It's surprising to learn that there are 30 distinct levels of credit scores. Even more surprising is the fact that when you search for the best credit score online, you'll receive a plethora of answers from various sources, many of which can be confusing and lead you toward dead ends. I'm here to help you avoid all of that. My name is Sarah and I've been working in the financial literacy and credit repair sphere for over a decade. My sole aim is to provide you with unfiltered advice on different topics, one at a time. Credit scores are particularly important, and I’ve had the opportunity to help over twenty thousand clients improve theirs. Hopefully, with the information I’m about to share, you’ll be able to do the same, too! Let's dive into it.
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Good Credit Scores
Determining the Best Credit Score to Obtain a Home Loan
What is a Good Credit Score for Purchasing a Car?
Ways to Increase Your Credit Score
Insight from Joe on Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage
Credit scores are important and can impact your ability to get a loan or credit. There are two primary credit-scoring models: FICO and Vantage. Understanding how these models calculate your credit score is crucial to making informed decisions.
1. FICO Credit Score
The FICO credit score is the most popular and widely used scoring model. With eight different FICO models, your credit score can vary depending on the credit report used. This is because lenders will pull a different FICO report based on the type of credit you are applying for.
- Mortgage lenders pull FICO 5 credit reports, and the score heavily weighs on previous mortgage history.
- Credit card companies primarily use the FICO 8 report, which heavily weighs on previous credit card history.
- Auto lenders typically pull FICO-2 reports, and the score heavily weighs on previous auto history.
2. Vantage Credit Score
The Vantage Score is a newer credit scoring model developed by Equifax, Experian, and TransUnion to compete with FICO. While still gaining popularity, Vantage is not widely used for lending purposes, making it less accurate when it comes to your actual lending score.
- Vantage is frequently used by credit monitoring websites to provide free credit score reports.
- The Vantage model is becoming more popular in certain sectors like personal loans and auto lending.
I advise using your Vantage score as a general idea of your FICO score since it's hard to obtain your FICO score unless you pay for it or a lender pulls your credit report. However, I believe the FICO scoring model is outdated and less representative of credit scores based on today's standards. In the next 5-10 years, I expect the Vantage scoring model to gain widespread usage due to its superior scoring models. Remember, since credit reporting agencies are significant data collection agencies, they have the upper hand in providing the best scoring data.
Understanding Good Credit Scores
Credit scores are measured on a scale of 350 to 850 for both FICO and Vantage models. A score of 350 is the lowest, while 850 is the highest achievable score. As you work towards attaining excellent credit scores, it's essential to know where you stand on the scale. Here are some crucial score thresholds to keep you informed.
620 or below
If your score is below 620, it's classified as bad credit. This score means that you probably have some adverse credit history, little or no credit card usage, or high-balance credit card accounts. The best way to improve your credit score is by making timely payments and having ten revolving credit accounts open. Consider getting a secured credit card like a Credit Builder Card or OpenSky Credit Card to help you establish credit. Once you reach a score of 620, you can start qualifying for an FHA home mortgage.
640-680
This range is considered fair for good credit. A score between 640 and 680 means that you have established credit, but you may have some derogatory marks or accounts on your credit report. You may also have some high balances on your credit cards that you'll need to pay down. Newly opened accounts can temporarily lower your credit score. Don't panic; this is only a temporal drop in your score, and it will return.
740+
A credit score of over 740 is considered "super-prime" and gives you the best interest rates for most loans. Congratulations if your credit score is over 740 because you're among the 20% of the US population with this score. Keep up the excellent work, always pay your bills on time, and keep your revolving credit card accounts paid. You will be in great shape!
Determining the Best Credit Score to Obtain a Home Loan
Whether or not your credit score is acceptable for purchasing a home depends on the type of mortgage loan you are applying for. The guidelines for most mortgage loans are similar. However, regulatory requirements may differ. The three most common mortgage loans available are conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are favored by most borrowers and provide the best "savings" loan option aside from VA loans. Unlike other loan types, they do not require private mortgage insurance (PMI), which increases downpayment or monthly payments. This insurance protects the lender from defaulters and typically goes along with the mortgage. Conventional loans needs a minimum credit score of 640 and a debt-to-debt ratio of no higher than 43%.
