Were you aware that there are actually 30 different levels of credit scores? It’s a little-known fact that many people are not aware of, and it can often lead to confusion when searching for the best credit score information on Google. Unfortunately, some of the information out there can be quite misleading and end up doing more harm than good. However, my name is Joe Mahlow and I have more than fifteen years of experience in the financial literacy and credit repair space. My aim is to offer straightforward advice on various financial topics, including credit scores. I have already helped more than 20,000 clients improve their credit scores and now I hope that I can offer you enough information to do the same. So, let's dive right in!
Contents:
Different Types of Credit Scores: FICO and Vantage
What Qualifies as a Good Credit Score?
Credit Score Requirements for Different Mortgage Loans
Determining a Suitable Credit Score to Finance a Car
Strategies for Improving Your Credit Score
Final Thoughts from Joe for Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage
Credit scores are crucial in determining your creditworthiness. There are two main credit scoring models that are essential to familiarize yourself with – the FICO and the Vantage model. Each has a unique way of calculating your credit score, making it necessary to understand their differences.
FICO Credit Score
The FICO score model is the most widely used scoring model, with eight different models available, ranging from FICO 2 to FICO 10. Depending on the lender and type of credit, you'll receive a different FICO score. For example, when applying for a mortgage, they will most likely use the FICO 5 credit report. On the other hand, credit card companies primarily use the FICO 8 report.
Why so many FICO scores?
Every credit report weighs different factors, with critical factors impacting a credit score more significantly than minor ones. The FICO 5 mortgage report weighs previous mortgage history more heavily than other types of credit, while the FICO 8 report is primarily impacted by past credit card history. Auto lenders primarily use the FICO-2 report, with previous auto history playing a significant role in determining credit scores.
If you want to see all of your different FICO scores, sign up for an account on www.myfico.com.
Vantage Credit Score
The Vantage model is a newer scoring model used by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. Although FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites also commonly use Vantage to provide you with a free copy of your credit report.
Is the Vantage Score accurate?
The accuracy of the Vantage Score depends on context. While it is accurate in its scoring, it may not accurately reflect your lending score since FICO remains the most recognized scoring model by lenders. Instead, I recommend using the Vantage score as a general idea of your FICO score. Since it's hard to know your FICO score without paying for it or having a lender pull your credit report, using your Vantage score can provide you with the best idea of where your overall scores are.
In the next 5-10 years, Vantage may become more widely accepted as a scoring model as its principles align with today's credit rating standards. The FICO model is outdated and doesn't provide users with the clearest representation of their credit scores. It's important to remember that credit reporting agencies are massive data collectors. If they have the data, they are in the best position to provide the most accurate scoring data.
What Qualifies as a Good Credit Score?
Credit scores are measured on a range of 350 to 850 for both FICO and Vantage models. 350 is the worst score you can have, while 850 is the best. When aiming to achieve a high score, it's important to evaluate your standing along the way. Below are some important score thresholds to keep in mind:
620 or below:
Scores at this level are considered bad credit and are often the result of adverse credit history, high-balance credit card accounts, or a lack of credit history. To improve your scores, timely payments and ten open revolving credit accounts can help.
640-680:
This is considered a fair range for good credit. Though you may have established credit, derogatory marks or high card balances can impact your score. New account opening can also cause temporary drops.
740+:
Any score above 740 is "super-prime" and offers the best interest rates for most loans. If you are part of the 20% of the US population with a credit score above 740, congratulations! Continue to make timely payments and keep your revolving credit card accounts paid to maintain your score.
Credit Score Requirements for Different Mortgage Loans
When it comes to buying a house, the credit score requirement varies depending on the type of mortgage loan you need. The eligibility criteria and guidelines can be similar and/or different due to federal regulations and government backing. Out of all mortgage loans, three types are the most popular: conventional loans, FHA loans, and VA loans. Here is what you need to know about these loans and their credit score requirements:
1. Conventional Loans
Conventional loans are the preferred option for many homebuyers and generally considered the most cost-effective outside of VA loans. Unlike other loans, conventional loans don't require you to pay Private Mortgage Insurance (PMI) in most cases. PMI serves to protect lenders in case you fail to make payments. You can qualify for a conventional loan with a credit score of 640 or more, and a debt-to-debt ratio of up to 43%. With lower downpayment requirements and interest rates than other loans, conventional loans are a go-to for many borrowers.
