It may come as a surprise that there are actually 30 different levels of credit scores. Many people who search for information on the best credit score are often inundated with a plethora of results from Google, which can be quite confusing. In fact, some of these results may even prove to be misleading, causing individuals to spiral down an unsavory path. My name is Joe Mahlow and I've spent over 15 years working in the financial literacy and credit repair industry. As an expert, I aim to provide you with valuable insights on a range of topics, starting with credit scores. I have a track record of helping more than 20,000 clients improve their credit scores and I hope this advice will help you do the same. Let's delve into it together.
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a House?
What Credit Score is Needed to Buy a Car?
Ways to Improve Your Credit Score
Joe's Insights on Credit Improvement
Different Types of Credit Scores: FICO and Vantage
Credit scores are an important aspect of your financial life. There are two main types of credit scoring models: FICO and Vantage. Understanding the difference between them is crucial, especially when it comes to calculating your credit score.
FICO Credit Score
FICO is the most common and widely used credit scoring model, with eight different models ranging from FICO 2 to FICO 10. The specific FICO model that's used will depend on the type of lender pulling your report. For example, a mortgage lender will usually pull your FICO 5 credit report, while a credit card company will likely use your FICO 8 credit report.
Each of the different FICO models assigns weight to different factors in your credit report, with weight given to the most critical factors for each type of lending. For instance, a FICO 5 report for a mortgage will weigh heavily on your previous mortgage history, while a FICO 8 report for a credit card will focus more on your credit card history.
If you want to view all of your different FICO scores, you can create an account at www.myfico.com.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies as a competitor to the FICO model. Vantage is a newer scoring model than FICO and is used by credit monitoring websites to provide free copies of credit reports.
While FICO is still the most widely used scoring model for lending purposes, the Vantage Score is gaining popularity in some sectors, such as personal loans and auto lending. However, Vantage is not always accurate when it comes to your actual lending score, because FICO is still the industry standard for most lenders. Instead, think of the Vantage score as a good general idea of your overall score and use it to get a sense of roughly where your scores are.
Overall, the credit reporting agencies are the most significant data collection agencies outside social media companies, and they have the upper hand in providing the best scoring data. While the FICO scoring model is starting to feel outdated, it will likely take several years for the Vantage model to become widely used across industries.
Understanding Good Credit Scores
Credit scores are essential when applying for loans or credit cards as they determine how creditworthy you are. Both the FICO and Vantage models score range from 350 to 850, with 850 being the best score and 350 being the worst. Here are some significant score thresholds to keep in mind when improving your score:
1. 620 or below
A score of 620 or lower is considered bad credit and could indicate negative credit history or a lack of credit. To improve your score, make timely payments and have at least ten revolving credit accounts open. Credit Builder Card or OpenSky Credit Card can help you build credit. Once you reach the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680
A credit score in this range is considered fair and indicates some established credit but may have derogatory marks or high balances. Temporarily lower scores can result from newly opened accounts, but they will return with time.
3. 740+
Any score over 740 is considered "super-prime" and puts you in the top 20% of the US population. Congratulations! Keep up the good work by paying your accounts on time and keeping your revolving credit paid, and you will continue to enjoy the best interest rates for most loans.
What Credit Score Do You Need to Buy a House?
The specific credit score needed to obtain a mortgage loan will vary depending on the type of loan you are applying for. The majority of mortgage loans have similar requirements and guidelines due to federal regulations and government backing, but there can be exceptions. There are three main types of mortgage loans: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most commonly used and are typically a smart financial option if you are not eligible for a VA loan. When compared with other types of loans, conventional loans have lower interest rates and lower down payment requirements. They also do not require you to purchase private mortgage insurance (PMI), which can be an added expense that increases your monthly payment or down payment. To qualify for a conventional loan, you will need a credit score of at least 640, and your debt-to-income ratio cannot exceed 43%.
