It might surprise you to learn that credit scores come in 30 different levels. Many people are unaware of this fact, and when searching for the best credit score, they often find themselves inundated with conflicting advice online. It can be tough to sort through all the information out there and make sense of it all. But fear not – as an experienced financial literacy and credit repair professional with over fifteen years of experience, I'm here to help. My name is Joe Mahlow, and my mission is to provide you with practical guidance on topics like credit scores. I've already helped more than twenty thousand clients turn their credit scores around, and I'm confident that I can provide you with the information you need to do the same. So let's dive into this topic together!
Contents:
Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores
What Credit Score Do I Need to Get a Mortgage?
Determining the Best Credit Score to Purchase a Car
Tips to Increase Your Credit Score
Joe's Insights on Improving Your Credit
Types of Credit Scores: FICO and Vantage Models
When it comes to credit scores, there are two main scoring models - the FICO and Vantage models. Understanding the differences in how they calculate your credit score is important.
FICO Credit Score
The FICO scoring model is the most widely used credit scoring model, with 8 different FICO models. Depending on the type of lender you use, they will pull a different FICO report. For example, a mortgage lender would most likely pull your Fico 5 credit report, while a credit card company would most likely pull your Fico 8 credit report. Each FICO model weighs differently based on the factors critical to the lender, meaning your score will be impacted differently based on the type of report pulled. For example, a FICO 5 mortgage report scores heavily on your previous mortgage history, while FICO 8 report scores heavily on your previous credit card history.
If you want to see your different FICO scores, go to www.myfico.com and sign up for an account.
Vantage Credit Score
The Vantage scoring model was developed by Equifax, Experian, and TransUnion to compete with the FICO scoring model. Although it’s a newer model than FICO, Vantage has gained popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites in the United States frequently use Vantage to give you a free copy of your credit reports.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but it depends on the context within this question. Since Vantage is not widely used for lending purposes, it will not be accurate when it comes to your actual lending score. Instead, use your Vantage score to get a general idea of your FICO score since Vantage provides a good representation of your overall scores.
Nevertheless, it is predicted that the Vantage scoring model will widely be used in the next 5–10 years due to its ability to provide the best scoring models based on today's standards, while the FICO scoring model may be considered outdated. Remember that credit reporting agencies have significant data collection abilities; therefore, they give the best scoring data, period.
Understanding Credit Scores
Both the FICO and Vantage models have a score range of 350 to 850, where 350 is the lowest score and 850 is the highest. To achieve the highest score, it's crucial to know where you currently stand, and here are some essential score thresholds to guide you:
1. 620 or below
A score below 620 is considered bad credit. If you find yourself in this category, you require some credit-building strategies like making timely payments and having ten active revolving credit accounts. Try out secured credit cards like Credit Builder Card or OpenSky Credit Card for this purpose. With a credit score of 620, you can start qualifying for an FHA home mortgage.
2. 640-680
A score ranging from 640 to 680 is considered fair for good credit. In this range, you might have some derogatory marks or credit accounts and owe outstanding debts on your credit cards. If you have recently opened a new account and experienced a temporary drop in your scores, don't worry; your scores will return in due course.
3. 740+
A score above 740 is considered "super-prime" and will get you the best interest rates for most loans. If you have a credit score of 740 or more, congratulations! You are part of the 20% of the US population with the highest score. Keep paying your accounts on time and managing your revolving credit card accounts correctly, and you'll be in excellent shape!
What Credit Score Do I Need to Get a Mortgage?
To determine the credit score you need to obtain a mortgage, you must first consider the type of mortgage loan you want to qualify for. Federal regulation and government backing usually lead to similar guidelines and requirements among mortgage loans, although some differences can be spotted. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most well-known and favored loans, aside from VA loans, because they do not require private mortgage insurance (PMI) nor a high down payment cost. PMI is a cost you incur when you can't make payments on your loan, and conventional loans come with lower downpayment requirements and better interest rates than other loan types. A conventional mortgage usually requires a typical credit score of 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loans
FHA loans offer a way out for those with lower credit scores, typically ranging from 580 to 619. Credit requirements vary across loan programs, but if you're within credit score limits, it may be good to look around for lenders that offer the best financial plans. FHA loans come with added costs, such as the need for PMI for 11 years and higher debt-to-income limits of up to 50%. A low downpayment requirement of 3.5% aligns with a higher interest rate compared to conventional loans.
