It's surprising to learn that there are actually 30 different levels of credit scores out there. You might think that finding the best credit score is easy, but a quick search on Google can leave you with a lot of conflicting information. It's a confusing and overwhelming rabbit hole for many people. That's where I come in. My name is Joe Mahlow, and I've spent over fifteen years working in the financial literacy and credit repair field. My mission is to provide you with honest and straightforward advice on various topics, starting with credit scores. Over the years, I've helped more than twenty thousand clients improve their credit scores. And now, I'm here to share some valuable insights with you! So, let's dive in.
Contents:
Different Kinds of Credit Scores
Understanding Credit Scores
What is the Ideal Credit Score to Buy a House?
Determining the Credit Score Range for Buying a Car
Ways to Increase Your Credit Score
Joe's Advice on Credit Repair
Different Kinds of Credit Scores
You may come across two types of credit scores: the FICO model and the Vantage model. These two models are crucial to understand because they differ in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most widely used. It comprises eight different FICO models, from FICO 2 to FICO 10. The different models produce varying credit scores depending on your credit report. Lenders pull different FICO reports based on the type of credit you apply for. For example, if you want a home loan, the mortgage lender will retrieve your FICO 5 credit report, while a credit card application will prompt the retrieval of your FICO 8 credit report.
Why are there so many FICO scores?
Each credit report carries a different weight, meaning some factors have a higher impact on credit scores than others. For instance, a FICO 5 mortgage report focuses heavily on previous mortgage history, with a good payment history on a previous mortgage weighing more in your favor. In comparison, FICO 8 report reflects your credit card history more significantly. Auto lenders typically pull the FICO-2 report, where previous auto history is paramount.
You can get a visual representation of your different FICO scores on www.myfico.com by creating an account.
Vantage Credit Score
The three leading credit reporting agencies- Equifax, Experian, and TransUnion, developed Vantage Score to rival the FICO model. While FICO has been in use since the seventies, Vantage is a newer model. Though it is not yet widely used for lending purposes, the Vantage Model is gaining popularity in some sectors, such as personal loans and auto lending. Vantage is often used by credit monitoring websites to provide free credit reports.
Is the Vantage Score Accurate?
Vantage Score accuracy depends on the context. Because it is not yet widely used for lending purposes, it may not always produce accurate lending scores. As such, use it as a good "general idea" of your FICO score. Credit reporting agencies have the biggest data collection outside of social media companies. Therefore, the Vantage scoring model may be more accurate in the long run than the FICO scoring model.
It is vital to understand and interpret both types of credit scores as you monitor your credit report.
Understanding Credit Scores
Credit scores are numerical values that range from 350 to 850 for both the FICO and Vantage models, with 350 being the worst possible credit score and 850 considered the best. If you’re working towards having the highest scores possible, it’s essential to have a clear understanding of where you stand. Here are some key credit score thresholds:
1. 620 or below:
This range is classified as bad credit and typically indicates adverse credit history, high-balance credit card accounts, or lack of credit history. To boost your score, make timely payments and keep ten active revolving credit accounts open. Consider using a secured credit card, such as the Credit Builder Card or OpenSky Credit Card, to help improve your credit. A 620 credit score range will allow you to start qualifying for an FHA home mortgage.
2. 640-680:
With scores in this range, you have fair to good credit, but may still have some derogatory marks or accounts on your credit and high balances on your credit cards. Newly opened accounts can also lower your scores, but this is usually temporary.
3. 740+:
Any credit score above 740 is considered “super-prime†and opens doors to the best interest rates for most loans. Only 20% of the US population have a score over 740, so congratulations if you’re part of this group. Always pay your accounts on time and keep revolving credit card accounts paid to stay in great shape.
What is the Ideal Credit Score to Buy a House?
When it comes to purchasing a house, the credit score required largely depends on the type of mortgage loan being applied for. Federal regulations and government backing result in similar requirements and guidelines for most mortgage loans, but differences persist. The three most common forms of mortgage loans are conventional loans, FHA loans, and VA loans. Below is a breakdown of each loan type and the credit scores required for approval.
