It might come as a surprise to know that there are actually 30 different levels of credit scores. You might have searched for the most reliable credit score online, but the results might have been perplexing and sometimes inaccurate. This is where I come in as an expert in financial literacy and credit repair. For the past fifteen years, I have been helping people like you gain a better understanding of credit scores and how they affect your financial health. My name is Joe Mahlow, and my aim is to provide you with genuine advice on a variety of finance-related topics, starting with credit scores. Over the years, I have successfully assisted over twenty thousand individuals in improving their credit scores, and I am excited to share helpful insights with you. So, without further ado, let's dive into it.
Contents:
Different Types of Credit Scores You Need to Know
Guidelines for Credit Score Understanding
What Credit Score Do You Need to Buy a House?
Determining Credit Score for Car Loans
Tips to increase your Credit Score
Advice from Joe
Different Types of Credit Scores You Need to Know
When it comes to credit scores, you need to know there are two types of credit scoring models that are commonly used by lenders and financial institutions. It's essential to understand the differences between these two models, as they impact how your credit score is calculated.
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, your credit score may vary depending on the type of credit report the lender pulls. For example, if you're applying for a home mortgage, the lender will most likely pull your FICO 5 credit report, while for a credit card, they would typically use your FICO 8 credit report.
So, why are there so many FICO scores? Each credit report has a different "weight" assigned to its critical factors, which means that some factors will impact your score more than others. For instance, a FICO 5 mortgage report will weigh heavily on your previous mortgage history. In contrast, credit card companies primarily use the FICO 8 report, meaning that your previous credit card history will impact this score the most.
To see all your different credit scores, you can sign up for an account on myfico.com.
2. Vantage Credit Score
The Vantage Score scoring model is a new scoring model compared to the FICO model, which has been used for decades. Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), Vantage aims to compete with the FICO model. Currently, Vantage is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending. However, since it's not widely used for lending purposes, it's not as accurate as FICO scores.
That being said, the Vantage score can be a good "general idea" of your FICO score. While 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 give you a rough idea of your creditworthiness. Credit reporting agencies have access to the most significant amount of data, and if they have it, they have the upper hand in providing the best scoring data.
Guidelines for Credit Score Understanding
Credit scores can be calculated through both FICO and Vantage models, with scores ranging from 350 to 850. While 350 signifies the worst possible score, 850 stands for a perfect credit score. If you aim to increase your score, it is crucial to grasp the basic score thresholds. Here are some important thresholds:
Bad Credit (620 or below):
If your score is below this threshold, you may have some negative credit history, high-balance credit card accounts, or no credit cards at all. Paying all of your bills on time and keeping ten active revolving credit accounts open could improve your credit score. To enhance your credit-building process, try secured credit cards such as Credit Builder Cards or OpenSky Credit Cards, as they can assist you in building credit. Reaching a 620 credit score will make it possible for you to qualify for an FHA home mortgage.
Fair for Good Credit (640-680):
If your score is in this range, your credit is generally established. However, derogatory marks or accounts on your credit, high balances on credits cards, or recently opened accounts may contribute to a provisional shortfall in your scores. These are temporary, and your scores will return to their previous level.
Super-prime Credit (740+):
Any score over 740 qualifies as super-prime and attracts the best interest rates for most loans. This score denotes a creditworthy record. Excellent credit behaviour with timely payment of bills and consistent management of revolving credit card accounts paved the way to this credit score. Congratulations if you are part of the 20% of the US population who have a credit score of over 740!
What Credit Score Do You Need to Buy a House?
The credit score required to buy a house depends on the type of mortgage loan you are considering. Mortgage loan requirements and guidelines are similar, if not different, due to federal regulation and government backing. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
Among all the mortgage loan types, conventional loans are the most common and often the best "savings" loan option outside of VA loan. You do not have to maintain private mortgage insurance (PMI) if you choose a conventional loan, which is an additional cost that can either increase your downpayment or monthly payment. With lower downpayment prerequisites and better interest rates than other mortgage loans, traditional mortgage loans necessitate a credit score of 640 and a debt-to-debt ratio no greater than 43%.
