It's an interesting fact that credit scores have 30 different levels. Yet, it's not widely known. While searching for the best credit scores online, one may stumble upon varying answers from Google. Unfortunately, the information available tends to be more confusing than helpful, misleading people and leading them into a confusing web. I am Joe Mahlow, having spent over fifteen years in the financial literacy and credit repair sphere. My aim is to provide straightforward advice on different topics, including credit scores. Having helped more than twenty thousand clients in boosting their credit ratings, I'm confident I can provide you with sufficient knowledge to accomplish the same. Let's dive right in!
Contents:
Exploring the Different Types of Credit Scoring Models
Understanding Credit Scores: Good, Fair, and Super-Prime
Qualifying Credit Scores for Different Types of Mortgage Loans
What Credit Score is Ideal to Purchase a Car?
Ways to Improve Credit Scores
Tips from Joe for Improving Your Credit Score
Exploring the Different Types of Credit Scoring Models
Understanding the different credit scoring models is essential when managing your finances, especially when it comes to credit reports. There are two well-known models that you need to know about: the FICO model and the Vantage model.
FICO Credit Score
The FICO model is the most popular credit scoring model widely used by lenders. There are eight different FICO models, ranging from FICO 2 to FICO 10. Different models calculate your credit score differently, depending on your credit report. This is based on the different weights given to each factor critical to the lender. When you apply for credit, each type of lender will pull a different FICO report. For example, while a mortgage lender is likely to pull your FICO 5 credit report, a credit card company will likely use the FICO 8 score.
Why are there so many FICO scores?
Each credit report has a different weight, which means that factors critical to the lender will have a more significant impact on a credit score. For instance, if you want a mortgage, your FICO 5 score will heavily weigh your previous mortgage history. Conversely, your previous credit card history will impact the FICO 8 score, primarily used by credit card companies. Auto lenders typically use Fico-2 reports, and your scores will weigh heavily on your previous auto history.
Vantage Credit Score
The Vantage Score model competes with the FICO model, developed by Equifax, Experian, and TransUnion. It is a new scoring model compared to the FICO model, which has been used since the 1970s. Although FICO still dominates the lending sector, the Vantage model is becoming increasingly popular in some sectors, such as personal loans and auto lending.
How accurate is the Vantage score?
While the Vantage score is accurate, it is not widely used for lending purposes as FICO is the most recognized scoring model. Your credit score is only as accurate as your ability to obtain a loan, and since FICO is the most widely used scoring model, Vantage's accuracy may vary. Nonetheless, the Vantage model provides a good idea of your overall credit score, a rough estimate of your FICO score. It's worth noting that credit reporting agencies are significant data collection agencies, and Vantage could have the potential to become the best-scoring model based on current standards.
Understanding Credit Scores: Good, Fair, and Super-Prime
Credit scores are measured by both FICO and Vantage models, ranging from 350 to 850. A score of 350 is considered poor, and 850 is considered the best. To achieve the highest credit scores, you need to know where you stand. It's imperative to understand the thresholds of the score. Here are some important score ranges and what they mean:
620 or below:
This score is considered bad credit.
You may have unfavorable credit history and high-balance credit card accounts or no credit cards at all.
Make timely payments, have ten active revolving credit accounts, and use secured credit cards, such as Credit Builder Card or OpenSky Credit Card, to improve your scores.
Once you reach this score range, you can qualify for an FHA home mortgage.
640-680:
This score is considered fair for good credit.
This range indicates that you have established credit, but there are some derogatory marks or accounts on your credit.
You need to pay down high balances on your credit cards, and newly opened accounts can temporarily drop your scores.
Don’t worry if your scores drop temporarily due to a new account; they will return.
740+:
Any credit score over 740 is considered super-prime.
Congratulations, you are part of the 20% of the US population with excellent credit scores.
Pay your accounts on time, keep your revolving credit card accounts paid, and you’ll get the best interest rates for most loans.
Qualifying Credit Scores for Different Types of Mortgage Loans
The minimum credit score required to qualify for a mortgage loan largely depends on the type of loan you are seeking. Mortgage loans are categorized into three types: conventional, FHA, and VA loans. Each of these loans has its own set of requirements and guidelines that may vary based on federal regulations and government backing.
Conventional Loans
Conventional loans are the most sought-after loans and are the best option for savings outside of VA loans. These loans do not require private mortgage insurance (PMI) and have lower downpayment requirements. Conventional lenders usually look for a credit score of 640 and a debt-to-income ratio of 43% or lower. However, interest rates on conventional loans may not be as favorable as other loan types.
