It’s surprising to learn that there are 30 various credit score levels. Unfortunately, individuals who search for the best credit scores often become inundated with mixed messages from Google. These mixed messages can not only cause confusion but also cause individuals to spiral down a path of misinformation. My name is Joe Mahlow, and for over 15 years, I have been working in the financial literacy and credit repair industry. My ultimate objective is to provide you with raw and unfiltered advice on various topics- such as credit scores. I have helped over 20,000 clients turn their credit scores around, and it is my aspiration to provide you with enough knowledge and information to do the same! Let's dive into it.
Contents:
Different Types of Credit Scores and How They're Calculated
What Defines a Good Credit Score
Credit Score Requirements for Buying a House
Ideal Credit Score for Buying a Car
Tips for Increasing Your Credit Score
Revamping Your Credit: Helpful Insights from Joe
Different Types of Credit Scores and How They're Calculated
Understanding credit scores is essential to better manage your finances. There are two credit scoring models you should familiarize yourself with: the FICO model and the Vantage model. This article will discuss these two models and the differences in calculating your credit score.
1. FICO Credit Score
The FICO credit scoring model is the most widely used model and has eight different models from FICO 2 to FICO 10. Depending on the type of lender you approach for credit, you will have a different FICO report pulled. For example, if you apply for a home loan, the lender will most likely pull your FICO 5 credit report, whereas for a credit card application, they would pull your FICO 8 credit report. Each FICO model weighs various credit factors differently, which results in different credit scores.
2. Vantage Credit Score
The Vantage score is a new model introduced by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. Unlike the FICO model which has different models, the Vantage scoring model is just one. Vantage is slowly gaining popularity in the lending sector, particularly for personal loans and auto lending. However, it's crucial to understand that since the Vantage score is not widely used for lending decisions, it will not be as accurate as your actual lending score.
3. Why So Many FICO Scores?
Each credit report has different critical factors, and the weight placed on each factor significantly impacts your credit score. For example, your previous mortgage history plays a significant role in your FICO 5 mortgage report score. In contrast, your credit card history influences your FICO 8 credit report score. Auto lenders tend to pull FICO-2 reports, and your auto history heavily influences your credit score. Therefore, different lenders will pull different FICO reports depending on their lending criteria.
4. Is the Vantage Score Accurate?
The Vantage score is accurate, but its representation of your score depends on the context in question. Since the Vantage score is not widely used for lending purposes, it will not accurately reflect your lending score. However, it gives a general idea of your overall score compared to the FICO model. Although FICO is the dominant scoring model today, Vantage has the potential to become the most popular in the future. Credit reporting agencies collect vast amounts of data, giving them the upper hand in providing the best scoring data for consumers.
What Defines a Good Credit Score
Credit scores are determined using the FICO and Vantage models, both of which range from 350 to 850. While a score of 850 represents the best possible credit score, a score of 350 indicates the worst. Building the highest possible credit score is a worthwhile endeavor, and recognizing the importance of critical score thresholds can help you reach your goals. Here's what you need to know:
1. 620 or less:
This score is considered poor, indicating a history of damaging credit habits. To strengthen your credit, it is recommended that you make payments on time and open ten active revolving credit accounts. Two good secured credit card options to consider are the Credit Builder Card or OpenSky Credit Card, which can help rebuild credit. Achieving a credit score in the 620 range qualifies you for an FHA home mortgage.
2. 640-680:
Considered "fair" for good credit, this score indicates an established credit history, but with derogatory marks or high balances. If recently opening an account, expect a temporary decrease in scores.
3. 740 or higher:
Considered "super-prime," this score positions you for the best possible interest rates. Only 20% of the US population maintains a 740 credit score. Consistently paying accounts on time and maintaining revolving credit card accounts are essential in maintaining this score.
What Credit Score Do I Need to Buy a House?
The credit score needed to buy a house varies depending on the type of mortgage loan you’re trying to qualify for. Most mortgage loans have similar requirements and guidelines, but there are three main types: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and offer the best savings outside of VA loans. You don’t need to maintain private mortgage insurance (PMI), which can be costly, nor does it require a high downpayment. The credit score requirement for conventional loans is around 640, with a debt-to-debt ratio no higher than 43%.
