It may come as a surprise to many that credit scores have 30 different levels. Often, people scour the internet in search of the best credit score, only to be met with conflicting information. The abundance of information can be confusing at best, and at worst, deceitful and lead you down an undesirable path. With over fifteen years of experience in financial literacy and credit repair, my name is Joe Mahlow and my mission is to provide unfiltered guidance on a variety of topics, including credit scores. I have helped more than twenty thousand individuals enhance their credit scores, and it is my hope that through this article, you will gain the tools to do the same. So, let's jump right in!
Contents:
Types of Credit Scores: FICO vs. Vantage
Understanding Good Credit Scores
Credit Score Needed for Buying a House
Ideal Credit Score When Buying a Car
Ways to Increase Your Credit Score
Joe's Insights on Building Strong Credit
Types of Credit Scores: FICO vs. Vantage
Credit scores are a crucial part of your financial wellness, and it's essential to understand the different scoring models that exist. The two primary credit scoring models are FICO and Vantage. Learning the differences between these models can help you comprehend how your creditworthiness is determined.
FICO Credit Score
By far, FICO is the most widely used credit scoring model with eight different models ranging from FICO 2 to FICO 10. Depending on the lender and the type of credit you are applying for, they will pull a specific FICO report, making it difficult to determine your exact score. For instance, if you're applying for a mortgage, the lender may pull your FICO 5 report, whereas applying for a credit card may result in a FICO 8 report.
Why are there so many FICO scores?
The individual factors that affect your credit scores receive unique weightings, which determine the importance and impact they have on your score. For example, if you're applying for an auto loan, the lender will most likely pull your FICO 2 report, which weighs heavily on your previous auto loan history.
Vantage Credit Score
Vantage is a newer scoring model created by the three major credit reporting agencies, namely Equifax, Experian, and TransUnion, to compete with FICO. Websites that offer credit monitoring services often use Vantage to provide free credit reports. Although FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending.
Is the Vantage Score Accurate?
Although the Vantage Score is accurate and provides a reasonable estimation of your overall credit score, its accuracy varies since it's not widely used for lending purposes. As such, its accuracy cannot be ascertained as it is for FICO. Nonetheless, Vantage is an excellent tool for tracking your credit score, and you can access the score for free on various credit monitoring websites.
Conclusion
The Vantage scoring model may not have gained as much popularity as FICO, but it's gradually gaining acceptance in the lending industry. With time, it may become the norm, and lenders will use it more frequently. In essence, credit reporting agencies have access to vast amounts of data, and whichever scoring model they choose to use, it's almost always the most accurate.
Understanding Good Credit Scores
The FICO and Vantage models evaluate credit scores on a scale that ranges from 350 to 850. The lowest possible score is 350 while a score of 850 implies excellent credit. In order to achieve excellent credit, it is crucial to have a comprehensive understanding of the score thresholds as you work towards enhancing your credit score. Consider the following score ranges:
620 or below:
A score of 620 or below suggests a poor credit history. You may have high credit card balances or lack credit cards altogether. To improve your scores, ensure timely payment of bills and maintain ten active revolving accounts. The Credit Builder Card or OpenSky Credit Card are recommended as secured credit cards.
640-680:
A score of 640-680 indicates fair credit. While you have established credit, your credit report may feature derogatory marks or high credit card balances that need to be paid off. A newly opened account can cause a temporary drop in your scores, so do not panic.
740+:
A score greater than 740 is considered "super-prime". Congrats! This score implies excellent credit, and you will get the best interest rates on most loans. Keeping your revolving credit card accounts paid and always paying your accounts on time will keep you in great shape. Just know that only 20% of the US population has a 740 and over credit score.
