It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Despite this fact, many people who search for the best credit score are bombarded with a plethora of conflicting information from various sources online. In fact, some of these sources can be so confusing or even outright misleading that they lead you down a confusing and frustrating rabbit hole.
As someone who has worked in the financial literacy and credit repair space for over fifteen years, my name is Joe Mahlow, and I strive to provide you with straightforward and genuine advice on all things credit scores. Having helped over twenty thousand clients transform their credit scores, I believe that I can equip you with all the necessary information to do the same. So, let's dive right into it!
Contents:
Exploring Credit Scoring Models: FICO vs Vantage
Understanding Credit Scores: Ranges and Tips for Improvement
Credit Score Needed to Buy a House
Determining the Credit Score Range for Purchasing a Car
Simple Steps to Boost Your Credit Score
Joe's Advice on Credit Improvement
Exploring Credit Scoring Models: FICO vs Vantage
Credit scores play a significant role in loan approvals, and understanding the different credit scoring models can help individuals make informed financial decisions when it comes to their credit reports. The two primary credit scoring models are the FICO model and the Vantage model. Each model has its unique features, which we will explore below.
The FICO Credit Score
The FICO credit scoring model is the most widely used credit scoring model, with eight variations ranging from FICO 2 to FICO 10. Depending on the lender, a different FICO report will be pulled, which means that an individual can have several different FICO scores depending on the type of credit they are trying to access. For instance, a mortgage lender will typically use a FICO 5 credit report, while a credit card company is likely to use the FICO 8 credit scoring model.
What are the Different FICO scores for?
Different FICO scores are used because each credit report has varying weights specific to the lender. Factors that are crucial to the lender will have a more significant impact on the credit score than less crucial factors. For example, the FICO 5 mortgage report places more weight on previous mortgage history. In comparison, the FICO 8 report prioritizes credit card history. Auto lenders, on the other hand, use FICO-2 reports, which give more weight to the previous auto history.
The Vantage Credit Score
The Vantage Score scoring model was developed by the three primary credit reporting agencies (Equifax, Experian, and TransUnion) as an alternative to the FICO scoring model. The Vantage score is relatively new compared to the FICO score, and due to its limited use by lenders, it is mainly used by credit monitoring websites to provide individuals with their free credit reports. However, it is gaining popularity with some lenders in sectors like personal loans and auto lending.
Vantage Scoring Model Accuracy
The accuracy of the Vantage score depends on its use. While it is accurate for providing a general idea of an individual's credit score, its accuracy may not be as high as the FICO score when it comes to actual lending purposes. As FICO is the most widely recognized scoring model, it is the model of choice for many lenders. That said, the Vantage score is considered as a good alternative to provide a rough idea of an individual's FICO score.
Which Scoring Model is Best?
It is difficult to say which scoring model is better. While FICO is the most widely used credit scoring model and dominates the lending sector, the Vantage model provides a reliable alternative. Given the access credit reporting agencies have to vast data, the Vantage model may become more widely used by lenders in the future, especially considering its up-to-date, data-centric approach.
In conclusion, both the FICO and Vantage credit scoring models are essential components of a person's credit report. Knowing how each model works can help individuals assess their creditworthiness better. For a better visual representation of your credit scores, check out MyFICO.com.
Understanding Credit Scores: Ranges and Tips for Improvement
Credit scores are a critical part of your financial profile, providing insights into your creditworthiness and financial habits. Both the FICO and Vantage models score range from 350 to 850, with 850 representing the best and 350 the worst score. It is vital to monitor your score journey throughout the journey. Here are some crucial thresholds for each range to help you evaluate your credit score status.
Scores of 620 or below:
A score of 620 or below is considered bad credit. If you find yourself in this range, you may have adverse credit history or high-balance credit card accounts. You will need to build credit by making timely payments and having ten active revolving credit accounts open. Two recommended options to build credit are the Credit Builder Card or OpenSky Credit Card, as they are secured credit cards. Once your credit score reaches the 620 range, you can start qualifying for an FHA home mortgage.
Scores of 640-680:
This range is considered as fair to good credit. Scores in this range mean that you have established credit, but you may have some derogatory marks or accounts and high balances on your credit cards. Newly opened accounts can also temporarily reduce your scores. It is essential to pay down high balances and establish a good payment history over time.
Scores of 740 or higher:
This is considered a "super-prime" score. Having a score of over 740 will give you the best interest rates for most loans. The majority of Americans have a score below 740, making you part of the top 20%. Keep up the great work by maintaining timely payments and keeping your revolving credit card accounts paid.
Remember, understanding your credit score is the first step to take control of your financial future. Make sure you monitor your credit report and score regularly and take actions to improve your score over time.
Credit Score Needed to Buy a House
The credit score you need to buy a house depends on the type of mortgage loan you want to qualify for. Similar requirements and guidelines for most mortgage loans are set due to federal regulation and government-backed loans; however, some variations may exist. Below are the most common mortgage loans you can get.