2. FHA Loans
If your credit score is between 580 and 619, you may qualify for an FHA loan. However, credit score isn't the only factor lenders look at for this type of loan. Be sure to shop around for lenders and compare rates to get the best deal. While you may qualify for an FHA loan with a lower credit score, you'll be required to pay PMI for at least 11 years, which can be added to your mortgage cost. FHA loans typically have higher debt-to-income limits of up to 50%, helping borrowers with lower income buy more homes than conventional loan options. You can expect to make a down payment of 3.5% of the purchase price, which can get you into a mortgage with less money out of pocket, but with a higher interest rate.
3. VA Loans
VA loans are the most ideal option for military veterans who have served in the US military for at least 181 days, served 90 consecutive days during wartime, or served 6 years with the National Guard. If your spouse was in the military and lost their lives during active duty, you could also qualify for a VA loan. There's technically no credit score requirement for this loan, but it's important to note that pre-qualification includes checking for previous defaulted loans and past-due government debts. VA loans typically offer the best interest rates, and they don't usually require a down payment, making them an excellent choice for our deserving US veterans.
Determining a Suitable Credit Score to Finance a Car
When financing a car, your credit history plays a more vital role than your credit score. While it is still important to have a high credit score, the interest rate you qualify for mostly depends on your credit history.
Credit History and its Impact
In assessing your loan application, lenders evaluate your current and past credit histories to determine the level of risk involved. For example, borrowers who have had a previous car loan default or repossession will have a harder time getting loans than those who have a better track record. However, even if you have a bad credit score, some lenders will extend loans to you but with stringent conditions such as higher down payments and additional dealership fees.
Impact of Credit Score
Ideally, a credit score of 680 or higher to qualify for a vehicle loan, with anything lower than that, may increase the interest rate. As seen in the example given, a higher credit score can significantly impact the interest rate and the overall cost of the loan. For instance, a borrower with a 720 credit score or above will pay an average of $5,500 in interest, while someone with a score of 580 will pay an average of $15,300 in interest. It's essential to keep in mind the effect of your credit score on the interest rate charged by lenders. Finally, having equity or a downpayment can help you gain more leverage when financing a vehicle.
Strategies for Improving Your Credit Score
Improving your credit score is a gradual process that requires patience and a set of effective practices. Rushing things may lead to irrational decisions that will do more harm than good. Therefore, it is essential to keep in mind that building a good credit score takes time. However, here are some things you can do right now to improve your credit:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is an excellent option to help you increase your credit scores since it's easier to manage. For someone with limited credit or those looking to rebuild their credit, obtaining a large loan can be challenging. In this case, opening several secured credit cards may give you the best chance of approval. You can use cards that focus on your ability to pay on time, such as Open Sky or Credit Builder Card. These cards don't require a high credit score for approval and can have a significant impact on your credit score. However, you must remember to keep your balance at $5-10 and pay on time to see an increase in your credit score.
2. Raise Your Limits!
To avoid negatively impacting your credit score by exceeding 30% of your overall limit, you can increase your credit limit. Contact your credit card provider and request a credit limit increase, as most providers have different processes. They will evaluate your payment history, income, and credit score before approving the request. You can also request an increase online or via a phone call.
3. Pay Down Your Balances!
Keeping your balance low and close to zero is critical for maintaining a good credit score. You are not obligated to use your credit cards each month, so limit your usage to small purchases, such as gas or groceries. Additionally, you should strive to leave a $1-5 balance on your credit cards when paying your bill each month. If you have high balances that you can't pay off, make a plan to pay it off gradually, rather than running up the balance again. High-interest rates on a credit card can cause your payments to go towards interest rather than principal.
Final Thoughts from Joe for Improving Your Credit Score
Maintaining a good credit score can be challenging, but it's essential for financial stability. If you're currently struggling with bad credit, don't despair. By taking proactive steps to assess and improve your credit situation, you can make significant progress in a short amount of time. Unfortunately, many people with bad credit resign themselves to a lifetime of financial difficulties, assuming that good credit is out of reach. The truth is, building and maintaining strong credit requires consistent effort and discipline, but the rewards are well worth it. Start by creating a budget and identifying areas where you can cut back on spending. By reducing your debt and paying your bills on time, you can steadily improve your credit score. To learn more about credit repair or to get guidance on improving your credit, visit www.asapcreditrepairusa.com or contact our office today.