It's common knowledge that there are 30 various levels of credit scores, but not many people are aware of this fact. When looking for the best credit score, a simple Google search can return a plethora of conflicting information that can be quite confusing. Sometimes, this information can even lead you down an obscure and confusing path. I'm here to help! My name is Joe Mahlow, and I've been working in the financial literacy and credit repair field for more than fifteen years. As such, I aim to provide you with accessible advice on a variety of topics, including credit scores. I've helped over twenty thousand clients improve their credit scores, and I'm hopeful that the information I provide can benefit you as well. So without further ado, let's delve into the topic at hand.
Contents:
Different Types of Credit Scores: FICO and Vantage
What Constitutes a Good Credit Score?
Credit Score Needed for Mortgage Loans: Understanding Loan Types and Their Requirements
Determining the Best Credit Score for Car Buying
Tips to Improve your Credit Score
Joe's Insights on Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage
Credit scores are essential when it comes to apply for credit or make a purchase. There are two different credit scoring models, the FICO model, and the Vantage model. Understanding the differences in how they calculate your credit score is crucial.
1. FICO Credit Score
The FICO credit scoring model is the most popular and widely used credit scoring model. With eight different FICO models (from FICO 2 to FICO 10), you will get a different credit score depending on your credit report. When you apply for credit, the type of lender you use will pull a different FICO report depending on the purchase. For instance, if you are applying for a home, the mortgage lender will most likely pull your FICO 5 credit report, while if you apply for a credit card, they will pull your FICO 8 credit report. The factors critical to the lender will have a more significant impact on a credit score than the less important ones, depending on a credit report's "weight."
2. Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion). It is a new scoring model compared to FICO, which has been used since the seventies. Although FICO dominates the lending sector, the Vantage Model is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending. However, it will not be as accurate as FICO when it comes to your actual lending score.
To get the best idea of your overall scores, sign up for an account on www.myfico.com, and monitor your different FICO scores. While FICO is the most recognized scoring model, Vantage's accuracy can still give you a good “general idea†of your FICO score. In the next 5–10 years, the Vantage scoring model may be widely used by lenders nationwide, as it can provide the best scoring models based on today's standards.
What Constitutes a Good Credit Score?
The FICO and Vantage models both score on a range from 350 to 850. A credit score of 850 is considered to be the best score, while 350 is the worst. Establishing high credit scores requires an understanding of where you stand in the journey of building credit. To help you along the way, here are some significant score thresholds:
1. 620 or lower:
When your score is at or below 620, your credit is considered bad. This score range might indicate you have an unsatisfactory credit history, high-balance credit card accounts, or no credit cards. To develop credit scores, it is essential to make timely payments and have at least ten revolving credit accounts open. Applying for a secured credit card such as the Credit Builder Card or OpenSky Credit Card can also help build credit. Achieving a credit score of 620 makes you eligible for an FHA home mortgage.
2. 640-680:
Credit scores between 640 and 680 are considered fair for good credit. This score range usually reflects someone who has established credit but could have some derogatory marks or accounts and high BALANCES on their credit cards that need payment. Recently opened accounts might also affect your score temporarily.
3. 740 or higher:
Having a credit score over 740 is considered "super-prime" and gives you the best interest rates on most loans. A score higher than 740 means you are among the top 20% of the US population. Maintaining your scores is essential by always paying your accounts on time and keeping your revolving credit card accounts up to date.
Credit Score Needed for Mortgage Loans: Understanding Loan Types and Their Requirements
The credit score you need to buy a house varies depending on the type of mortgage loan you are interested in. While some requirements may be similar, you will find that they differ due to government backing and federal regulations. There are three common mortgage loan types, which include conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are popular, and they are often the best loan type for savings, except for VA loans. With conventional loans, you do not need private mortgage insurance (PMI) which can increase your monthly payment or downpayment. PMI protects the lender if you stop making loan payments. Besides, conventional loans have better interest rates and lower downpayment requirements. Their credit score requirement is usually around 640, with less than a 43% debt-to-debt ratio.
