Were you aware that your credit score can be categorized into 30 distinct levels? It's not uncommon to encounter a multitude of disparate answers to the question of what the best credit score is when seeking information on the subject. Unfortunately, this can often elicit more confusion than clarity and lead you down an uncertain path. As someone who has been dedicated to promoting financial literacy and credit repair for over 15 years, my name is Joe Mahlow, and I want to provide you with unfiltered insight into various pertinent topics, beginning with credit scores. What's more, I've been able to aid in the credit score transformation of 20,000 clients and am optimistic that the information I impart will do the same for you! Therefore, let's delve into the discussion at hand.
Contents:
Understanding the Different Types of Credit Scores
What is considered an Ideal Credit Score
What is a Suitable Credit Score to Purchase a Home?
What is the Ideal Credit Score for Car Buying?
Tips for Improving Your Credit Score
Tips from Joe on Improving Your Credit Score
Understanding the Different Types of Credit Scores
When it comes to credit scores, there are two main models to familiarize yourself with the FICO model and the Vantage model. It's essential to understand the differences between these models to learn how they calculate your credit score.
FICO Credit Score
The FICO scoring model is the most widely used and popular among lenders. It includes eight different models, ranging from FICO 2 to FICO 10, which can result in different scores based on your credit report. The reason for these variations lies in the fact that when you apply for credit, your lender will pull a specific FICO report based on the type of credit you are applying for. For example, if you applied for a mortgage, your lender will likely pull your FICO 5 credit report. Conversely, if you applied for a credit card, they would likely pull your FICO 8 credit report.
Why Are There So Many FICO Scores?
Different lenders use different FICO reports based on the critical factors they assess when loaning money. As such, credit reports have varying weights, with the most important criteria being the most significant determinants of your score. For example, if you're applying for a home loan using FICO 5, your previous mortgage history will have a more substantial impact on your score than other factors. Similarly, credit card companies typically use the FICO 8 report, which places more emphasis on your credit card history. Auto lenders, on the other hand, usually pull the FICO-2 report, with your past automotive history playing a more significant role in determining your score.
For a better view of your different FICO scores, you can visit www.myfico.com and sign up to see all your credit scores.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies – Equifax, Experian, and TransUnion – to compete with FICO. It's a relatively new scoring model compared to FICO, which has been around since the 1970s. Credit monitoring websites frequently use Vantage to provide you with a free copy of your credit reports. Although FICO remains the dominant lending sector scoring model, Vantage is gaining momentum in other sectors, such as personal loans and auto lending.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, its accuracy depends on the context within which it's used. Since Vantage isn't widely used for lending purposes, it won't be as accurate in determining your actual lending score. Your credit score is only as accurate as your ability to obtain a loan; hence, the Vantage score's accuracy may vary compared to FICO, the leading scoring model. Nevertheless, you can use your Vantage score as a general idea of your FICO score. Since it's hard to know your FICO score without paying for it or having a lender pull your credit report, your Vantage score can give you a rough idea of where your overall scores stand.
It's highly likely that lenders nationwide will start using the Vantage scoring model in the next five to ten years due to its ability to provide better scoring models based on today's standards. The FICO model, in contrast, is outdated and doesn't offer a clear representation of your credit scores. Credit reporting agencies have the most significant data collection outside of social media companies. Thus, they have the upper hand in providing the best scoring data.
What is considered an Ideal Credit Score
The FICO and Vantage scoring models have ranges that go from 350 to 850. A 350 score is the lowest possible score, while 850 is the best. It's essential to keep track of your score throughout your credit-building journey to achieve higher scores. Below are some score thresholds that you should know about.
1. 620 or below
Scores in this range are considered bad credit. Having derogatory credit history, high-balance credit card accounts, or no credit cards at all is highly likely. Ten active revolving credit accounts and timely payments are crucial in improving your credit score. Getting a secured credit card like the Credit Builder Card or OpenSky Credit Card can help build your credit. Once you reach a 620 credit score range, you can start qualifying for an FHA home mortgage.
2. 640-680
Credit scores in this range are considered good. It means you've established credit, but you may still have some derogatory marks or accounts on your credit, high balances on your credit cards to pay off, and opened new accounts recently, leading to a temporary dip in scores. However, the drop in the credit score is temporary, and you can always expect it to return.
3. 740+
Any credit score over 740 is considered "super-prime," and you'll enjoy the best interest rates on most loans. Congratulations if you belong to the 20% of the population with this score. Ensure you pay your accounts on time and keep your revolving credit card accounts paid, and you'll be in excellent shape.