3. VA Loan
VA loans do not have a rigid credit score requirement, but lenders prequalifying you will evaluate past defaulted loans and government-owed past-due debts. It is exclusively for those who have either served in the military for a minimum of 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or for spouses of military personnel who lost their lives during active duty. The VA loan boasts the most advantageous interest rates available, and individuals usually do not need to make a downpayment. This loan is ideal for veterans to benefit from.
Determining the Best Credit Score to Purchase a Car
When it comes to purchasing a car, it's imperative to have a good credit history rather than just a high credit score. Although a high credit score is important, it only plays a minor part in determining the interest rate for which you qualify. Lenders scrutinize your past and current credit history to determine the risks associated with extending credit. For instance, individuals with a history of late payments, prior repossession, or other credit issues will have a more arduous time securing car loans than those without. Even if you have experienced past repossessions, you may still qualify for a car loan from the worst credit or special finance lenders; however, these lenders usually set distinct criteria that applicants must meet, such as high down payments and additional fees to the dealership. Dealerships may have to pay for fees, which helps reduce the possibility of defaulting on the loan and makes it possible to approve loans for people with bad credit. Furthermore, down payments or having equity increase your chances when purchasing vehicles on credit. Credit score considered, a credit score over 680 is ideal for financing a new automobile. Interest rates are determined based on the risks you pose to the lenders. The higher your score, the lower the interest you will pay, as depicted in the following examples:
1. 720+ credit scores pay an interest of $5,500 on loans on average.
2. 680+ credit scores pay an interest of $6,600 on loans on average.
3. 650+ credit scores pay an interest of $8,100 on loans on average.
4. 615+ credit scores pay an interest of $10,200 on loans on average.
5. 580+ credit scores pay an interest of $13,900 on loans on average.
6. Less than 580 credit scores pay an interest of $15,300 on loans on average.
In conclusion, a good credit history, down payments, and equity are crucial factors that affect the purchase of a car on credit. The interest rates you are charged vary based on your credit score, which ultimately influences your overall credit score.
Tips to Increase Your Credit Score
Improving your credit score is a long-term process that requires patience and discipline. However, there are a few steps you can take right now to increase your credit score with minimal effort. Here are some tips:
1. Open 3-5 revolving credit accounts:
Obtaining a large loan may be challenging if you have limited credit or need to rebuild it. Therefore, opening secured credit cards such as Open Sky or Credit Builder Card can increase your chance of approval. Revolving credit makes up 30-35% of your overall credit score and can help you boost your score quickly. However, be sure to keep your balance at $5-10 each time you make a payment and limit the use of the card to small purchases.
2. Request a credit limit increase:
Lowering your credit utilization percentage by increasing your credit limits can improve your overall credit score. To do so, reach out to your credit card company and request a "Credit Limit Increase." You may need to fill out some information, including your current income, and have excellent payment history for 7-15 months to be considered.
3. Pay down your balances:
Keeping your credit card balance low is essential. Try limiting the use of your credit cards to small purchases, and when paying your bill each month, leave about a $1-5 balance. If you cannot pay off your high balances, create a plan to use a portion of your paycheck each month, but the goal is to ultimately stop using the cards and focus on paying off the debt. Remember to limit your usage, as high-interest rates can lead to more payments towards interest instead of principal.
Remember to stay patient and disciplined while improving your credit score – a good credit score takes time to build and maintain.
Joe's Insights on Improving Your Credit
Having a less than stellar credit history can be a real struggle. Fortunately, by devoting time and effort to improve your credit, you can get your credit score back on track in no time. Many people with poor credit feel stuck in a cycle of financial difficulty, doubting that they can ever repair their credit. In reality, achieving a great credit score requires hard work and commitment, but it is achievable. To start, create a budget and focus on breaking any bad spending habits you may have to improve your credit score. This article provides valuable insights on understanding credit. If you are seeking guidance or help with credit repair, don't hesitate to reach out to my office at www.asapcreditrepairusa.com.