Credit Score Needed for Buying a House
The credit score required for buying a house varies depending on the type of mortgage loan you are trying to qualify for. Most mortgage loans have similar requirements and guidelines due to federal regulation and government backing, but there are differences between the three most common mortgage loan types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most sought-after loans offered, and they are generally the best option outside of VA loans. Most importantly, conventional loans will not require you to maintain private mortgage insurance (PMI), which can be an additional cost, increasing your monthly payment or down payment. These loans usually have lower down payment requirements and better interest rates than other mortgage loans, with a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loan
FHA loans are for borrowers with lower credit scores (between 580 and 619). However, loan programs differ, and shopping around for different lenders that offer the best financial terms is recommended if you fall within the credit score limits. You will need to keep PMI for at least 11 years, which is a component of the mortgage that can increase your monthly payment. FHA loans usually have higher debt-to-income limits of up to 50%, enabling the purchase of more homes if your income is lower. Although the downpayment requirements for an FHA loan are lower (3.5%), interest rates are often higher.
3. VA Loan
For the VA loan, there isn't a set credit score requirement. Still, they are looking at previous defaulted loans and government-owed past-due debts when qualifying you. To qualify, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was a service member who died while on active duty. VA loans offer the best interest rates in the market and, unlike other loans, do not require a down payment, making it the perfect option for veterans.
Ideal Credit Score When Buying a Car
While having a higher credit score is important when purchasing a car, your credit history is actually the determining factor when it comes to loan qualification. Lenders will scrutinize your previous and current credit histories to determine the likelihood of you defaulting on the loan. If you have a bad credit history, lenders and even dealerships will add requirements to the approval process, such as a higher down payment and additional fees. Furthermore, having equity or a down payment can increase your bargaining power while purchasing a vehicle on credit.
When it comes to the credit score range for a new vehicle, a score over 680 is ideal, while anything below this score can increase the amount of interest charged. The following examples show the amount of interest paid based on different credit scores:
Interest Rates Based on Credit Scores:
A credit score of 720 or above pays, on average, $5,500 in interest on a loan.
A credit score of 680 or above pays, on average, $6,600 in interest on a loan.
A credit score of 650 or above pays, on average, $8,100 in interest on a loan.
A credit score of 615 or above pays, on average, $10,200 in interest on a loan.
A credit score of 580 or above pays, on average, $13,900 in interest on a loan.
A credit score of 580 or above pays, on average, $15,300 in interest on a loan.
As you can see, having a higher credit score lowers the amount of interest paid on a loan, which in turn, positively affects your overall credit score.
Ways to Increase Your Credit Score:
Building a strong credit score may take some time, and it's important to be patient during this process. Impulsive decisions can harm your credit score, so it's best to plan ahead. However, there are a few simple steps you can take to improve your credit score right now.
Here are some things you can do today:
1. Open 3-5 revolving credit accounts:
Revolving credit accounts, like credit cards, can be extremely beneficial for improving your credit score. For those with limited or poor credit, it can be difficult to obtain a large loan. Therefore, a secured credit card like Open Sky or Credit Builder Card could be a good option to start with, as they focus more on your ability to make payments on time. Revolving credit makes up 30-35% of your overall credit score, so it's a great tool for building credit quickly. It may take time to see the impact on your credit score, but make sure to pay off the balance on time and keep it low.
2. Raise your credit limits:
Requesting a credit limit increase can help raise your overall limits and lower your credit utilization percentage. This is especially important because utilizing more than 30% of your available credit can harm your credit score. To request a credit limit increase, contact your credit card company and provide them with information about your finances.
3. Pay down your balances:
Maintaining low balances on your credit cards is crucial for building a strong credit score. You don't have to spend a lot on your credit cards each month, but try to leave a $1-5 balance and pay off your credit cards in full each month. If you have high balances, make a plan to pay them down. Avoid using your cards until your balances are more manageable.
Joe's Insights on Building Strong Credit
Credit problems can affect anyone, and it can be frustrating when your credit score is less than perfect. But, taking your credit status seriously and committing to improving your credit can bring about major transformations in your credit score relatively quickly. Unfortunately, many individuals with poor credit feel like it's impossible to have a good credit score again and get trapped in a cycle of credit problems. But, with hard work and dedication, anyone can improve their credit, and those who focus on prioritizing their credit score and adjusting their spending habits are more likely to succeed. Start by creating a budget and addressing any bad spending habits you may have, as this can heavily influence your credit score. This article provides valuable insights on credit, but for personal assistance with your credit score or credit repair, reach out to my office at www.asapcreditrepairusa.com.