It may come as a surprise to many that there are actually thirty different levels of credit scores. This fact is often overlooked when trying to determine the best credit score, as a simple Google search will yield a plethora of conflicting information. Unfortunately, much of this information is not only confusing, but can also be misleading, leading you down a rabbit hole of misinformation. My name is Joe Mahlow, and for over fifteen years, I've been helping people navigate the financial literacy and credit repair world. My mission is to provide you with straightforward guidance on topics such as credit scores. Having assisted more than twenty thousand clients in boosting their credit scores, I am confident that I can supply you with ample information to achieve the same success. So, let's dive in!
Contents:
Two Main Types of Credit Scores: FICO and Vantage
Understanding Credit Scores: Ranges and Thresholds
Credit Score Requirements for Mortgage Loans
Determining a Good Credit Score for Buying a Car
Ways to Improve Your Credit Score
Final Thoughts from Joe: Tips to Improve Your Credit Score
Two Main Types of Credit Scores: FICO and Vantage
You will need to be familiar with two primary credit scoring models: the FICO model and the Vantage model, as they have a significant impact on how lenders calculate your credit score.
FICO Credit Score
The most widely used scoring model in the US is the FICO credit scoring model. It has eight different versions (from FICO 2 to FICO 10), and each one gives a different credit score based on the credit report. Many FICO models may be confusing, but the article explains why they exist.
When you apply for credit, different types of lenders will pull different FICO reports based on their needs. For example, if you apply for a home, the mortgage lender will pull your FICO 5 credit report, whereas if you apply for a credit card, they will mostly pull your FICO 8 credit report.
So why are there so many FICO scores? Because each credit report has a different "weight," and some of the factors that lenders consider are more significant than others. A FICO 5 mortgage report, for example, places more emphasis on previous mortgage history. So if you've been making payments on your previous mortgage, your score will reflect that, whereas if you have no history or negative history, your score will be lower. The same applies to all different FICO scoring models. Credit card companies primarily use the FICO 8 score, so your credit card history will most affect this score. Auto lenders, on the other hand, usually pull FICO-2 reports, and your scores will vary, depending on your previous auto history.
If you want to see all of your different FICO scores clearly, go to www.myfico.com, where you can create an account.
Vantage Credit Score
The Vantage Score is a scoring model developed by the three main credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO. It's a new model compared to FICO, and while currently, FICO remains the most widely used scoring model for lending, Vantage is gaining ground in some sectors, such as personal loans and auto lending. Credit monitoring websites frequently use Vantage to provide you a free copy of your credit reports.
Is the Vantage Score accurate?
The Vantage Score is accurate, but its accuracy depends on the context of this question. Since the Vantage Score is not yet widely used for lending purposes, it may not be as accurate as your lending score. In other words, how accurate your score is depends on your ability to obtain credit. As FICO remains the most recognized scoring model, Vantage's accuracy can vary. However, we can use Vantage as a helpful tool. Although you may not know your FICO score without paying for it or having a lender pull your credit report, you can use the Vantage Score to get a general idea of your overall score.
I believe that the Vantage scoring model will become widely used by lenders in the next 5-10 years. It is more capable of providing scoring models that align with today's standards than the FICO model. FICO is outdated and does not provide a clear representation of your credit scores. Remember, credit reporting agencies are the most significant data collection agencies aside from social media companies. If they have the data, they have the upper hand in providing the best scoring data, period.
Understanding Credit Scores: Ranges and Thresholds
Credit scores for both FICO and Vantage models typically range from 350 to 850, with 850 being the highest score you can attain and 350 being the lowest. Building a good credit score takes some effort, but it's crucial to know where you stand in the process, so here are some significant score thresholds to aim for:
1. 620 or below:
This is considered poor credit. Scores in this range often mean that you have a history of adverse credit or high-balance credit card accounts. To improve your score, ensure that you make timely payments and have at least ten active revolving credit accounts. You may consider using secured credit cards like the Credit Builder Card or OpenSky Credit Card to build your credit. With a score of 620, you can start becoming eligible for an FHA home mortgage.
2. 640-680:
This is considered fair credit. Scores in this range indicate that you have an established credit history, but you may have derogatory marks or high balances on your credit cards. If you recently opened a new account, you might observe a temporary drop in your scores, but don't panic as this is normal.
3. 740+:
Any score above 740 is considered "super-prime." With a score in this range, you qualify for the best interest rates for most loans. If you have managed to achieve over a 740 credit score, congratulations! You belong to the 20% of the US population with this credit score. Ensure you maintain this score by paying your accounts on time and keeping up with your revolving credit card payments.
