSky Credit Card can help you build your score. With a score of 620, you can start qualifying for an FHA home mortgage.
640-680:
This credit score range is considered "fair for good credit." This means you have an established credit history, but you may have some derogatory marks or accounts on your credit report, and you may have high balances on your credit cards that you need to pay down. A temporary dip in your scores may occur if you recently opened a new account.
740 or higher:
With a credit score over 740, you are part of the 20% of the US population with a "super-prime" score. Congratulations! You can enjoy the best interest rates for most loans. To maintain this score, make timely payments and keep your revolving credit card accounts paid. Great job!
What is the Minimum Credit Score Required to Qualify for a Mortgage?
The answer to this question varies depending on the type of mortgage loan you are considering. Federal regulations and government backing mean that most mortgage loans have similar requirements and guidelines, but there are subtle differences. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
The most popular mortgage loan type is the conventional loan. With conventional loans, you do not have to maintain private mortgage insurance, which reduces the required down payment or monthly payment. Unlike other mortgage loans, conventional loans have lower down payments and better interest rates, requiring a typical credit score of 640 and a debt-to-debt ratio of no more than 43%.
2. FHA Loan
FHA loans are designed for borrowers with lower credit scores, generally between 580 and 619. However, many lenders offer different financial options, so if you're within the credit score limits, make sure to shop around. While FHA loans require PMI to be paid for at least 11 years, they have a higher debt-to-income limit of 50%, allowing you to purchase more homes if your income is lower. Although the down payment is only 3.5%, the higher interest rate means you will pay more over the life of the loan.
3. VA Loan
There is no minimum credit score required for a VA loan, but lenders will check your previous defaulted loans and government-owed past-due debts when pre-qualifying you. To qualify for a VA loan, you must have served in the military, either for 181 days or 90 consecutive days during wartime, served in the National Guard for six years, or have a spouse that died while serving. The VA loan has the best interest rate available, and there is typically no down payment required. For this reason, many people value the VA loan as a way of giving back to our veterans.
Ideal Credit Score for Buying a Car
When determining your car loan eligibility, your credit history takes precedence over your credit score. While a higher credit score is important, it is not the sole factor affecting your interest rate. Lenders check your past and current credit histories to assess the risk of extending credit. Any late payments or vehicle repossession can make it harder to get approval for a car loan. Though some lenders will approve borrowers with poor credit scores, they will impose specific criteria, such as a higher down payment and additional fees to the dealership. Therefore, having equity or making a down payment can give you more leverage when buying a car on credit.
Regarding credit scores, there is no definitive number that guarantees approval, as other factors can come into play. However, a credit score above 680 is considered ideal. Lower credit scores can increase the interest rate that lenders charge, as it implies a higher risk. For instance, someone with a 720 credit score pays an average of $5,500 in interest, while someone with a 580 credit score pays approximately $15,300 in interest. The table below will help you understand how credit scores and interest rates affect the overall cost of your car loan.
Table:
| Credit Score | Interest Rate | Average Interest Paid |
|---|---|---|
| 720 or above | -- | $5,500 |
| 680 or above | -- | $6,600 |
| 650 or above | -- | $8,100 |
| 615 or above | -- | $10,200 |
| 580 or above | -- | $13,900 |
| Below 580 | -- | $15,300 |
In summary, while your credit score influences the cost of buying a car, having a good credit history and making a down payment can go a long way to help achieve a favorable interest rate.
Tips for Boosting Your Credit Score
Improving your credit score is crucial, but it can take some time and effort. It's important to be patient, as building a good credit score does not happen overnight. Here are some things you can do right now to start improving your credit:
1. Open 3-5 Revolving Credit accounts (Credit Cards):
Revolving credit is an excellent option for building credit, especially for those with limited credit or looking to rebuild their credit. A secured credit card, such as Open Sky or Credit Builder Card, could be a good place to start. Revolving credit makes up 30-35% of your overall credit score and helps build credit scores quickly.
2. Raise your Limits:
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage, which is often a crucial factor in calculating credit scores.
3. Pay down your balances:
Keeping a low balance on your credit cards is critical for improving your credit score. If you’re unable to pay off your balances entirely, make a plan to pay down your balances with a percentage of your paycheck each month until they're paid off. Limit your credit card usage to small purchases such as gas or groceries.
Remember, the key to building a better credit score is to be consistent in your efforts and maintain good financial habits over time.
Joe's Insights on Credit Score Improvement
We have all faced the situation of having a less-than-desirable credit score. The good news is that by taking your credit situation seriously and putting in the necessary time and effort, you can see significant improvements in your credit score quickly. Many individuals with poor credit feel trapped in a cycle of credit issues and assume that having good credit again is impossible. However, developing a great credit score requires dedication and a willingness to prioritize your credit and spending habits. Begin by creating a budget and making changes to any bad spending habits; these actions will directly reflect in your credit score. This article provides valuable insight on credit improvement. If you are seeking credit guidance or in need of credit repair services, don't hesitate to contact my office at www.asapcreditrepairusa.com.