It may surprise you to learn that credit scores come in 30 different levels. Many individuals who seek to obtain the best credit score are often presented with a variety of responses from Google, leaving them feeling bewildered and sometimes even misinformed. I am Joe Mahlow, a seasoned financial literacy and credit repair professional with over fifteen years of experience in the industry. I aim to provide you with candid insights on various topics, particularly credit scores. Throughout my career, I have successfully helped more than twenty thousand clients improve their credit scores, and I believe that I can assist you in doing so as well. So, without further ado, let's dive in!
Contents:
Variations in Credit Scores
Understanding Credit Score Levels
What Credit Score is Needed to Buy a House?
Determining Credit Score Range for Car Purchase
Tips to Increase Your Credit Score
Joe's Insights on Boosting Your Credit Score
Variations in Credit Scores
Credit scores are crucial for financial health, and it’s essential to understand the different types of credit scores and their variations. Currently, two widely used credit scoring models are the FICO model and the Vantage model. A closer look at these models can help you appreciate how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model has eight different versions, from FICO 2 to FICO 10, each with slight variations. You’ll get a different score depending on which model your lender uses. For example, a mortgage lender will most likely pull your Fico 5 credit report, while a credit card issuer will pull your Fico 8 credit report.
Why so many FICO scores?
Each credit report has a different "weight," meaning that some factors are more critical than others depending on the lender. More important factors will have a more significant impact on the score. For instance, a FICO 5 mortgage report will weigh heavily on your previous mortgage history. On the other hand, credit card companies primarily use the FICO 8 report, and your credit card history will impact your score the most.
If you want a better visual representation of your different FICO scores, go to www.myfico.com, and sign up for an account.
Vantage Credit Score
The three major credit reporting agencies – Equifax, Experian, and TransUnion – developed the Vantage Score to compete with the FICO model. However, the Vantage Score is relatively new compared to FICO. While FICO dominates the lending sector, Vantage is gaining popularity, especially in some sectors like personal loans and auto lending.
Is the Vantage Score accurate?
Although the Vantage Score is accurate, it’s not widely used for lending purposes. Therefore, it’s not entirely accurate when it comes to your actual lending score. A credit score is only as accurate as your ability to obtain a loan. However, the Vantage scoring model is a good general idea of your FICO score. Since knowing your FICO score can be hard, the Vantage score can give you a rough idea of where your overall scores are.
In conclusion, credit reporting agencies are essential data collection agencies, and if they have the data, they have the upper hand in providing the best scoring data. While many lenders still use the FICO model, the Vantage scoring model is likely to be widely used in the next 5–10 years due to the best scoring models it provides based on today's standards.
Understanding Credit Score Levels
Credit scores are measured on a range of 350 to 850 for both the FICO and Vantage models, with 850 being the highest score and 350 being the lowest. Knowing where you stand on this range is essential for setting credit score improvement goals. The following are important credit score thresholds to keep in mind:
620 or below:
This is considered a bad credit score, indicating a history of negative credit or no credit card usage. To improve your score, it's essential to make payments on time and maintain ten active revolving credit accounts. Credit Builder Card or OpenSky Credit Card are recommended for secured credit card options. Once your score is 620 or above, you can qualify for an FHA home mortgage.
640-680:
A score within this range is considered fair for good credit, indicating established credit with a few derogatory marks or accounts. Paying down high credit card balances is necessary to achieve better credit scores, along with avoiding opening new accounts frequently.
740+:
This is considered a "super-prime" credit score and is achieved by approximately 20% of the US population. It offers the best interest rates for most loans, indicating excellent credit management. To maintain this level, it is crucial to pay accounts on time and keep your revolving credit card accounts paid. Congratulations if you already have a score of 740 or above!
What Credit Score is Needed to Buy a House?
The credit score needed to buy a house depends on the type of mortgage loan you are seeking. Each mortgage loan type has different requirements and guidelines set by federal regulation and government backing. The most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular loan option and offer great savings outside of VA loans. These loans do not require private mortgage insurance (PMI), which can be an added cost leading to a higher downpayment or monthly payment, unlike other loan types. The credit score requirement for a conventional mortgage loan is typically 640, and the debt-to-debt ratio must not exceed 43%. Additionally, conventional mortgage loans offer better interest rates and lower downpayment requirements than most mortgage loans.