FHA Loan
The FHA mortgage loan has a lower credit score requirement, generally ranging from 580 to 619. It's important to keep in mind that all loan programs are different, so if you're within the credit score limits, seek out different lenders that can offer you the best financial option. FHA loans mandate that you pay PMI for at least 11 years, which can be a financial burden to your mortgage payments and should be factored into your budget. This particular loan typically has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes with a lower income than with a typical mortgage loan. Finally, downpayment conditions on FHA loans can be as low as 3.5% of the purchase, allowing you to get into a mortgage loan with less money than with a traditional mortgage loan, but at the cost of typically having a higher interest rate.
VA Loan
Technically, there is no credit score requirement for VA loans, but you will be pre-qualified based on any previously defaulted loans or any outstanding government-owed debts. To be eligible for a VA loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or be the spouse of someone who was in the military and passed away during active duty. Generally, the VA loan offers the best interest rates available on the market, and a down payment is not usually required, making it a perfect way to give back to our veterans.
Determining Credit Score for Car Loans
When making a car purchase, your credit history has a more significant impact on your qualification for a loan than your credit score. While a higher credit score is important, it does not significantly affect the interest rate you can receive. When applying for a car loan, lenders analyze your credit history to evaluate the risk involved. A poor credit history, such as late payments or a repossession, makes it harder to get approved. Special finance lenders who approve almost any applicant, including those with previous repossessions, add specific criteria to mitigate risks, such as a high deposit and additional dealership fees. Having some equity or a down payment provides leverage when getting a vehicle on credit.
Credit Score Range for New Cars
A credit score over 680 is ideal when purchasing a car. A score below 680 increases your interest rate due to higher risk. For example, a credit score of 720 or above will result in paying an average of $5,500 in interest on a loan, while a score of 580 or above will result in paying an average of $15,300. This data shows that having a higher credit score can significantly reduce the interest rate and ultimately improve your overall credit score.
Tips to increase your Credit Score
Improving your credit score takes time, effort, and patience. Rushing into decisions can lead to poor decisions and worsen your problems. The following tips can help you increase your credit score:
Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit is one of the best options to increase your credit score. It's easier, especially for those with limited credit or looking to rebuild their credit. Start with a secured credit card that doesn't focus on your credit score like Open Sky or Credit Builder Card. Make sure you pay your balance on time and keep it at $5-10 each time you make a payment. Use the card for small purchases like gas or groceries.
Raise your Limits
Request credit limit increases for your active revolving credit card accounts. It can help lower your credit utilization percentage, which is a factor that can harm your credit score. Contact your credit card company to request a "Credit Limit Increase" and provide your current income information. It usually takes 7-15 months of excellent payment history to grant this request.
Pay down your Balances
Keeping your balance low and close to zero is critical. Use your credit cards for small purchases, and when paying your bill each month, leave a $1-5 balance on your credit cards. If you have high balances, make a plan to pay them off monthly. Avoid spending finances to pay down a credit card only to run the balance back up. Limit credit card usage, as it is a significant factor in determining your overall score. Additionally, credit card rates are high, with most payments going towards interest and not principal.
Advice from Joe
Many of us have experienced the frustration of having poor credit. However, by taking responsibility for your credit situation and investing time and effort into improving it, you can make significant progress in your credit score. Often, people with bad credit feel like they are trapped in a cycle and cannot improve their situation. Developing a strong credit score requires hard work and discipline, but anyone who prioritizes their credit and spending can succeed. Start by creating a budget and addressing any negative spending habits, as this will have a direct impact on your credit score. If you want to learn more about credit and need assistance with credit repair, don't hesitate to contact my office at www.asapcreditrepairusa.com.