Were you aware that credit scores have 30 different levels? Unfortunately, many individuals are unaware of this fact and become confused when searching for the best credit score online. The volume of information available can be overwhelming and sometimes misleading. My name is Joe Mahlow and I have extensive knowledge in the financial literacy and credit repair industry, spanning over 15 years of experience. My objective is to provide objective advice on various topics, including today's discussion on credit scores. I have successfully assisted more than 20,000 clients in improving their credit scores and I hope to share enough information with you to do the same. Let's delve into the specifics.
Contents:
Different Credit Scoring Models Explained
Understanding A Good Credit Score
What is the Minimum Credit Score Needed to Buy a House?
Determining the Credit Score Range for Purchasing a Car
Tips on Increasing Your Credit Score
Tips from Joe on Improving Your Credit
Different Credit Scoring Models Explained
Understanding the different credit scoring models that lenders use to evaluate your creditworthiness is essential. The two main models that you should be aware of are the FICO model and Vantage model. Here's what you need to know about each of them:
FICO Credit Score
The FICO credit scoring model is the most widely used model by lenders in the United States. FICO has eight different models, which can produce varying scores depending on the information on your credit reports. For instance, if you are applying for a mortgage, your lender will likely use FICO 5, but if you apply for a credit card, they will use FICO 8.
What's the reason for so many FICO scores?
Each model focuses on different factors that lenders consider when assessing creditworthiness. Mortgage companies focus on mortgage payment history, while credit card companies prioritize credit card payment history. Auto lenders turn to FICO-2 reports, since they reflect your auto payment history. By understanding each model, you can focus on the most relevant factors to improve your credit score.
Vantage Credit Score
Vantage is a relatively new credit scoring model that competes with FICO. Equifax, Experian, and TransUnion created the Vantage model. While FICO is the most recognized score for lending purposes, Vantage is gaining popularity in personal loans and auto lending. Credit monitoring websites frequently use Vantage to provide free credit reports to customers.
Is the Vantage Score accurate?
Since Vantage is not widely used for lending, its accuracy varies. However, it provides a good general idea of your credit score. Think of it as comparable to your FICO score. To get a visual representation of your scores, you can sign up for an account on myfico.com.
Is FICO outdated?
Many experts believe that FICO is outdated and that Vantage provides more relevant information. Although Vantage may not be as widely recognized as FICO, it may become more prevalent over time. Credit reporting agencies have access to significant data and will produce the best possible scoring models available. Ultimately, the best way to evaluate your credit scores is to consider as many factors as possible, including both FICO and Vantage scores.
Understanding A Good Credit Score
Both the Vantage and FICO models use a score range of 350 to 850, with 350 being the worst score and 850 being the best score. If you're aiming to have high scores, it's important to know where you stand in your credit-building journey. Here are some critical score thresholds to keep in mind:
620 or below
This is considered below average, and it's likely that you have adverse credit history or no credit cards at all. To improve your credit scores, make timely payments and have ten active revolving credit cards. Try secured credit cards like Credit Builder Card or OpenSky Credit Card. With a credit score of 620, you can start qualifying for an FHA home mortgage.
640-680
This is considered fair for good credit. You may have established credit, but you may have some derogatory marks or accounts or high balances on your credit cards that you'll need to settle. Your scores might temporarily drop if you have recently opened new accounts. Ensure to maintain good credit habits, and your scores will return.
740+
Any credit score over 740 is considered "super-prime" and is the dream. Congratulations if you're part of the 20% of the US population with this score. Always pay on time, and keep your revolving credit card accounts paid. It will help you get the best interest rates for most loans.
What is the Minimum Credit Score Needed to Buy a House?
The required credit score to qualify for a mortgage loan differs across various loan types. Due to federal regulations and government backing, most mortgage loans share similar guidelines, but some differ marginally. There are three common mortgage loan types: conventional loans, FHA loans, and VA loans. Here's what you need to know about each of them:
1. Conventional Loans
These loans are highly popular and usually the best savings option outside the VA loan. With a conventional loan, you don't need to maintain private mortgage insurance (PMI), which is an extra cost that can increase your down payment or monthly payments. Conventional loans come with lower down payment requirements and better interest rates than other mortgage loans. The credit score requirement usually rests at 640 with a debt-to-debt ratio no higher than 43%.