FHA Loan
An FHA loan is a loan that is tailored to individuals with lower credit scores typically ranging from 580 to 619. Keep in mind that each loan program has unique guidelines, so it is important to shop around and compare different lenders to find the best financial option for your needs. PMI is required for at least 11 years with an FHA loan, which is an additional expense you must consider if you’re on a budget. However, FHA loans typically have a higher debt-to-income ratio of up to 50%, which is ideal for those who have a lower income and want to purchase a more expensive home. FHA loans require as little as a 3.5% down payment, making them an ideal option for those who want to get into a mortgage but have limited resources; nevertheless, these loans often have higher interest rates.
VA Loan
There is technically no specific credit score requirement with the VA Loan, but they do look into your past defaulted loans and any past-due debts with the government when pre-qualifying you. 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 surviving spouse of a service member who died while on active duty. The VA loan typically has the best interest rates available, and they do not usually require a down payment. I love the VA Loan, as I believe it is a great way to give back to our veterans.
What Credit Score is Needed to Buy a Car?
When considering buying a car, it's important to understand that your credit history is more crucial than simply your credit score alone. Although having a higher credit score helps, it plays a lesser role in determining the interest rate that you will be eligible for. When applying for a car loan, your past and current credit history are analyzed to determine the level of risk associated with lending to you. Borrowers with credit issues, such as previous auto loan delinquencies or repossession, may find it difficult to be approved for a loan. Even specialized lenders will have criteria you must meet, such as a higher down payment and additional fees to help lower the risk of defaulting on the loan. When purchasing a car on credit with poor credit history, having equity or a down payment can provide more leverage.
Regarding credit score ranges for buying a new car
While there is no exact score that guarantees approval due to several variables involved, a credit score above 680 is ideal. If your score falls below this number, you may face a higher interest rate due to the risk of extending credit to you. The amount of interest is determined by credit score, with higher credit meaning less interest paid overall. As an example, someone with a credit score of 720 or above will pay $5,500 on average for interest on a loan. Contrastingly, someone with a score of 580 or higher will pay an average of $15,300 in interest on a loan. Ultimately, it's clear that the higher your credit score is, the less interest you will pay, which affects your overall credit score.
Ways to Improve Your Credit Score
Improving your credit score requires effort and patience. It is a gradual process that cannot be achieved overnight. Without patience, irrational and bad decisions can be made, which can make the situation worse. However, you can take the following steps to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit accounts, such as credit cards, can help you maximize your credit scores. For those with limited credit or looking to rebuild their credit, it can be difficult to obtain a large loan, making revolving credit a better option. Avoid credit cards that focus on credit scores and instead opt for secured credit cards like Open Sky or Credit Builder Card. Revolving credit makes up 30-35% of your overall credit score, and it can take 2-4 months to see its effect on your credit score. Therefore, always make sure to pay your balance on time and keep it low.
2. Raise your limits:
Requesting a credit limit increase can help raise your overall credit limits and lower your credit utilization percentage. Credit card balances exceeding 30% of your overall limits can hurt your credit score. You can request a credit limit increase either online or by calling your credit card company. Typically, a credit card company wants to see excellent payment history on a credit card for 7-15 months before approving an increase.
3. Pay down your balances:
Keeping your credit card balances low or close to zero is critical to improving your credit score. Use credit cards for small purchases and leave a $1-5 balance on them when paying your bill each month. If you have high balances, make a game plan to pay them off gradually. Limit your credit card usage and avoid running up balances.
Joe's Insights on Credit Improvement
We've all encountered difficult times with our credit scores. However, if you're serious about improving your credit, you can make rapid progress through hard work and dedication. Many people who have had credit problems for a long time may believe that it's impossible to have good credit again. Yet building a great credit score requires effort, and those who make it a priority and focus on their spending habits will ultimately succeed. To begin, establish a budget and address any problematic spending patterns, which will directly affect your credit score. If you need further assistance with improving your credit or credit repair services, please contact my office at www.asapcreditrepairusa.com. Below are some points to help you better understand credit.
1. Less than perfect credit can be improved with commitment and perseverance.
2. Bad spending habits are often the root cause of poor credit scores.
3. Creating a budget is an excellent way to proactively address any credit problems.
4. Seeking expert credit counseling can provide additional guidance to improve your credit score.