Were you aware that your credit score has 30 different levels? It's a common misconception that the best credit score is a one-size-fits-all solution. But when searching for the ideal score, many are inundated with conflicting information that is both puzzling and potentially inaccurate. As someone who has been involved with credit repair and financial literacy for over fifteen years, my name is Joe Mahlow and I aim to provide honest advice on various topics, starting with credit scores. I've had the privilege of working with over twenty thousand customers and helping improve their credit scores. Now, it's my pleasure to offer insights that may assist you in doing the same. Let's dive in.
Contents:
Types of Credit Scores: FICO vs. Vantage
Understanding Good Credit Scores
Determining an Optimal Credit Score to Purchase a Home
Determining the Credit Score Needed to Secure a Car Loan
Tips to Increase Your Credit Score
Insights by Joe on Improving Your Credit Score
Types of Credit Scores: FICO vs. Vantage
When it comes to credit scoring, there are two main models to consider: the FICO model and the Vantage model. It's essential to understand how these models work and differ, especially since they can impact your credit score differently.
FICO Credit Score
The FICO credit scoring model is widely used and popular. Eight different FICO models exist, ranging from FICO 2 to FICO 10, and each one calculates your credit score differently. This variation in models exists because different lenders pull different FICO reports based on the type of credit being applied for. For instance, a mortgage lender will likely use the Fico 5 report when evaluating a mortgage application, while credit card companies typically rely on the FICO 8 report. The different scoring models account for the variations in weighting factors to produce accurate credit scores based on the loan type.
Vantage Credit Score
The Vantage scoring model is a newer competitor to FICO, developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion. The Vantage score is often used by credit monitoring websites across the US. While FICO continues to dominate the lending sector, the Vantage model is gaining popularity in sectors such as personal loans and auto lending.
Accuracy of the Vantage Score
The Vantage Score can provide a reliable "general idea" of your FICO credit score, but it's not broadly used by lenders yet. Its accuracy depends on the context in which it's used, and obtaining a loan can ultimately validate how accurate any score is. Although it may not be precise, it gives you a good representation of your credit report and helps you understand your current credit standing.
In Conclusion
As credit reporting agencies are the most significant data collection agencies outside of social media companies, they have the ability to provide the best scoring data. Even though FICO currently dominates the lending sector, Vantage's popularity is growing, and it's likely that this scoring model will become more frequently used in the future.
Understanding Good Credit Scores
Credit scores can be generated by both the FICO and Vantage models and can range from 350 to 850. Achieving a score of 850 is the best ranking, while 350 represents the lowest. During the process of achieving the highest possible score, it's crucial to keep track of your scores along the way. Here are some crucial score thresholds to consider:
- 620 or below: Falling below this number indicates bad credit, usually a result of an insufficient or adverse credit history, high-balance credit card accounts, or absence of credit cards. To improve your score, focus on making timely payments and having ten active revolving credit accounts open. If you're looking to start building your credit, Credit Builder Card or OpenSky Credit Card, both of which are secured credit cards, are recommended. After you reach a credit score of 620, you can qualify for an FHA home mortgage.
- 640-680: This indicates fair to good credit. Having scores in this range suggests that you've established credit, but you may have high balances on your credit cards to pay down or derogatory credit marks. New credit accounts can also temporarily decrease your credit scores.
- 740+: A credit score over 740 signifies "super-prime" credit and makes you part of the 20% of the US population with the highest score. Having such a score will give you the best interest rates on most loans. It's essential to maintain this score by paying your accounts on time and ensuring your revolving credit card accounts are paid up. Congratulations if you already have a score of 740 or above – keep up the excellent work!
Determining an Optimal Credit Score to Purchase a Home
When figuring out the ideal credit score to purchase a home, the type of mortgage loan sought is the chief consideration. Federal regulation and government backing result in requirements and guidelines for most mortgage loans being similar, if not different. Three popular mortgage loan types include conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are highly sought after due to their affordability which makes them the best savings option outside of VA loans. These loans do not necessitate the maintenance of private mortgage insurance (PMI), incurring an extra cost that could hike up your monthly payment or downpayment. PMI protects lenders in case of borrowers failing to honor their loan repayment plan. Conventional loans usually come with lower downpayment requirements and better interest rates than most other mortgage loans. They have a conventional credit score requirement of 640 and limit debt-to-debt ratios to no more than 43%.
