It's important to know that credit scores aren't just one-size-fits-all. In fact, there are a total of thirty different levels of credit scores that exist. With so many different answers available on the internet, it can be overwhelming when trying to determine what the best credit score is for you. Often times, the information you find can be confusing and even misleading. That's where I come in. My name is Joe Mahlow and I have spent over fifteen years in the financial literacy and credit repair industry. My mission is to provide you with straightforward advice on various topics, including credit scores. Over the years, I have helped more than twenty thousand clients improve their credit scores and I am excited to share my insights with you. So, let's get started!
Contents:
Understanding Credit Scores: FICO vs Vantage
What Constitutes a Good Credit Score
What Credit Score Do You Need to Buy a House?
Determining the Credit Score You Need to Purchase a Car
Tips on Increasing Your Credit Score
Joe's Insight on Credit Improvement
Understanding Credit Scores: FICO vs Vantage
When it comes to credit scoring models, there are two primary models that one should be familiar with- FICO and Vantage. Both the FICO and Vantage scoring models are essential to understand because of the differences in calculating credit scores between them.
FICO Credit Score
The FICO scoring model is widely used and popular with eight different FICO models, ranging from FICO 2 to FICO 10. Though this can be confusing, the difference in credit scores depends on the credit report pulled by each specific lender. For instance, a mortgage lender will pull your FICO 5 credit report when you apply for a home loan, whereas a credit card provider is likely to use your FICO 8 credit report when you apply for a credit card.
Why So Many FICO Scores?
Each credit report has a different weight, with critical factors weighing more heavily than less important ones. For example, a FICO 5 mortgage report will weigh heavily on previous mortgage history, meaning that a great payment history on a previous mortgage favors a higher score than no history or negative history. This pattern goes for all different FICO scoring models. Due to this, credit card providers mainly use the FICO 8 report, as previous credit card history is the most impactful in this score. Auto lenders commonly pull FICO-2 reports, and in this scenario too, the previous auto history heavily influences your scores.
If you wish to visually compare your different FICO scores, create an account on www.myfico.com to see your scores.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion. Vantage was created to compete with the FICO scoring model and is comparatively newer, with credit monitoring sites commonly using it to give you a free copy of your credit report. Though FICO dominates the lending sector, the Vantage model is gaining popularity, especially in sectors like personal loans and auto lending.
Is the Vantage Score Accurate?
The accuracy of the Vantage score depends on its context. It is not widely used for lending purposes yet, so it may not be entirely accurate for your actual lending score. A credit score is only as accurate as your ability to get a loan, and the Vantage model's accuracy may differ as FICO is currently the most recognized scoring model. However, considering the information available, the Vantage scoring model gives a good "general idea" of your overall scores. If you use your Vantage score, it will provide an idea of where your overall scores are.
I believe the Vantage scoring model is more likely to be widely adopted in the next 5-10 years. It provides a more modern and accurate representation of credit scores based on today's standards than the outdated FICO scoring model. Remember, credit reporting agencies are the most significant data collection agencies, and if they have the data, they have the upper hand in providing the best scoring data.
What Constitutes a Good Credit Score
The FICO and Vantage models both use a scoring range from 350 to 850, with 350 being the poorest rating and 850 being the best. Setting a target to achieve the highest possible score requires you to understand where you stand in terms of score thresholds, so I'll provide you with some crucial ones to aim for.
1. 620 or below
This rating is regarded as poor, and if you're below this threshold, you probably have a history of negative credit. This might include a high balance on your credit card accounts or no credit cards at all. To increase your score, pay your bills on time and keep ten active revolving credit accounts open. I suggest using a Credit Builder Card or OpenSky Credit Card, both of which are secure credit cards that can assist you in establishing your credit. Once you've reached the 620 credit score range, you're eligible for an FHA home mortgage.
2. 640-680
This rating is deemed good for fair credit. This score range typically indicates that you have established credit, but you may have derogatory accounts or marks on your credit, as well as high balances on your credit cards that you must pay down. Another common scenario is the temporary drop in your scores due to newly opened accounts. If you fall into this category and have a new account, don't be concerned; the drop in your score is temporary and will recover.
3. 740+
Any credit score above 740 is considered "super-prime" and will result in the most favorable interest rates for many loans. Congratulations if you have a 740+ credit score, as you are part of the only 20% of the US population in this range. Keep doing what you're doing and always pay your accounts on time, and maintain a paid revolving credit card account. You're in excellent shape!