Credit Score Requirements for Mortgage Loans
The credit score you need to qualify for a mortgage loan depends on the type of loan you are applying for. Most mortgage loan requirements and guidelines are similar, but there may also be some differences due to federal regulation and government backing. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans, and each of them has its own credit score requirement.
1. Conventional Loans
Conventional loans are the most popular loans, and they usually have the lowest interest rates and the lowest downpayment requirements. They require a credit score of at least 640 and a debt-to-income ratio no higher than 43% for approval. One of the best things about conventional loans is that they don't require you to maintain private mortgage insurance.
2. FHA Loans
FHA loans are designed for those with lower credit scores. The credit score requirement for an FHA loan is typically between 580 and 619. FHA loans have higher debt-to-income limits of up to 50% and lower downpayment requirements of 3.5% of the purchase price. However, keep in mind that you'll be required to pay mortgage insurance for at least 11 years, which could increase your monthly payment.
3. VA Loans
There is no credit score requirement for VA loans, but your previous defaulted loans or government-owed past-due debts will be taken into consideration. To qualify for a VA loan, you must have either served in the military for a specific period or have a spouse who lost their life while on active duty. VA loans typically have the lowest interest rates and don't require a down payment. If you are a veteran, this loan option could be perfect for you.
Determining a Good Credit Score for Buying a Car
When it comes to purchasing a car, the key factor that determines your eligibility is not just your credit score, but your overall credit history. While a high credit score is important, it is not the only deciding factor in the interest rate you may qualify for. Lenders assess the risk involved in extending credit to you by scrutinizing your credit histories, including any late payments or repossession of previous auto loans. Special finance and subprime lenders may offer loans to those with poor credit, but with stricter approval criteria such as higher down payment and dealership fees. Moreover, the dealership may have to pay a fee to cover the risk of loan default. Therefore, to have more negotiating power while buying a car on credit, it is recommended to have sufficient equity or a downpayment.
Credit Score Range for a New Car
While there is no specific credit score range for approval, a credit score of over 680 is considered ideal, as scores below this range may result in a higher interest rate due to higher risk. Your credit score significantly affects the interest rate you pay, a higher credit score corresponding to a lower interest rate. For instance, a person with a score of 720 and above would pay an average of $5,500 in interest on a loan. By comparison, a person with a 580 credit score or higher will pay an average of $15,300 in interest. This demonstrates that maintaining a higher credit score will lead to an overall lower cost of credit.
Ways to Improve Your Credit Score
To improve your credit score, it is essential to take action right away and understand that building an excellent credit score takes time. Being patient and making rational decisions will help you reach your goal. Here are some tips to help improve your credit score:
1. Open 3-5 Revolving Credit Accounts:
Revolving credit is the best option to maximize your credit scores. It is easier to obtain approval for a credit card rather than a large loan; therefore, start by opening a secured credit card. Focus on payment history, and consider using small expenditures such as gas or simple groceries. Revolving credit makes up 30-35% of your overall credit score, and this option will help you build credit fairly quickly.
2. Raise Your Limits:
Credit utilization percentage is a crucial factor that can hurt your credit score. To keep your credit utilization low, consider requesting a credit limit increase to increase your overall credit limits.
Contact your credit card company and request a credit limit increase.
Fill out some information about your current income and wait for their credit team to review your request.
They will agree to do this once they see 7-15 months of good payment history on your credit card.
3. Pay Down Your Balances:
Keep your balance low and close to zero, and leave about $1-5 balance on your credit cards. Do not spend more than you can afford, and pay your credit cards off each month. If you have high balances and cannot pay them off, make a game plan to pay a percentage of your paycheck each month to pay the credit card down. Remember, your credit card spending habits will play a significant role in your overall credit score, so it is vital to limit your credit card usage if you want to see your score improve.
Final Thoughts from Joe: Tips to Improve Your Credit Score
Bad credit can happen to anyone, and it's important to take it seriously. There is hope to improve your credit score if you're willing to put in the work and effort. The cycle of bad credit can be broken if you prioritize your credit and work to change your spending habits. Creating a budget is a great way to start. Fixing any bad spending habits will positively impact your credit score. It takes plenty of effort and time to improve your credit score substantially, but it is achievable. If you require assistance with restoring your credit or have any concerns regarding your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com. This article will provide valuable insights into credit repair.