1. Conventional Loans
These are the most popular loans and is the best savings loan option outside of VA loans. Conventional loans do not require you to maintain private mortgage insurance (PMI), which can save you additional down payment or monthly payment. PMI is included in your mortgage plan to protect the lender in case you stop making payments on your loan. Conventional loans typically have lower down payment requirements and better interest rates compared to other loans. The debt-to-income ratio cannot exceed 43%, and the credit score requirement is 640.
2. FHA Loans
The FHA mortgage loan is for lower credit scores between 580 and 619. Different lenders provide various financial options. Irrespective of credit score limits, always shop for lenders that offer the best terms. FHA loans require you to keep PMI for at least 11 years, which can be a consideration if you are on a tight budget. This loan typically has a higher debt-to-income limit of up to 50%, allowing you to buy more homes on a lower income level. The down payment requirement on an FHA loan is relatively low, at 3.5%. However, the interest rate is often higher.
3. VA Loans
This loan doesn't necessarily have a credit score requirement, but it checks for any government-related past-due debts or any defaulted loans in your past. Veterans or active military personnel with 181 days of service, 90 consecutive days during wartime, six years in the National Guard, or whose spouse died in the line of duty can qualify for a VA loan. This loan typically has the best interest rates and usually doesn't require a down payment. VA loans are excellent because they reward veterans who served our country.
Determining the Credit Score Range for Purchasing a Car
When looking to buy a car, your credit history will play a bigger role in determining loan approval than your credit score alone. Although a good credit score is important, it won't necessarily secure you a lower interest rate. This is because when you apply for a car loan, lenders examine your credit history to assess the risk involved in extending credit to you. For example, if you have a history of late payments or repossession, this will make it harder for you to obtain a loan. However, some lenders still provide car loans to individuals with poor credit histories, but with stricter approval criteria such as higher down payments and additional fees.
To get the best deal on a car loan, it's important to have equity or a down payment. While there's no magic credit score that will guarantee loan approval, a score above 680 is desirable. Anything lower than this can increase the interest rate you pay due to the risk you pose to the lender. In fact, interest rates can make a substantial difference to the total amount of interest you pay, as illustrated in the following examples:
Examples of Interest Rates Based on Credit Scores:
A loan on which someone with a 720 credit score or above typically pays $5,500 in interest
A loan on which someone with a 680 credit score pays $6,600 in interest on average.
A loan on which someone with a 650 credit score pays $8,100 in interest on average.
A loan on which someone with a 615 credit score pays $10,200 in interest on average.
A loan on which someone with a 580 credit score pays $13,900 in interest on average.
A loan on which someone with a credit score of 580 or above will pay $15,300 in interest on average.
As demonstrated by the figures above, maintaining a good credit score can significantly lower the interest you pay on a car loan.
Simple Steps to Boost Your Credit Score
Elevating your credit score can be achieved with easy steps. However, you need to realize that the process demands patience and discipline. You cannot expect to enhance your credit score overnight, and you need to have resilience throughout the process. Remember, if you lack patience, you might end up making rash decisions that can worsen your credit situation.
Here are some steps that can help you improve your credit score:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit, such as credit cards, is an excellent option to boost your credit scores quickly. It is easier to get approved for a secured credit card than a large loan when you have limited credit or intend to rebuild your credit. Open Sky or Credit Builder Card are some of the best-secured credit card options that focus on your ability to pay your bill on time. Revolving credit contributes 30–35% to your credit score and can show improvements after 2-4 months. Ensure that you use the credit card for small purchases only and pay the balance on time.
2. Raise your Limits!
Request for a credit limit increase if you have active revolving credit card accounts. A credit limit increase will help lower your credit utilization percentage, thereby increasing your overall credit limit. Do this through your credit card company's online portal or by calling the customer service helpline. Ensure that you have a good payment history before requesting a credit limit increase.
3. Pay down your balances!
Maintain a low or zero balance on your credit cards by paying them off each month. Only use your credit cards for small purchases and leave a balance of $1-$5 each month. If you have a high balance and are unable to pay it off, create a game plan to repay an "x" percentage of your paycheck each month and ultimately stop using the card. Remember that your credit card spending habits play a massive role in determining your credit score; thus, limiting your usage is crucial. Wasting finances on paying off a credit card only to accrue a balance soon is an irrational decision.
Joe's Advice on Credit Improvement
Credit issues are common, and many people feel like their bad credit is a permanent state. However, if you are serious about improving your credit score, it is possible to see significant changes in a short amount of time. Developing excellent credit takes time and effort, but it is achievable for those who are committed to making a change. To start, consider creating a budget and identifying and fixing any harmful spending habits that may be affecting your credit score. If you need further guidance with credit repair, don't hesitate to reach out to Joe's office at www.asapcreditrepairusa.com. This article aims to offer a better understanding of credit and help you achieve a better credit score.
Key Points:
- Credit issues are common but can be improved with effort and commitment.
- A budget and improved spending habits can directly impact your credit score.
- Joe's office is available for guidance and assistance with credit repair.