2. FHA Loan
An FHA mortgage loan may be granted to applicants with credit scores within the range of 580 to 619. Every loan program is unique, so within credit score limits, borrowers should opt for different lenders who offer the best financial option. For an FHA loan, PMI must be maintained for about 11 years, which could increase your mortgage cost and is worth considering, particularly when budgeting. The debt-to-income limit on this loan is usually higher, standing at 50%. This makes it possible to buy more homes with a lower income compared to a conventional loan. Although the downpayment requirements for FHA loans are as small as 3.5% of the purchase amount, borrowers may still have a higher interest rate.
3. VA Loan
In the VA loan, there is technically no credit score requirement. Instead, pre-qualification for this loan is based on prior defaulted loans and previous government-obligated past-due debts. You must have served in the US Military for at least 181 days, been on active duty for 90 consecutive days during wartime, been active for 6 years with the national guard, or be a deceased military spouse. The VA loan generally comes with the best interest rates available and does not usually require a down payment. This loan is perfect for veterans and gives back to them.
Determining the Credit Score Needed to Secure a Car Loan
Your credit history carries more weight than just your credit score when applying for a car loan. While a higher credit score is beneficial, lenders also scrutinize your past and present credit practices to determine the risk of extending credit. If you've been late on an auto loan payment or faced repossession, it can pose challenges to get approval. However, the worst credit lenders and special finance lenders qualify just about anyone for a car loan, but with stricter conditions like a higher down payment and additional fees. In such cases, the dealership pays the fee to compensate for the lending risk.
While there is no precise way to determine approval, a credit score above 680 is ideal when financing a car purchase. Anything below can lead to a higher interest rate charged to mitigate the risk you pose. As per current trends, a loan with 720+ credit scores accrues an average of $5,500, while lower scores will incur a higher interest rate, with a record of $15,300 for scores below 580. Hence, a higher credit score means lesser interest, providing good credit standing.
Tips to Increase Your Credit Score
Building a good credit score takes time and effort but there are several things you can do right now to help increase your credit score with little effort. To begin with, patience is key when building credit and avoiding irrational and bad decisions which can worsen your problems. The following are helpful tips to improve your credit score:
- Open 3-5 revolving credit accounts (credit cards) - Revolving credit is a great option to maximize your credit score as it offers you a better chance of approval, especially if you have limited credit or are looking to rebuild your credit. You can start with a secured credit card like Open Sky or Credit Builder Card that doesn't focus on your credit score but rather on your ability to pay the card on time. Revolving credit comprises 30-35% of your overall credit score and can help you build up your credit scores quickly.
- Raise your limits - Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. Increasing your credit limits to help lower your utilization percentage can help you avoid having your credit scores hurt if your credit card balances exceed 30% of your overall limits. You can inquire about the process on each credit card company's website or call them to request a "Credit Limit Increase."
- Pay down your balances - Keeping your balance low and close to zero is critical. You are not required to use your credit cards each month, so it's best to use them for small purchases. Leave about a $1-5 balance on your credit cards when it comes to paying your bill, as paying off your credit cards and then running the balance up again is a bad decision that can impact your credit score. Your credit card spending habits play a significant role in your overall credit score, and it's important to limit your credit card usage.
Insights by Joe on Improving Your Credit Score
It's not unusual to have below-average credit at some point in life. However, if you take your credit situation seriously and put in the time and effort to make a change, you will see a significant improvement in your credit score in no time. Many individuals with poor credit get caught in a pattern of financial difficulty that lasts for years and begin to think that good credit is unattainable. Building a great credit score requires a lot of effort, but those who prioritize their credit and spending habits are likely to succeed. Begin the process by establishing a budget and addressing any negative spending habits, this will have a positive impact on your credit score. This article aims to offer you a better understanding of how credit scores work. For assistance in improving your credit score or any credit repair needs, please visit www.asapcreditrepairusa.com to contact our office.
Key Points:
- With dedication, you can improve your credit score regardless of your current situation
- Many people with bad credit feel like they can't recover, but that's not true
- Improving your credit score requires hard work, prioritization, and positive financial habits
- Start by creating a budget and addressing poor spending habits
- Visit www.asapcreditrepairusa.com for guidance and help with your credit score.