FHA Loan
On the other hand, the Federal Housing Administration (FHA) mortgage loan type is perfect for lower credit scores. Usually, your credit score should range between 580 and 619. Different loan programs have varying requirements, so make sure to shop around for the best deal. FHA loans need PMI for 11 years, which may increase the mortgage cost, particularly if you are on a budget. However, these loans have a high debt-to-income ratio of up to 50%, which allows you to purchase more homes if you have a lower income. Downpayment requirements for this loan can be as low as 3.5% of the purchase, but the interest rates are typically higher.
VA loan
The VA loan type does not technically have a credit score requirement, but they look at defaulted loans and any past-due debts owed to the government during pre-qualification. To qualify, you must have served in the United States military for at least 181 days, served 90 consecutive days during wartime, 6 years with the National Guard, or your spouse lost their lives during active duty. With the VA loan, you get the best interest rates, and usually, no down payment is required. This loan is ideal for veterans as it gives back to them for their noble service.
Determining the Best Credit Score for Car Buying
When it comes to buying a car on credit, it's not solely your credit score that dictates your eligibility. In addition to a high credit score, your prior credit history plays a significant role in determining the interest rate you qualify for. Defaulting on an auto loan or repossession of a car, for example, can make securing a loan more difficult. However, those with the worst credit can still get approved but at a higher cost, such as a higher down payment and additional dealership fees. Additionally, equity or a down payment can help in securing a loan. As for credit score requirements, although your application is considered individually and other factors weigh in, a credit score of over 680 is ideal. Keep in mind, however, that the lower your credit score, the higher your interest rate will be. Referring to the following interest rate examples, you can see the correlation between applicants' credit scores and the interest they have to pay:
A 720+ credit score results in an average of $5,500 in interest
A 680+ credit score results in an average of $6,600 in interest
A 650+ credit score results in an average of $8,100 in interest
A 615+ credit score results in an average of $10,200 in interest
A 580+ credit score results in an average of $13,900 in interest
A 580 credit score or below results in an average of $15,300 in interest
This data demonstrates the impact of having a higher credit score on the interest rate and the overall cost of the loan.
Tips to Improve Your Credit Score
Improving your credit score is a step-by-step process that requires patience and dedication. Building a good credit score overnight is impossible, but implementing some measures can help you increase it steadily. The most important thing to keep in mind is to avoid making irrational or impulsive decisions with your credit.
Here are the things you can do to improve your credit score:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Having revolving credit accounts is an excellent way to maximize your credit score, particularly for individuals with limited credit or those in rebuilding mode. Obtaining a large loan to build credit can be challenging, but a secured credit card makes it easier to get approved. For instance, Open Sky or Credit Builder Card is an excellent starting point for securing a secured credit card. Revolving credit is vital as it constitutes 30-35% of your credit score. However, it may take 2-4 months to reflect the benefits, so it is crucial to pay your balance promptly, limiting its use to small purchases.
2. Raise your Limits!
Requesting a credit limit increase for your revolving credit card account is an excellent way to raise your overall credit limit and decrease your credit utilization percentage. To keep your credit score in check, it is essential to maintain a balance of 30% or less of your overall credit limit. You can request a credit limit increase online or over the phone, depending on the credit card company. Be prepared to provide your income and a brief history of your excellent payment record, usually spanning 7-15 months.
3. Pay down your balances!
Maintaining a low or zero balance on your credit card is crucial for improving your credit score. While it is not mandatory to use your credit card every month, using them for small purchases and leaving a $1-$5 balance at the end of each month can be beneficial. Paying off high balances requires a game plan, such as setting aside a percentage of your paycheck each month to chip away at the balance. Avoid running up your credit card balance after paying it down, as your payment history hugely impacts your credit score, and high-interest rates only complicate matters.
Joe's Insights on Improving Your Credit Score
Many of us have struggled with less-than-perfect credit, but it's not a hopeless situation. If you prioritize your credit and put in the time and effort to improve it, you can see significant changes in your score. Unfortunately, many people get stuck in a cycle of credit issues and assume that good credit is unattainable. However, with hard work and focus, anyone can develop a great credit score.
To start
Create a budget and identify and address any negative spending habits. Doing so will directly improve your credit score.
For more guidance or credit repair assistance
Contact my office at www.asapcreditrepairusa.com.