It's surprising to learn that there are actually 30 different levels of credit scores. It's not uncommon for people to search for the best credit score, only to be presented with a variety of conflicting answers from search engines. Unfortunately, some of this information can be confusing or even harmful if it's inaccurate. I'm Joe Mahlow, an expert in financial literacy and credit repair with over fifteen years of experience. My aim is to provide clear and useful advice on topics like credit scores. Having helped more than twenty thousand clients improve their credit scores, I'm hoping that I can offer you valuable information that will do the same for you. Let's dive right into it!
Contents:
Different Credit Score Models: FICO Versus Vantage
What is a Good Credit Score Range?
What Credit Score Do You Need to Buy a Home?
Determining the Credit Score Range for Buying a Car
Assistance in Raising Your Credit Score
Joe's Insight on Credit Repair
Different Credit Score Models: FICO Versus Vantage
Understanding your credit score is essential to your financial health, and there are two commonly used credit scoring models – FICO and Vantage. Knowing the differences between these two models can help you interpret your credit score better.
FICO Credit Score
The FICO credit scoring model, with its eight different versions (from FICO 2 to FICO 10), is widely used by lenders. Each version weighs credit factors like previous mortgage and auto history differently, hence producing different scores. For instance, a mortgage lender will pull a FICO 5 credit report while a credit card issuer will most likely use a FICO 8 report.
Why Multiple FICO Scores?
Credit reports have different weights assigned to factors that are more important to individual lenders. For instance, previous mortgage history holds more weight when applying for a new mortgage, and the scores in the FICO 5 model reflect this more prominently compared to the FICO 8 model. To get a better idea of your different FICO scores, you can access them on a credit monitoring website like myfico.com.
Vantage Credit Score
The Vantage Score is a newer credit scoring model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO. It is gaining popularity in non-lending industries such as auto lending and personal loans. Although Vantage is accurate, it is not widely adopted for lending purposes. As such, the scores may not be an accurate representation of your lending score.
Which Scoring Model is More Accurate?
The FICO score is currently the most recognized scoring model, but the Vantage Score is providing stiff competition. The Vantage Score should be deemed a general idea of your FICO score since it's hard to know your FICO score unless you pay for it or a lender pulls your credit report. Credit reporting agencies collect vast amounts of data, making them the best source of scoring data. It’s only a matter of time before Vantage becomes the go-to scoring model.
What is a Good Credit Score Range?
There are two credit scoring models: FICO and Vantage, and they both operate by utilizing a range of scores that goes from 350 to 850. The lower end of that range represents the worst possible score, while the upper end denotes the best. To attain the highest credit score possible, it is important to know where you stand in relation to score thresholds. Here are some critical scores to keep in mind:
1. 620 or below
If your credit score falls within this range, it is considered bad credit. Such a score may suggest that you have some negative credit history, high-balance credit card accounts, or no credit cards in general. To improve your credit score, make sure you pay your bills on time and keep ten active revolving credit accounts open. If you are looking to build your credit, secured credit cards such as OpenSky Credit Card or Credit Builder Card can prove helpful. Reaching a score of 620 means you become eligible for an FHA home mortgage.
2. 640-680
With a score within this range, you have fair to good credit. Although you have built some credit, you probably possess derogatory marks or accounts and may have high balances on your credit card to pay down. Your score may also have temporarily dropped if you've recently opened a new account. This is a regular occurrence, and with time, the score will return to its fair rating.
3. 740+
Any score rated above 740, known as "super-prime," would give you the best interest rates for most loans. If your credit score is above 740, congratulations as you are part of the 20% of the U.S population with this score. You should continue to strive to keep your revolving credit cards paid and make timely payments on all your accounts.
What Credit Score Do You Need to Buy a Home?
To determine your required credit score for a mortgage loan to buy a home, you will need to consider the specific type of loan you are applying for as regulations and guidelines differ. Most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular type of mortgage loan outside of VA loans. The credit score requirement for a conventional mortgage loan is usually around 640, and the debt-to-debt ratio should not exceed 43%. Conventional loans typically offer better interest rates and lower downpayment requirements, and do not require private mortgage insurance (PMI).
FHA Loan
FHA loans are ideal for those with lower credit scores ranging between 580 and 619. You should consider different lenders as each program has different requirements. The loan requires you to maintain PMI for at least 11 years and typically allows for a higher debt-to-income ratio of up to 50%, making it easier to purchase homes with a lower income. While these loans offer lower downpayment options, the interest rate is usually higher.