FHA Loan
FHA loans are suitable for borrowers with lower credit scores, typically between 580 and 619. Borrowers within the credit score limits should shop around for different lenders to find the best financial option for their circumstances. FHA loans can require up to 11 years of PMI payments, but on the flip side, they have higher debt-to-income limits, allowing borrowers with lower incomes to qualify for higher-priced homes. FHA loans are accessible with a downpayment requirement of as low as 3.5% but may attract higher interest rates.
VA loan
VA loans are designed to assist veterans in buying homes. There is technically no credit score requirement for VA loans, but borrowers must meet other criteria, such as serving in the military for a certain period. The VA loan usually offers the most competitive interest rates with no down payment requirement. It is an excellent option for veterans who meet the eligibility criteria.
What Credit Score is Ideal to Purchase a Car?
When it comes to purchasing a car, your credit history matters more than your credit score in determining your eligibility. While a higher credit score can be advantageous, it doesn't have a significant impact on the interest rates you qualify for. Lenders assess your credit background, including current and previous credit activity, to determine the risk associated with approving your car loan. For instance, if you've defaulted on a previous car loan, you're likely to face difficulty obtaining approval for a new one. While some lenders may approve anyone for a car loan, including those with a poor credit history, they'll charge additional fees or require a higher down payment to reduce their risk. The dealership may also charge a fee to lessen their risk and approve you for the loan. Ideally, having equity or a down payment on hand when seeking financing helps strengthen your bargaining power.
Credit Score Range for Financing a New Car
Though no specific credit score guarantees you'll get approved for financing, a score above 680 is preferable. A score below this mark increases the interest rates and poses a higher risk to the lender. A higher credit score can significantly reduce the interest paid on loans, as demonstrated by the following example:
Applicants with a credit score of 720 or more tend to pay around $5,500 in loan interest on average.
Applicants with a credit score of 680 or more tend to pay around $6,600 in loan interest on average.
Applicants with a credit score of 650 or more tend to pay around $8,100 in loan interest on average.
Applicants with a credit score of 615 or more tend to pay around $10,200 in loan interest on average.
Applicants with a credit score of 580 or more tend to pay around $13,900 in loan interest on average.
Applicants with a score of 580 or more tend to pay around $15,300 in loan interest on average.
This data shows that the higher your credit score, the lower your interest rate will be, which will ultimately affect your credit score overall.
Ways to Improve Credit Scores
Improving your credit score requires patience and effort and cannot happen overnight. However, there are several things you can do right now to increase your credit score. Here are some ways to improve your credit scores:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit is an excellent option to maximize credit scores, especially for individuals with limited credit or those seeking to rebuild it. Instead of obtaining a large loan to build credit, opening a secured credit card that doesn’t focus on the credit score can help. For example, Open Sky or Credit Builder Card typically focuses on the individual's ability to pay their balance on time and their income status. Revolving credit makes up 30-35% of overall credit scores and is the best option for building credit quickly. Remember to make payments on time and keep the balance between $5-10 each time. Use the credit card only for small expenses like gas or groceries.
2. Raise Your Limits
Requesting a credit limit increase for credit cards can increase the overall credit limits and lower credit utilization percentage if you already have active revolving credit card accounts. If your credit card balances exceed 30% of your overall limits, it can negatively impact credit scores. Most credit cards allow for a limit increase, either online or via phone call. Ensure you have an excellent payment history on the credit card before requesting a limit increase.
3. Pay Down Your Balances
Keeping the balance low and close to zero is critical. Limit credit card usage to small expenses and leave a $1-5 balance each time. If high balances are an issue, develop a plan to pay them off each month and ultimately stop using the credit cards. Limiting credit card usage is essential since credit card spending habits play a crucial role in overall credit scores. High credit card rates affect payment towards interest and not principal.
Tips from Joe for Improving Your Credit Score
It's not uncommon to have a less-than-perfect credit score, but it's important to take your credit situation seriously and work on improving it. Most people with bad credit feel like they're stuck in a cycle of financial issues, but with dedication and effort, you can see a significant improvement in your credit score relatively quickly. To develop a strong credit score, start by creating a budget and addressing any bad spending habits. This will have a positive impact on your credit score and help break the cycle of bad credit. It takes hard work and a focus on your credit to achieve a great credit score, but it's possible. This article aims to help you understand how credit works. If you need guidance about improving your score or repairing your credit, don't hesitate to reach out to my office at www.asapcreditrepairusa.com.