It may come as a surprise, but there are actually 30 different levels of credit scores. Despite this knowledge, many people find themselves lost when trying to navigate the internet's endless sea of information in pursuit of the best score possible. Unfortunately, not all that glitters is gold, and it can be challenging to differentiate between legitimate advice and misinformation. My name is Joe Mahlow, and having worked in financial literacy and credit repair for over 15 years, I aim to provide you with unbiased and unfiltered guidance on a variety of topics, including credit scores. With a track record of over 20,000 satisfied clients who have achieved significant improvements in their credit scores, I hope to offer you ample insights to help elevate your credit score as well. Let's jump right in!
Contents:
Types of Credit Scores and How They Are Calculated
Understanding What Constitutes a Good Credit Score
What is the Minimum Credit Score Required to Buy a House?
Determining the Credit Score Range for Buying a Car
Tips for Improving Your Credit Score
Joe's Insights on Improving Your Credit
Types of Credit Scores and How They Are Calculated
FICO Credit Score Model
The FICO credit scoring model is the most widely used model and consists of eight different versions from FICO 2 to FICO 10. Each version provides a different credit score depending on the credit report being used. The reason for the multiple versions is that different lenders use different versions of the FICO model, and they pull different credit reports from different credit reporting agencies depending on the type of credit being applied for. For example, if you are seeking a mortgage, the lender is likely to pull a FICO 5 credit report, while a credit card application may result in a FICO 8 report being used.
Multiple FICO Scores
Each FICO score is assigned a different "weight," meaning that the critical factors that lenders consider will have a more significant impact on a credit score than the less important ones. Thus, different versions of the FICO score are needed for different lending sectors. As an example, FICO 5 mortgage reports focus heavily on previous mortgage history, while FICO-8 reports are primarily used by credit card companies, with previous credit card history carrying the most weight for this score. FICO-2 reports are used by auto lenders, with previous auto history being the most critical factor weighed. All of these factors result in multiple FICO scores that are used to assess different types of creditworthiness.
Vantage Credit Score Model
Competing with the FICO model, the Vantage Score scoring model was developed by the three major credit reporting agencies and is gaining popularity in certain sectors such as personal loans and auto lending. However, it is not widely used in the lending sector but is commonly used by credit monitoring websites to provide consumers with a free copy of their credit reports.
Accuracy of the Vantage Score
The Vantage Score is accurate, although less so than the FICO score since it is not as widely used for lending purposes. Therefore, its accuracy depends on the context within this question. If you need an idea of your FICO score outside of what is available for free on credit card accounts and the like, the Vantage score can provide an approximate representation of where you stand. However, if you are applying for a loan, the FICO score holds the most weight and is the most accurate measure of your creditworthiness.
Future Outlook
It remains uncertain which scoring model will become the most widely used in the future. While the FICO model is currently dominant, Vantage is gaining traction, particularly as data collection technology improves and more data is collected about consumers' credit histories.Understanding What Constitutes a Good Credit Score
Credit scores for both the FICO and Vantage models range from a minimum of 350 to a maximum of 850, with 850 being the best score and 350 being the worst. It is crucial to determine where you stand in the score range when aiming for the highest scores, so we will discuss some critical scoring thresholds.
1. 620 or Below
A score of 620 or below is deemed poor credit, and if you fall below this threshold, it is likely you have adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit score, it is best to make timely payments and have ten active revolving credit accounts. Secured credit cards like Credit Builder Card or OpenSky Credit Card can assist you in building credit. You can start qualifying for an FHA home mortgage when you reach the 620 credit score range.
2. 640-680
This range is considered reasonable for fair credit. A score within this range suggests that you have established credit, but there might be derogatory marks or accounts on your credit reports, and you may have some high balances on your credit cards that you should consider paying down. If you recently opened up a new account and your score falls within this range, don't worry; this is just a temporary drop in your score, and it will return.
3. 740+
Any score above 740 is considered super-prime and will provide you with the very best interest rates on loans. You should feel proud of yourself if you have a credit score above 740 as you are part of the 20% of the US population with this score. Always pay your accounts on time and keep your revolving credit card accounts in good standing to maintain your excellent score.
What is the Minimum Credit Score Required to Buy a House?