VA Loan
This loan provides benefits to United States Military veterans. While there isn’t technically a required credit score, they will examine past defaulted loans and government-owed past-due debts during the pre-qualifying process. If you served in the military for 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse lost their life during active duty, you may qualify for a VA loan. Typically the best interest rates, VA loans often do not require a down payment. This loan was designed to honor those who have bravely served our country.
Determining the Credit Score Range for Buying a Car
When it comes to buying a car, your credit history holds more weight in determining your eligibility for a loan than your credit score. Although a higher credit score is a good indicator of financial responsibility, lenders often base their decision to extend credit on your credit history. They evaluate your previous and current credit standing to determine the risks they face in lending you money. Even if someone has a good credit score, a history of late payments or repossessions will make it harder for them to secure a loan. Some lenders cater to those with a poor credit score, but they have specific criteria that one must meet, such as higher down payments and additional dealership fees. To have more bargaining power, having equity or a down payment helps.
Since there is a multitude of factors, it is challenging to pinpoint a specific credit score needed to secure a vehicle loan. However, a credit score of 680 or higher as an ideal position to apply for new car loans. A lower credit score could increase the interest rates charged. The example outlined shows that a higher credit score equates to less payable interest. The data illustrates how these factors can impact a borrower's overall credit score, and how important it is to maintain a good credit history.
Credit Score Ranges for Buying a New Vehicle:
Credit score of 720 or higher will pay an average of $5,500 on a loan.
Credit score of 680 or higher will pay an average of $6,600 on a loan.
Credit score of 650 or higher will pay an average of $8,100 on a loan.
Credit score of 615 or higher will pay an average of $10,200 on a loan.
Credit score of 580 or higher will pay an average of $13,900 on a loan.
Credit score of 580 or higher will pay an average of $15,300 on a loan.
Assistance in Raising Your Credit Score
Improving your credit score is possible with some straightforward actions that you can take today with relatively little effort. It's important to understand that building a good credit score takes time and patience, as it's not something that happens overnight. Without patience, you risk making irrational and poor decisions with your credit that can make your problems worse.
Below are three effective ways to improve your credit score:
Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is a great way to maximize your credit scores, especially if you have limited credit history or are looking to rebuild. While obtaining a large loan can take a lot of effort to build credit, revolving credit gives you the best chance of approval. To get started, we recommend opening a secured credit card that doesn't focus solely on your credit score, like Open Sky or Credit Builder Card. Revolving credit makes up 30-35% of your overall credit score and is the best option to help you quickly build your credit score. Remember to pay your balance on time and keep it at $5-10 each time you make a payment. We suggest using the card only for small purchases like gas or groceries.
Request a credit limit increase:
If you have active revolving credit accounts, requesting a credit limit increase can quickly boost your overall credit limits and lower your credit utilization percentage. You can usually do this online through your credit card company's portal or by calling them. Make sure to fill out any required information, including your current income, and expect the credit team to review and decide whether or not to grant your request. Most credit card companies want to see 7-15 months of excellent payment history before they agree to increase your limit.
Pay down balances:
Keeping your credit card balance low is crucial to your overall credit score. While you are not obligated to use your credit card each month, it's best to use it for small purchases. When it's time to pay your bill, leave a small balance of about $1-5 on your credit cards. If you are currently carrying high balances and are unable to pay your credit cards off, make a plan to pay a certain percentage of your paycheck each month until they are paid off. It is crucial to limit your credit card usage since your spending habits play a massive role in your overall credit score. Most credit card companies have high-interest rates, so most of your payments will go towards the interest and not towards the principal.
Joe's Insight on Credit Repair
Having bad credit can be a challenging situation to be in, but it is not impossible to turn it around. Taking your credit situation seriously and committing time and effort to work on it can lead to significant improvements in your credit score. Unfortunately, many individuals faced with bad credit give up too soon and believe that having good credit is unattainable. The truth is, achieving a great credit score takes hard work and a willingness to prioritize credit and spending habits. To begin repairing your credit, start by creating a budget and working on changing any bad spending habits you may have. This can directly impact your credit score. If you require further support and guidance with credit repair, don't hesitate to contact our office at www.asapcreditrepairusa.com.
Key Points:
- Bad credit can be turned around with commitment and effort.
- Good credit requires prioritizing credit and spending habits.
- Creating a budget and fixing bad spending habits can directly improve your credit score.
- www.asapcreditrepairusa.com can provide guidance and support for credit repair.