It may come as a surprise to you that there are actually 30 different levels of credit scores. This can make it difficult to determine what the best credit score is and often leads people down a confusing and misleading path when they turn to Google for answers. I am Joe Mahlow and I have spent the last fifteen years working in financial literacy and credit repair. My aim is to provide honest and practical advice on various topics, including credit scores. With my experience, I have successfully helped over twenty thousand clients improve their credit scores. In this article, I will share relevant information that will help you do the same, so stay tuned.
Contents:
Exploring the Different Types of Credit Scores
Determining a Good Credit Score
Determining the Best Credit Score to Secure a Mortgage
Determining the Ideal Credit Score for Buying a Car
Strategies to Improve Your Credit Score
Joe's Insights on Improving Your Credit
Exploring the Different Types of Credit Scores
Credit scores are an important factor for anyone who wants to apply for credit, but there are two different credit scoring models that you need to be familiar with before you get started. These are the FICO model and the Vantage model, each with its own way of calculating your credit score. In this article, we'll take a closer look at these two models and explain why FICO has several different models that can be used depending on the type of credit you're applying for.
FICO Credit Score
The FICO scoring model has been around for decades and is the most widely used credit scoring model. There are eight different types of FICO scores, ranging from FICO 2 to FICO 10, with each model offering a different credit score depending on your credit report. This can be confusing, but it's important to understand that different lenders use different FICO reports depending on the type of credit you're applying for.
For instance, if you're applying for a mortgage loan, the lender will most likely pull your FICO 5 credit report. On the other hand, if you're applying for a credit card, they'll likely pull your FICO 8 credit report. This is because each credit report is given a different "weight" based on the factors that are most critical to the lender. For example, a FICO 5 mortgage report will place greater emphasis on your previous mortgage history compared to a FICO 8 credit card report that will stress your previous credit card usage.
Vantage Credit Score
The Vantage Score, developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), is a more recent credit scoring model that was created to compete with FICO. Though it's not as widely used in the lending sector, it's starting to be used more frequently in some industries, such as personal loans and auto lending.
One of the advantages of Vantage is that it's often used by credit monitoring websites to provide you with a free copy of your credit report. However, it's important to keep in mind that Vantage scores may not accurately reflect your lending score since FICO scoring models are the most recognized in the industry.
Conclusion
While FICO remains the most popular credit scoring model, the Vantage Score is gaining in popularity. Although its accuracy may not be as strong as FICO, it's still a good indicator of your credit scores in general. In any case, as credit reporting agencies have access to a vast amount of data, it's likely that both models will be useful indicators of credit scores in the future. So, whether you use FICO scores or Vantage scores, monitoring your credit score regularly is essential to ensure that you maintain good credit standing.
Determining a Good Credit Score
Both FICO and Vantage models have a score range of 350 to 850, with 850 being the highest and 350 being the lowest score. It is crucial to understand these score thresholds to set appropriate goals when working to improve your score. Here are the vital ranges to keep in mind:
620 or below:
This is considered bad credit resulting from either adverse credit history, high-balance credit card accounts, or no credit cards. To improve these scores, ensure to make timely payments and have ten active revolving credit accounts open, recommended as Credit Builder Card or OpenSky Credit Card. A 620 credit score may qualify for an FHA home mortgage.
640-680:
This score is fair for good credit, indicating established credit with some derogatory marks, such as high balances on credit cards that need paying down and newly opened accounts that may result in temporary score drops.
740+:
Any credit score over 740 is considered "super-prime." This high score guarantees the best interest rates for most loans, with only 20% of the US population having this score. Maintaining timely payments and paying off credit card accounts will help you keep this score.
Note: Keep in mind that the above score thresholds may differ from one lender to another.
Determining the Best Credit Score to Secure a Mortgage
The credit score needed to qualify for a mortgage is dependent on the type of loan you are considering. Regulation and government backing dictate that the majority of mortgage loans have similar criteria; however, some differences exist. Three common loan types exist: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most favored option outside of VA loans. These loans do not need private mortgage insurance (PMI), a financial obligation that increases your down payment or monthly payment. PMI protects the lender in case of payment default. Conventional loans require a minimum credit score of 640 and debt-to-debt ratio of 43%. They usually have lower down payment demands and offer lower interest rates compared to other mortgage loans.