The credit score you need to buy a house will depend on the type of mortgage loan you want to qualify for. Federal regulation and government backing means that requirements and guidelines for most mortgage loans are usually similar, if not necessarily the same. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular loans and often considered the best “savings†loan option outside of VA loans. Conventional loans do not require private mortgage insurance (PMI), which can be an additional cost that increases your downpayment or monthly payment and protects the lender in case you stop making loan payments. Conventional loans generally have lower downpayment requirements and better interest rates than other mortgage loans. The typical credit score requirement for a conventional mortgage loan is 640, and the debt-to-income ratio must be no higher than 43%.
2. FHA Loan
The FHA mortgage loan is designed for lower credit scores that typically range between 580 and 619. Because all loan programs differ, shop around for different lenders that offer the best financial option for you as long as you are within the credit score limits. FHA loans require you to maintain PMI for at least 11 years, which could add to your mortgage costs and need to be considered especially if you're operating on a tight budget. This loan usually features a higher debt-to-income limit of up to 50%, allowing you to buy more homes with lower-income than with a conventional loan. Lastly, an FHA loan requires a downpayment as low as 3.5% of the purchase, so it could allow you to get into a mortgage with less pocket money than conventional loans, but usually with a higher interest rate.
3. VA Loan
There are no strict requirements for credit scores to get a VA loan, but pre-qualification involves checking your previous default loans and any past-due debts owed to the government. You need to have served in the United States Military for a minimum of 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or lost your spouse during active military duty. Usually, VA loans offer the best interest rates, and they do not usually require a down payment. VA loans are an excellent option for veterans and amazing way to show gratitude for their service.
Determining the Credit Score Range for Buying a Car
When looking to purchase a car, your credit history is the most important factor to consider, as opposed to just your credit score. While having a higher credit score is important, it is not the only factor that influences the interest rate for which you qualify. Your past and present credit history will be evaluated to assess the risk of extending credit to you. If you have a history of late payments, repossession, or default, it will be harder to secure a car loan. While some lenders will still consider you, you may need to meet specific approval criteria such as a higher down payment or additional fees. Thus, a larger down payment or equity can give you more leverage when applying for a car loan.
Ideal Credit Score Range for a New Car Purchase
When it comes to the ideal credit score range for a new car purchase, there is no specific score that ensures approval as there are multiple factors involved. However, having a credit score of at least 680 is recommended for better interest rates. A credit score below this value will increase the interest rate, and you may pay more in interest over the life of the loan. For example, someone with a credit score of 720 or higher can expect to pay an average of $5,500 in interest on a car loan, while someone with a credit score of 580 and above will pay around $15,300 in interest on a car loan. In this regard, a high credit score can heavily influence the interest rate you pay and save you money in the long run.
Tips for Improving Your Credit Score
Improving your credit score is a gradual process that requires patience and persistence. Rushing it may lead to making impulsive decisions that can harm your score even further. Here are some practical steps you can take to boost your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is easier to obtain and helps you maximize your credit score. You can start with secured credit cards such as Open Sky or Credit Builder Card, which focus on your ability to pay on time rather than your credit score. Make sure to keep your balance at $5-10 and pay it on time each month.
2. Increase your credit limits:
You can lower your credit utilization percentage by requesting a credit limit increase for your credit cards. The process varies among credit card companies, but all require an excellent payment history over 7-15 months before granting an increase.
3. Pay down your balances:
Be diligent in keeping your card balances low and close to zero, as high balances can hurt your score. Make a plan to pay credit cards down with a percentage of your income each month, and avoid running up your balance again. Remember that limited credit card usage is key to improving your score and avoiding interest payments.
Joe's Insights on Improving Your Credit
Many people have experienced the frustration of having poor credit. However, taking proactive steps to assess your credit situation can yield significant improvements to your score in a relatively short amount of time. Sadly, some people believe that because their credit is already bad, it is forever out of their control. However, building up good credit will take some effort, and individuals who prioritize this task while addressing any unfavorable spending behaviors will ultimately succeed. One useful approach is to establish a budget, and then work to eliminate problematic spending habits. These positive behaviors will result in improved credit scores. For additional assistance with your credit score or credit repair, contact our team at www.asapcreditrepairusa.com.