FHA Loan
FHA mortgage loans typically support credit scores between 580 and 619, and its requirements vary per lender, so try seeking different lenders to see which option best fits your finances. This mortgage type has a higher debt-to-income limit of 50%, which makes it possible to buy more homes than with a conventional loan if your income is low. The minimum down payment required for this loan is as low as 3.5% of the purchase price, however, the interest rate is generally higher, and PMI must be maintained for at least 11 years.
VA Loan
Although there is not necessarily a credit score requirement with the VA loan, past defaults on loans and government debt are considered during pre-qualification. The loan is designed for individuals who 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 whose spouse died while on active duty. The VA loan usually provides the lowest interest rates and often does not need a down payment. This loan option is an excellent opportunity for veterans to be rewarded for their service to the country.
What is a Good Credit Score for Purchasing a Car?
When considering buying a car, it's essential to understand that your credit score is not the only factor in determining what type of loan you can qualify for. Your credit history often plays a more significant role in this determination. While a high credit score is important, it holds little weight in the interest rate you receive.
For the lender to decide the risk that comes with extending credit to you, they will check your credit history and analyze issues like late payments or prior repossession. Someone with a default on a current or prior auto loan will struggle more to get loan approval than someone without these credit issues. Meanwhile, lenders specializing in bad credit or special finance will almost qualify anyone for a car loan, but may require special criteria, like a higher down payment or payment to the dealership. The dealership may cover the risk of loan default, but you will experience higher interest rates. Also, to gain an edge when buying on credit, create a downpayment or equity to use.
The Credit Score Range for a New Vehicle
As with other factors, it's hard to say what score will pass you for approval as various elements come to play. Yet, a credit score higher than 680 is ideal for purchasing a car. Any score lower than this will increase the level of interest charged as the lender carries a higher risk in extending credit to you.
The following table shows how your interest rates will change depending on your credit score when borrowing to buy a car:
A credit score of 720 or above would pay on average $5,500 in interest on an auto loan.
A score of 680 or above would pay on average $6,600 in interest.
A score of 650 or above would pay on average $8,100 in interest.
A score of 615 or above would pay on average $10,200 in interest.
A credit score of 580 or above will pay, on average, $13,900 to $15,300 in interest on an auto loan.
Looking at the data, it's clear that a higher credit score results in lower interest rates, which directly affects your credit score.
Ways to Increase Your Credit Score
Improving your credit score is not an easy feat, but it can be done with some effort and patience. Building a good credit score takes time and consistency, and making impulsive decisions can only worsen the situation. If you want to increase your credit score, here are some things you can do right now:
1. Open 3-5 revolving credit accounts
Revolving credit, such as credit cards, is a great option for those looking to boost their credit scores. It may be challenging to receive approval for a large loan if you have a limited credit history or are trying to rebuild your credit, but revolving credit offers a higher likelihood of approval. Begin with a secured credit card that focuses on your ability to pay, such as Open Sky or Credit Builder Card, to establish credit. Revolving credit accounts for 30-35% of your overall credit score and is helpful in raising your credit score quickly. Keep your balance low and pay on time.
2. Raise your limits
Requesting a credit limit increase for your active revolving credit card accounts can significantly increase your overall credit limits and lower your credit utilization percentage. Most credit card companies allow you to apply for an increase online or by phone. However, you should have at least 7-15 months of excellent credit history before requesting the increase.
3. Pay down your balances
Keeping your balance low or close to zero is crucial. You can use your credit cards for small purchases and avoid using them unnecessarily, thus keeping the balances low. If you have high balances, making a game plan to pay off the credit card balance in portions and then refraining from excessive use of the cards is essential. High credit card utilization can negatively impact your credit score and increase interest payments.
Insight from Joe on Improving Your Credit Score
It's common to experience credit struggles at some point in time, but you can change your situation by putting forth the effort to work on your credit score. Rather than accepting poor credit as a lifelong burden, prioritize your credit by committing to beneficial habits. Overhauling your financial behavior can rapidly revive your credit score. To get started, establish a budget and identify areas for improvement. By altering your spending habits, you'll experience a direct improvement in your credit score. This article aims to enhance your understanding of credit, though if you require additional help with credit repair, don't hesitate to reach out to my office at www.asapcreditrepairusa.com.