What Credit Score Do You Need to Buy a House?
To determine the ideal credit score required to qualify for a mortgage, you must first identify the loan type you are seeking. While most mortgage loans share similar guidelines, there may be some differences that depend on factors such as federal regulation and government backing. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Among the different mortgage loan options, conventional loans are the most popular due to their favorable interest rates and lower down payment requirements. Unlike other loans, conventional loans do not demand you to keep private mortgage insurance (PMI). However, you need at least a credit score of 640 and a debt-to-debt ratio no higher than 43% to be eligible.
FHA Loan
FHA loans may be ideal for those with lower credit scores that fall within the 580 to 619 range. You should explore different lenders to find a loan program that suits your unique financial circumstances, given the varying guidelines of each program. With an FHA loan, expect to keep PMI for at least 11 years, and the debt-to-income limit can go as high as 50%. Down payment requirements are as low as 3.5% of the purchase price, but interest rates may be higher.
VA Loan
VA loans do not technically require a credit score but investigate previous defaulted loans and government-owed past-due debts during pre-qualification. To qualify for VA loans, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, or served six years with the National Guard, or your spouse died during active duty. VA loans often have the most attractive interest rates and do not require a down payment, making them one of the most preferred mortgage loan options, especially for veterans.
Determining the Credit Score You Need to Purchase a Car
When it comes to buying a car on credit, your credit history is more critical than your credit score in determining what you qualify for. Although a higher credit score is essential, it has a smaller impact on the interest rate you are eligible for. Instead, lenders assess your previous and current credit histories to determine the level of risk involved in extending credit to you. If you have a history of late payments, repossession, or other credit issues, you may have trouble getting approved for a loan, whereas someone with a good credit history may qualify for a more favorable interest rate. However, those with bad credit can still obtain a car loan from special finance or subprime lenders, but the criteria for approval may include a higher down payment and additional fees to mitigate the risk involved.
Credit Score Impact
When considering what credit score you need to purchase a car, a score over 680 is ideal. Anything below this score may result in a higher interest rate due to the higher risk you pose as a borrower. The interest rate you pay can vary significantly based on your credit score. For example, someone with a score above 720 may pay an average of $5,500 in loan interest, while someone with a score of 580 or above may pay more than double that amount ($15,300). As such, it pays to have a good credit score, as higher scores mean less interest and lower overall costs. To improve your chances of getting a favorable car loan, having equity or a down payment can also tip the scales in your favor.
Tips on Increasing Your Credit Score
To improve your credit score, it's crucial to take some vital steps, but don't expect overnight success as it takes time and patience. Otherwise, you may make poor and unwarranted choices with your credit cards that can worsen the situation. Here are some things you can do right now:
1. Get Three to Five Revolving Credit Accounts
Revolving credit accounts, like credit cards, can help maximize your credit score, particularly if you have no credit history or need to rebuild your credit. To start, it's better to open a secured credit card that does not solely focus on credit scores. For instance, Open Sky or Credit Builder Card emphasize your ability to pay on time, such as having no bankruptcy records in two years and a current source of income. Revolving credit comprises 30-35% of your credit score and can help boost scores faster, but ensure to keep balances between $5-10, pay on time, and use it for minor purchases like gas or groceries.
2. Raise Your Credit Limit
Requesting an increase in your credit limit can reduce your credit utilization percentage, which is a vital factor that can negatively affect your score. Contact your card issuer to make a formal request to increase your credit limit and explain your motive for doing so. Many card issuers have an online portal, while others may require a phone call. However, you must have excellent payment history on your credit card for at least 7-15 months to qualify.
3. Pay Down Balances
Aim to keep a low balance on your credit card to close to zero, and use it only for minor purchases to avoid having high balances. Suppose you currently have a high balance that you cannot handle financially. In that case, set a plan to pay it off by taking a particular percentage of your paycheck each month. Besides, avoid using your credit cards after paying down your balance to improve your credit utilization percentage, which influences your credit score significantly. Remember, high-interest rates may consume most of your payment, hurting your payments' principal.
Joe's Insight on Credit Improvement
No one is immune to financial setbacks, especially when it comes to credit. The truth is, with some dedication and hard work, you can see a significant improvement in your credit score. Unfortunately, many people with poor credit become comfortable with the idea that it's impossible ever to have good credit again. However, by focusing on developing sound financial habits and committing to working on your credit score, you can break free from this cycle.