It may surprise you to learn that credit scores are determined by 30 different levels of scoring. Although many people try to find the best credit score by searching online, the information they find can often be confusing and even misleading. As an expert in the financial literacy and credit repair industry for over fifteen years, my name is Joe Mahlow, and my goal is to provide you with honest insight on various topics such as credit scores. Through my work, I've had the opportunity to help over 20,000 clients improve their credit scores, and I hope to do the same for you by giving you the knowledge you need. So, let's dive in!
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
Understanding Good Credit Score Ranges
Credit Score Requirements for Different Mortgage Loan Types
Determining What Credit Score is Required to Purchase a Car
Tips for Improving Your Credit Score
Joe's Perspective on Improving Your Credit
Different Types of Credit Scores: Understanding FICO and Vantage Models
1. FICO Credit Score
The FICO credit scoring model is the most widely used in the lending sector.
There are eight different FICO models, and lenders use specific FICO reports based on their type, such as FICO 5 for mortgages and FICO 8 for credit cards.
Each FICO model is weighted differently, prioritizing factors that are more critical to the lender for a specific type of credit. For instance, a FICO 5 mortgage report weighs heavily on previous mortgage history, while FICO 8 credit report weighs on credit card history.
You can visit www.myfico.com to see your different FICO scores.
2. Vantage Credit Score
The Vantage Score was developed by the three major credit reporting agencies to compete with the FICO model.
While FICO dominates the lending sector, the Vantage Score is gaining popularity in some sectors like personal loans and auto lending.
Credit monitoring websites use Vantage to provide consumers with a free copy of their credit reports.
The Vantage Score is a good "general idea" of your FICO score, but it may not be accurate for actual lending purposes.
3. Accuracy of Vantage Score
The Vantage Score's accuracy depends on the context within the question.
Since Vantage is not widely used for lending purposes, it may not accurately represent your actual lending score.
However, the Vantage Score can give you a general idea of your credit score compared to your FICO score.
The Vantage Score may become more widely used in the next 5-10 years as it provides the best scoring models based on today's standards.
Understanding Good Credit Score Ranges
The FICO and Vantage models both use a range of 350 to 850, where 350 is the worst, and 850 is the best credit score. To achieve high scores, one must be aware of their position in the journey of building credit. Here are some important score thresholds to keep in mind:
620 or below
Considered bad credit, this range likely indicates adverse credit history, high-balance credit card accounts, or no credit cards at all. Timely payments and ten active revolving credit accounts are keys to improvement. Credit Builder Card or OpenSky Credit Card are recommended options for secured credit cards that aid in building credit. At a score of 620, one can qualify for an FHA home mortgage.
640-680
This range is fair for good credit, with established credit, some derogatory marks, and high balances on credit cards, indicating the need to pay them down. A temporary drop in scores can occur with newly opened accounts.
740+
Any score above 740 is considered "super-prime" and offers the best interest rates for most loans. Achieving this score means being part of the 20% of the US population with this ranking. Consistently paying accounts on time and maintaining low revolving credit card account balances is key to maintaining high scores.
Credit Score Requirements for Different Mortgage Loan Types
When it comes to purchasing a home, the credit score you need will depend on the type of mortgage loan you're applying for. Most government-backed loans have similar guidelines and requirements, but there are some differences. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the preferred option for many homebuyers. Compared to other mortgage loans, they usually have better interest rates and lower downpayment requirements. Additionally, conventional loans do not require you to maintain private mortgage insurance (PMI), which can increase your costs. To qualify for a conventional loan, you need a credit score of at least 640 and a debt-to-debt ratio of no higher than 43%.
FHA Loan
For homebuyers with lower credit scores, an FHA loan may be a good option. These loans typically require a credit score of at least 580, though different lenders may have different requirements. The downpayment requirements for an FHA loan are as low as 3.5% of the total purchase price, making it easier for homebuyers to qualify, especially if they have limited cash reserves. However, FHA loans require you to keep PMI for at least 11 years, and they often have higher interest rates. The debt-to-income ratio can be as high as 50%, allowing you to purchase more homes if you have a lower income.
VA Loan
The VA Loan is a great option for veterans and active-duty military personnel. There isn't a specific credit score requirement, but they do look for previous defaults and government-owed past-due debts when qualifying you for the loan. To qualify, you must have served in the military or the National Guard or be the spouse of someone who lost their lives during active duty. VA loans have the best interest rates available, and they do not typically require a downpayment. Overall, the VA Loan is an excellent option for those who have served our country.
Determining What Credit Score is Required to Purchase a Car
When it comes to buying a car, your credit history is more important than your credit score. Although having a high credit score is beneficial, it is not the only factor that determines the interest rate you qualify for. Lenders check your current and past credit histories to assess the risk of providing you with credit. For instance, a person who has experienced late payments or repossession of a previous auto loan may find it difficult to qualify for a loan. However, there are subprime lenders who approve almost everyone, even those who have faced repossession in the past, but they have specific criteria such as a higher down payment and dealership fees. When negotiating a car loan with a dealership, having equity or a downpayment can be advantageous.
While there is no set credit score to approve you for a car loan, having a score of 680 or more increases your chances of being approved. A lower credit score increases the interest rate charged since it raises the risk to the lender. A great credit score of 720 or more pays interest of around $5,500 on a loan, whereas a 580 credit score pays $13,900 or more. This data shows that a higher credit score equals a lower interest rate, which affects your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time and effort but is achievable. Having patience is crucial because it prevents you from making irrational decisions that may worsen your credit woes. Here are some strategies to enhance your credit score:
Open Revolving Credit Accounts
Having 3-5 revolving credit accounts such as credit cards can boost your credit score. Obtaining a secured credit card like Open Sky or Credit Builder Card can increase your chances of approval by focusing on timely payments rather than your credit score. Paying off your balance regularly and keeping it low can significantly improve your credit scores.
Request a Credit Limit Increase
Receiving a credit limit increase can lower your credit utilization percentage and overall credit limits if you have active credit card accounts. The process involves filling out some information about your income and a credit check by the credit card company. A history of excellent payment on your credit cards for at least seven to fifteen months is necessary before requesting a credit limit increase.
Pay off Card Balances
Keeping your credit card balances low will benefit your credit score. You can use your card for small purchases and leave a small balance of $1-$5 when paying your bill. Planning to pay a certain percentage of your paycheck each month can help you pay off your balances. Limiting your credit card usage and avoiding running up your balance again will play a crucial role in enhancing your credit scores.
Joe's Perspective on Improving Your Credit
All of us at some point have faced a less-than-desirable credit history. However, dedicating time and effort towards improving your credit can lead to significant changes in your score. Unfortunately, many individuals with poor credit become trapped in a seemingly endless cycle, believing that good credit is unattainable. The reality is, cultivating an excellent credit score requires significant work, and those who prioritize their credit and adjust their spending habits can succeed. The first step is to create a budget and focus on rectifying any poor spending practices. This will directly impact your credit score. This article provides insights into credit, and for those seeking guidance or credit repair assistance, our office can be contacted at www.asapcreditrepairusa.com.