2. FHA Loan
The FHA loan is designed for lower credit scores ranging from 580 to 619. However, different lenders offer varying loan programs, so if you fall within the credit score limits, shop around for different options that suit your finances. While an FHA loan requires you to keep PMI for at least eleven years, it has higher debt-to-income limits of up to 50%. If you have a lower income, an FHA loan can help you buy more homes than with a conventional loan. Usually, the down payment requirement for FHA loans is as low as 3.5% of the purchase, allowing you to get into mortgages with less money out of pocket than conventional loans.
3. VA Loan
This loan comes without a specific credit score requirement, but the government will pre-qualify you based on your previous defaulted loans and any past-due debts owed to the government. To qualify, you must have served in the US military for at least 181 days, served for 90 consecutive days during wartime, served six years with the National Guard, or have lost your spouse on active duty. The VA loan typically has the best interest rates available, and you usually do not need a down payment. The VA loan is an exceptional option for veterans in search of home financing.
Determining the Credit Score Range for Purchasing a Car
When it comes to buying a car, it's important to understand that your credit score is not the only factor that determines your eligibility. Your credit history plays a significant role in the interest rates you will qualify for, and lenders use your previous and current credit history to gauge the risks involved in extending credit to you. Factors such as late payments and vehicle repossession can make it challenging to get approved, and while some lenders may approve anyone for a car loan, they may attach specific criteria such as higher down payments and dealership fees. A down payment or equity can increase your leverage while buying a car on credit. The credit score range for qualifying for a car is not exact, but an ideal score is above 680. A credit score below this can increase the interest rate charged by the lender, as it indicates a higher risk. As shown in the data above, a higher credit score can substantially reduce the interest rate you pay for a loan, which can affect your overall credit score.
Tips on Increasing Your Credit Score
Improving your credit score is a gradual process that requires patience and consistency. Rushing to try and fix your credit overnight can lead to poor decisions that worsen the situation. Here's what you can do right away to build your credit:
Open 3-5 Revolving Credit Accounts:
Revolving credit, such as credit cards, can help maximize your credit scores. For those with limited or poor credit, applying for a large loan can be difficult. That's why opening a secured credit card, such as Open Sky or Credit Builder Card, is a good place to start. These types of cards are more focused on your ability to pay on time, rather than your credit score. Revolving credit accounts make up 30-35% of your overall credit score and are the best option for quickly boosting your credit scores. Make sure to keep your balances low (around $5-$10 each time you make a payment) and limit your use to small purchases like gas or groceries.
Request a Credit Limit Increase:
If you already have active revolving credit accounts, you can request a credit limit increase. This strategy will increase your overall credit limits and lower your credit utilization percentage. Most credit card companies offer this option either online or by calling customer service. You will need to provide information about your current income, and the credit card company will evaluate your request based on your payment history. To avoid hurting your credit scores, make sure not to exceed 30% of your overall limits.
Pay Down Your Balances:
Keeping your balances low and close to zero will greatly benefit your credit score. You don't need to use your credit cards every month but, if you do, try to limit your usage to small purchases. When it comes time to pay off your balance, leave a small amount, around $1-$5, to show that you are using your credit responsibly. If you cannot pay your balances off in full, devise a plan to pay down a percentage of your debt each month until it is fully paid off. The worst thing you can do is pay off a credit card and then let the balance build up again. Be mindful of your credit card usage as it plays a large role in your overall credit score and try to avoid high interest rates and fees.
Tips from Joe on Improving Your Credit
We've all experienced less-than-ideal credit situations, but taking your current credit situation seriously and investing time and effort into self-improvement and credit repair can result in significant changes to your credit score in a short amount of time. Many individuals with poor credit fall into the trap of living with credit issues and assume that achieving good credit is impossible. However, a great credit score requires hard work, and those who prioritize improving their credit by focusing on smart spending habits will ultimately succeed. To begin, establish a budget and work towards breaking any bad spending habits you may have; this will directly impact your credit score. For further guidance or assistance with credit repair, please contact my office today at www.asapcreditrepairusa.com.