FHA Loan
FHA loans accommodate lower credit scores, typically between 580 and 619. It is essential to note that lenders have different loan programs, so it is wise to shop around. You must keep PMI for 11 years, making it a crucial financial consideration. The debt-to-income limit is higher (up to 50%), so if you have a lower income, you may purchase more homes than a conventional loan. Down payment requirements are as low as 3.5%, which allows you to invest less in the mortgage. However, this often results in higher interest rates.
VA Loan
To pre-qualify for a VA Loan, lenders consider past defaulted loans and government-owed past-due debts. This loan doesn't technically have a credit score requirement but focuses on military service qualifications. You qualify for a VA Loan if you served in the Military, for either 181 days, 90 consecutive days during wartime, or six years with the National Guard. If your spouse died during active duty, you also qualify. VA loans have the best interest rates and typically don't require a down payment. If you're a veteran, VA loans can be an ideal solution.
Determining the Ideal Credit Score for Buying a Car
When looking to purchase a car, your credit history, not your credit score, is the most crucial factor in determining qualification. While a higher credit score is of significance, it plays a minimal role in the interest rate you earn. Car loan providers scrutinize your previous and current credit histories when evaluating risks associated with extending credit - not just your credit score. Having a bad credit rating can be detrimental, including previous and current car loan delinquency or repossession. Some unscrupulous lenders may approve your loan but have specific approval criteria you must meet, such as a higher down payment and dealer fees. If you have bad credit, you may experience this scenario at a dealership, where they select the vehicle you're approved to buy because they have a higher markup on the car to cover the fee. Finally, to have more buying power in a vehicle purchase on credit, saving sufficient funds for a down payment or equity is key.
Credit Score Range for Purchasing a New Car
While there's no definitive credit score for approval in a car loan, a credit score above 680 is considered optimal, as any score less than this heightens the interest rate you're charged, which is commensurate with the risk you pose to the lender. With this data, you can equate how much interest you'll pay on a loan when making a vehicle purchase based on your credit score. A credit score of 720 and above will cost, on average, $5,500 in interest, while a 615 score or above will cost $10,200 and a score of 580 and above require $13,900 in interest. As such, the higher your credit score, the lower the interest rates, ultimately affecting your total credit rating.
Strategies to Improve Your Credit Score
Building a strong credit score is an ongoing process that requires patience and dedication. While it may take time, there are several steps you can take right now to begin improving your score. Here are some vital things you can do to improve your credit:
1. Open 3-5 Revolving Credit accounts:
Revolving credit, such as credit cards, can help you increase your credit score more quickly than other types of credit. A secured credit card, such as Open Sky or the Credit Builder Card, can be a good option for those with limited credit history or looking to rebuild their credit. Remember to keep your balance at $5-10 each time you make a payment and limit usage to small purchases like gas or groceries.
2. Raise your Limits:
Requesting a credit limit increase for your credit cards can help to lower your credit utilization percentage and increase your overall credit limits. Contact your credit card company to request a “Credit Limit Increase†and be prepared to provide information about your income. Most companies will want to see 7-15 months of excellent payment history before agreeing to an increase.
3. Pay down your Balances:
Keeping your credit card balances low and close to zero is crucial to improving your credit score. If you have high balances, it’s important to make a plan to pay them off incrementally and avoid running up new balances. Leave a small balance of $1-5 on your credit card each month and avoid spending more than you can afford to pay back to keep your credit card utilization low. Remember, your credit card usage plays a significant role in your overall credit score, so limit your usage and pay down your balances regularly.
Joe's Insights on Improving Your Credit
It's not uncommon to have less-than-perfect credit; we've all been there. However, taking your credit situation seriously and dedicating time and effort to improving it can result in significant improvements to your credit score in a short period. Many people with bad credit resign themselves to a lifetime of financial hardship, convinced that good credit is unattainable. The truth is that building an excellent credit score takes hard work and dedication, but anyone can do it with the right mindset and habits. One of the first steps is creating a budget and correcting any poor spending habits which will have a direct impact on your credit score. If you're looking to gain a better understanding of credit or need assistance with credit repair, don't hesitate to reach out to our office at www.asapcreditrepairusa.com.
Key Takeaways:
- Taking your credit situation seriously can result in significant improvements to your credit score in a short period.
- Correcting poor spending habits will have a direct impact on your credit score.
- Building an excellent credit score takes hard work and dedication, but it is attainable with the right mindset.