1. Conventional Loans
Conventional loans are the most preferred and offer fantastic savings, aside from VA loans. These loans do not demand the maintenance of private mortgage insurance (PMI), which serves as added expenditure and increases the monthly payment or downpayment. PMI is in place to safeguard the lender in case you default on the loan repayment. Conventional loans have lower downpayment requirements and better interest rates than other loan types, with a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loans
FHA loans are made specifically for individuals with lower credit scores that range from 580 to 619. All loan programs are not equal; so, if you fall within the credit score limit, consider lenders with the best financial options. FHA loans attract PMI costs for at least 11 years, so it is essential to consider every factor before taking out a loan. The debt-to-income limit for FHA loans is up to 50%, thereby enabling individuals with lower incomes to purchase more homes than with a conventional loan. FHA loans have a downpayment requirement as low as 3.5% of the purchase price, which allows you to obtain a mortgage with less money out-of-pocket than a conventional loan, but the interest rates are typically higher.
3. VA Loans
VA loans have no set credit score requirement, but they analyze previous defaulted loans and government-owed past-due debts during the pre-qualification process. If you have served in the Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse passed away while serving in the Military, then you are eligible for VA loans. They offer the lowest interest rates and do not require a downpayment, making them an excellent option for veterans.
Determining the Credit Score Range for Buying a Car
When embarking on buying a car, your credit score is certainly essential, but it's not the sole factor in determining how much you qualify for. It's your credit history that also plays a crucial role. A better credit score may help, but it doesn't significantly impact the interest rate on your loan. A lender analyzing your credit history will determine the level of risk you carry while extending the loan. Any history of late auto loan payment or repossession may cause difficulty in loan approval, unlike someone with a clean credit history. Although lenders are willing to qualify anyone with credit issues, there are specific criteria that must be met, such as making a higher down payment and charging additional fees. It's also interesting to note that dealerships have to pay a fee when extending such loans. If you are suffering from a low credit score, equity or a downpayment may be a lifesaver in ensuring loan approval.
Credit Score Range for New Vehicles
It's difficult to establish an exact credit score for loan approval due to several factors involved, as mentioned above. However, with a credit score over 680, you're in a great place to receive favorable loan terms. Creditors may consider anyone with a score lower than this, to present a higher risk, which prompts them to charge a higher interest rate. To explain this further, a person with a credit score of 720 or higher may pay an average interest rate of $5,500 on a loan, while someone in the 615-630 credit score range may pay about $10,200 in interest on a loan. It's evident that a higher credit score reduces the amount of interest you pay and positively affects the overall score.
Ways to Increase Your Credit Score
There are many effective ways to boost your credit score with minimal effort. However, it's vital to understand that building a solid credit score takes time and patience. Rushing things can lead to irrational decisions that end up worsening your financial situation. Here are some things you can do today to improve your credit:
Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, can help maximize your credit scores. It's easier to obtain approval for this type of credit, making it an excellent option for those with limited credit history or those rebuilding their credit. Consider starting with a secured credit card that does not focus on your credit score, like Open Sky or Credit Builder Card, which focus on your ability to pay the card on time and are easier to obtain. Ensure to pay your balance on time and keep it between $5-$10 each time you make a payment. Limit using your card to small purchases like gas or groceries.Raise your credit limits:
Requesting a credit limit increase for your active revolving credit card accounts is another way to boost your overall credit limits and lower your credit utilization percentage. To avoid hurting your credit scores, keep your credit card balances below 30% of your overall limits by increasing your credit limits.Pay down your balances:
It's essential to keep your credit card balances low, close to zero, and limit your credit card usage. Pay down your high balances if you can afford it, so the majority of your payments will go towards principal, not interest. Limiting your credit card usage will play a massive role in your overall credit score.
Remember that building and maintaining a good credit score takes effort and time. Be patient and follow these tips to increase your credit score.
Joe's Advice on Credit Repair
Having a less-than-stellar credit score is a common situation that many people find themselves in. However, putting effort into improving your credit and changing your spending habits can result in significant improvements to your credit score. Unfortunately, many people feel trapped in a cycle of poor credit, believing that good credit is out of reach. Achieving a great credit score takes dedication and prioritization of your credit. Begin by creating a budget and addressing any bad spending habits to improve your credit score. If you need assistance with credit repair, don't hesitate to contact our office at www.asapcreditrepairusa.com. This article provides valuable insight into credit repair, and we are here to help guide you towards a better financial future.