What is a Suitable Credit Score to Purchase a Home?
The credit score required to purchase a home is dependent on the mortgage loan you are looking to qualify for. You will find that the guidelines and requirements for most mortgage loans are similar due to federal regulation and government backing. The three most common loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and offer the best "savings" loan option outside of VA loans. These loans do not require you to maintain private mortgage insurance (PMI) and usually have better interest rates and lower downpayment requirements than other loans. To qualify for a conventional mortgage, lenders require a credit score of 640 and a debt-to-debt ratio of no higher than 43%.
2. FHA Loan
FHA mortgage loans are ideal for those with lower credit scores, usually between 580 and 619. However, different lenders have varying financial options, so make sure you shop around. These loans require PMI to be paid for at least 11 years and usually have higher interest rates. However, they allow for higher debt-to-income limits of up to 50%, which can increase your home purchasing power. FHA loans require a downpayment of as little as 3.5% of the purchase price.
3. VA Loans
There is no credit score requirement for VA loans, but you will have to qualify by demonstrating past financial responsibility. 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 have a military spouse who lost their life during active duty. There are no downpayment requirements for VA loans, and they typically offer the best interest rates available. VA loans are an excellent way to show gratitude and support to our veterans.
What is the Ideal Credit Score for Car Buying?
Your credit history is the most crucial factor in qualifying for a car purchase, not just your credit score. Although a good credit score is necessary, it has a minor impact on the interest rate you receive. Typically, lenders examine your current and previous credit history to determine the level of risk they take by giving you a car loan. Individuals with poor credit scores or previous credit issues, such as late payments and repossessions, might face challenges in getting approved for a loan.
The credit score range for a new vehicle
There isn't any set credit score that guarantees approval, but a credit score ranging above 680 is desirable. The credit score you possess can affect your interest rate, with a score below 680 resulting in higher rates due to a perceived increase in risk for the lender. For example, a person with a credit score of 720 or above may pay an average interest of $5,500, while someone with a credit score of 580 would pay $15,300 in interest.
It's evident from this data that your credit score significantly impacts the interest rates, which affect your overall credit score. You might be required to pay a higher down payment and additional fees if you have poor credit, but credit score isn't the only factor that determines your eligibility to obtain credit.
Tips for Improving Your Credit Score
Improving your credit score takes time and patience, but there are several things you can do right now to start moving in the right direction. Building good credit takes time, so it's important to be patient. Making impulsive decisions with credit can backfire and make things worse. Here are a few actions you can take to start improving your credit:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is an excellent tool for improving your credit score. It's easier to get approved for a credit card than a large loan, and a secured credit card is a good place to start. Focus on paying the balance on time and keeping it at $5-$10 with small purchases like gas or food. Revolving credit makes up 30-35% of your overall credit score.
2. Request a credit limit increase
If you have active credit card accounts, you can quickly request a credit limit increase. This can help lower your credit utilization percentage and increase your overall credit limits. Each credit card company has a different process for requesting an increase, but typically, you'll fill out some information, including your current income, and wait for approval.
3. Keep your balances low
Keeping your balance low and close to zero is crucial. You're not obligated to use your credit cards every month, so try to use them for small purchases only. When paying your bill each month, consider leaving a balance of about $1-$5 on your credit cards. If you have high balances, make a plan to pay them down gradually. Remember, your credit card spending habits play a significant role in your overall credit score, so it's essential to limit your usage.
Improving your credit score takes effort and patience, but by following these tips, you can start moving in the right direction.
Tips from Joe on Improving Your Credit Score
Whether due to past mistakes or unforeseen circumstances, many people find themselves with poor credit. However, if you're willing to put in the time and effort, you can turn your financial situation around more quickly than you may think. All too often, individuals with less-than-ideal credit resign themselves to a lifetime of financial woes, believing that good credit is out of reach. Yet with dedication and a focus on improving your spending habits, you can build a strong credit score over time. Begin by creating a budget and working on correcting any problematic expenses. By doing so, you'll begin to see improvements in your credit score. For more information on navigating the world of credit, check out our other resources. And if you'd like professional help repairing your credit score, don't hesitate to reach out to us at www.asapcreditrepairusa.com.
Here are Joe's tips for improving your credit score:
1. Take your credit situation seriously
2. Focus on your spending habits
3. Prioritize your credit
4. Create a budget
5. Work on fixing any bad spending habits