2. FHA Loan
The FHA mortgage loan is for borrowers with a lower credit score range of 580 to 619. However, loan programs have different requirements, so it is best to examine lenders to find the best financial option for you. PMI is required on FHA loans for up to 11 years, which can be a significant added cost to your mortgage. Nevertheless, FHA loans offer a higher debt-to-income ratio of up to 50%, allowing you to buy more homes than with a conventional loan type if your income is low. An FHA loan requires a 3.5% downpayment, making it an affordable option for homeowners. The downside is that you may incur higher interest rates than with a conventional loan type.
3. VA loan
The VA loan does not technically have a credit score requirement. Yet, VA loans' main pre-qualification criteria are defaulted loans and past-due debts owed to the government. To qualify for a VA loan, you must have completed at least 181 days of military service in the United States, served 90 consecutive days in wartime, served 6 years with the National Guard, or be a military spouse lost in action. Without a doubt, the VA loan has the best interest rates available and usually does not require a down payment, making it the ideal loan option for veterans.
Determining Credit Score Range for Car Purchase
When purchasing a car, the key factor in determining approval for a loan is not solely based on your credit score, but your entire credit history. While having a high credit score is important, it doesn't necessarily guarantee a lower interest rate. When applying for a car loan, your credit history is analyzed to assess the risk of extending credit. Late payments, previous repossession, or credit issues can make it more challenging to qualify for a loan. Special finance lenders are willing to qualify individuals with bad credit for a car loan but with specific criteria such as a higher down payment and additional fees. Moreover, the dealership charges extra fees to approve the loan and select the vehicle that covers the markup. Having equity or a down payment can increase your leverage when buying a vehicle on credit.
Although an exact credit score that guarantees approval cannot be determined due to multiple factors, having a score over 680 is ideal. A score below 680 may increase the interest rate due to the risk posed to the lender. Based on the data, someone with a credit score over 720 would pay around $5,500 in interest on a loan. In contrast, someone with a score over 580 can pay up to an average of $15,300 in interest rates for the same loan. As such, maintaining a higher credit score can significantly reduce the interest rate, ultimately resulting in an improved credit score overall.
Tips to Increase Your Credit Score
Improving your credit score is a gradual process, and it requires patience and discipline. You can take some simple steps to boost your scores, such as:
1. Open 3-5 revolving credit accounts
Opening a few revolving credit accounts, such as credit cards, can help enhance your credit scores. It's easier to obtain approval for credit cards than for a large loan, especially if you're a borrower with limited credit or looking to rebuild it. For example, you can start with secured credit cards that focus on your ability to pay on time, rather than your credit score. Revolving credit contributes to 30-35% of your overall credit score and can quickly raise your scores. Remember to use your cards sparingly and pay off your balance on time.
2. Raise your limits
Increasing your credit limits can help reduce your credit utilization rate and boost your overall credit limits. You can request a limit increase from your credit card company online or by phone. Typically, you will need a solid payment history of 7-15 months before getting approval.
3. Pay down your balances
Paying off your credit card balances and keeping them low is crucial for maintaining good credit scores. If you have high balances, it's advisable to create a repayment plan and chip away at them over time. Never run the balance back up after paying it off, and keep your credit card usage in check to avoid interest charges and overspending.
Joe's Insights on Boosting Your Credit Score
We've all been in a situation where our credit wasn't up to par. However, if you take your credit seriously and put in the necessary time and effort to improve your credit, you can see significant improvements to your credit score in no time. Many people with bad credit get stuck in a cycle of poor credit and start to believe that improving their credit is impossible. But, developing a great credit score takes effort, and those who prioritize their credit and focus on their spending habits will see the benefits. To begin, start by creating a budget and working towards improving any bad spending habits. This will have a direct impact on your credit score. For more information on managing your credit score or for assistance in repairing your credit, please visit www.asapcreditrepairusa.com.