FHA Loan
The credit score required for FHA loans is lower, typically between 580 and 619. You’ll need to keep PMI for 11 years, so it’s important to factor it into your budget. You can have a higher debt-to-income limit with an FHA loan, which makes it a great option if you have a lower income. Downpayment requirements can be as low as 3.5% of the purchase price, but interest rates are usually higher.
VA Loan
There is no specific credit score requirement for a VA Loan, but they do look for previous defaulted loans and government-owed past-due debts. This loan is only available to veterans who’ve served a minimum amount of time, including wartime periods, and offers the best interest rates and requires no down payment.
Ideal Credit Score for Buying a Car
When it comes to buying a car, your credit history takes precedence over your credit score. Though a higher credit score is desirable, it does not play a significant role in determining the interest rate you qualify for. Instead, lenders evaluate your past and present credit histories to assess the risk involved in extending credit. For instance, applicants with a record of delayed payments, repossession, or defaults on car loans would find it more challenging to obtain approval than those with a clean slate.
While subprime lenders provide car loans to almost all applicants, including those with a history of repossession, there are specific criteria that borrowers with bad credit must meet. This includes a more substantial down payment and additional fees to mitigate the risk of defaulting on the loan, which dealerships also pay. As such, dealerships may limit the vehicles available to buyers with poor credit to those with a higher markup to cover the fee. In summary, the presence of equity or a down payment on the car enhances leverage when buying a car on credit.
The Credit Score Range for Obtaining a Loan for a New Car
While there is no single credit score that guarantees approval, a score above 680 is ideal. A score lower than this may increase the interest rate, reflecting the borrower's risk. This is illustrated in the following interest rate average:
1. Someone with a 720 credit score or above will pay, on average, $5,500 in interest on a loan.
2. Someone with a 680 credit score or above will pay, on average, $6,600 in interest on a loan.
3. Someone with a 650 credit score or above will pay, on average, $8,100 in interest on a loan.
4. Someone with a 615 credit score or above will pay, on average, $10,200 in interest on a loan.
5. Someone with a 580 credit score or above will pay, on average, $13,900 in interest on a loan.
6. Someone with a credit score of 580 or above will pay, on average, $15,300 in interest on a loan.
From these statistics, it is evident that a high credit score reduces the interest payable on the loan, influencing the borrower's overall credit score.
Tips for Increasing Your Credit Score
Improving your credit score requires time and effort, and it will not happen overnight. It is important to be patient and avoid making irrational decisions with your credit. Consider these steps to help improve your credit score:
1. Open 3-5 revolving credit card accounts:
Revolving credit is an effective way to maximize your credit scores. To begin, it is best to open a secured credit card that does not focus on your credit score but rather your ability to make payments on time. Revolving credit accounts make up 30-35% of your overall credit score. Using your credit cards for small purchases, such as gas or groceries, and paying off a small portion of the balance each month is recommended.
2. Raise your limits:
You can quickly request a credit limit increase for your credit cards, which can increase your overall credit limits and lower your credit utilization percentage. Most credit card companies allow you to request a credit limit increase online or by phone, and they typically want to see 7-15 months of excellent payment history.
3. Pay down your balances:
Keeping your credit card balance low and close to zero is crucial. It is recommended to leave a small balance of $1-$5 on your credit card and pay it off each month. If you have a high balance, create a plan to pay it down each month to ultimately stop using the card. Limiting your credit card usage is vital as your credit card spending habits play a significant role in your overall credit score.
Revamping Your Credit: Helpful Insights from Joe
Having bad credit is a common experience for many people, and it can be discouraging. However, improving your credit score is achievable if you put in the time and effort to work on yourself and your credit history. It's easy for individuals with credit issues to fall into the cycle of having bad credit for their entire lives and believe that good credit is unattainable. Building a great credit score requires work, but those who prioritize their credit status and focus on their spending habits will see satisfying results. To begin, create a budget and work on addressing any problematic spending behaviors as it could directly affect your credit score. This article provides insights to help individuals gain a better understanding of credit. If you are seeking guidance and assistance with credit repair, please contact my office today at www.asapcreditrepairusa.com.