It's interesting to know that there are varied credit score levels out there that one can attain. Not many individuals are aware of this tidbit of information. It's a common habit for people to search for the best credit score on Google, but this often produces a flood of answers, which can be quite overwhelming and confusing. What's worse is that some information can actually be misleading and lead one down a frustrating path. My name is Joe Mahlow and I have been in the financial literacy and credit repair industry for over fifteen years. My aim is to provide you with unfiltered advice on different topics, such as credit scores. Over the years, I have been able to aid over twenty thousand clients to elevate their credit scores, and I hope that I can do the same for you. So, let's dive in.
Contents:
Types of Credit Scores: FICO vs Vantage
Determining a Good Credit Score
Credit Score Requirements for Buying a House
Determining Your Credit Score for Car Buying
Tips for Improving Your Credit Score
Tips from Joe for Improving Your Credit Score
Types of Credit Scores: FICO vs Vantage
Credit scores are essential, especially when it comes to getting approved for loans or credit cards. There are two different credit scoring models, the FICO model, and the Vantage model. Both models are important to understand, as they differ in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used, with eight different FICO models, each providing a different credit score depending on your credit report. This is because different lenders will pull different FICO reports depending on the type of credit being applied for. For instance, mortgage lenders will pull FICO 5 credit reports, while credit card companies typically use the FICO 8 report. This is because each credit report has a different "weight" where more critical factors have a more significant impact on your credit score.
Vantage Credit Score
Vantage Score is a more recent competitor in the credit-scoring market, created by the three major credit reporting agencies. Although it is not widely used for lending purposes, Vantage can provide a "general idea" of your FICO score. It is accurate for credit monitoring purposes and is commonly used by personal loan and auto lenders.
FICO vs. Vantage Scoring Models
Although FICO has been the dominant scorer for years, the Vantage model is gaining popularity. The accuracy of the Vantage Score depends on the context. Since it isn't widely used for lending, it won't be accurate for determining your actual lending score. However, it can provide an idea of your credit scores. Many believe the FICO scoring model is outdated, and Vantage will be more widely used in the future due to its ability to provide more up-to-date scoring models.
To see your different FICO scores, visit myfico.com">www.myfico.com and sign up for an account. Whereas, to obtain a Vantage score, many credit monitoring websites provide free copies of your credit reports. Remember, credit reporting agencies are data collection agencies, and access to that data gives them the ability to provide the best scoring data available.
Determining a Good Credit Score
If you're looking to achieve the highest credit scores possible, it's crucial to understand what scores are considered good. Both FICO and Vantage models rate scores on a scale of 350 to 850, with 850 being the best score you can achieve and 350 being the worst. Here are some important score thresholds you should keep in mind to help you reach your credit goals:
1. 620 or below
A credit score below 620 is regarded as bad credit. If you're in this category, it's likely that you have adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, you'll need to make timely payments and have at least ten active revolving credit accounts open. Consider applying for a secured credit card such as the Credit Builder or OpenSky Cards to help build your credit. Once you reach the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680
Scores in this range are considered fair for good credit. It means you have established credit but may still have derogatory marks or accounts on your credit report or may owe high balances on your credit accounts. Newly opened accounts can also temporarily lower your credit score. However, don't panic; your score will improve over time, especially if you continue to make timely payments.
3. 740+
A credit score of 740 or higher is super-prime and will get you the best interest rates for most loans. Only 20% of the US population has this score, so if you’re in this category, congratulations! Keep up the great work by paying your accounts on time and keeping your revolving credit card accounts paid and you'll stay in great shape.
Credit Score Requirements for Buying a House
The credit score requirement to buy a house depends on the type of mortgage loan you want to qualify for. Mortgage loans have similar requirements and guidelines because of federal regulation and government backing, but there may be differences between them. The three most common loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and best "savings" loan option after VA loans. These loans do not require you to maintain private mortgage insurance (PMI) which can increase your down payment or monthly payment. However, you have to meet certain credit score requirements and maintain a debt-to-debt ratio no higher than 43%. The typical credit score requirement for conventional loans is 640, but you could be eligible for lower down payment requirements and better interest rates.
2. FHA Loan
FHA loans are for lower credit scores, typically between 580 and 619. However, different lenders may have varying requirements, so it's important to shop around for the best option for you. FHA loans require PMI for at least 11 years, which can be an added cost to consider. The debt-to-income limit for this loan is up to 50%, allowing you to purchase more homes than a conventional loan if you have a lower income. Additionally, the down payment requirements on an FHA loan are as low as 3.5% of the purchase price, but the interest rates are usually higher.
3. VA Loan
The VA loan has no defined credit score requirement, but they will check for any previous defaulted loans and government-owed debt when pre-qualifying you. To be eligible, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse was in the military and lost their lives during active duty. This loan typically has the best interest rates available, and they do not usually require a down payment, making it a great option for veterans.
Determining Your Credit Score for Car Buying
When considering purchasing a car, your credit history is the primary factor in deciding what loans you qualify for, rather than simply your credit score. While a high credit score is valuable, it isn't the sole determinant of your interest rate. Previous and existing credit histories are considered when extending credit, especially if potential issues arise such as prior repossession or tardiness in paying off previous auto loans. While lenders specializing in bad credit or special finance can provide car loans even to those with repossessions, this often comes with additional criteria such as higher down payments and fees to diminish their risk, while the dealership may also charge an additional fee. A down payment or equity, however, can provide you with the most negotiating power when buying a car on credit.
In terms of the credit score range affecting the interest rates on new cars, the risk you pose to the lender takes priority over your credit score. Though a score of over 680 is ideal, it is not an exact cutoff point. An example of how interest rates relate to credit scores can help illustrate the point. A person with a 720 credit score or above will pay around $5,500 in interest on a loan. For someone with a credit score of 580, the interest rate on the loan will be $15,300 on average. Therefore, a higher credit score is essential in getting a better interest rate and overall credit score.
Tips for Improving Your Credit Score
Improving your credit score is possible with some effort and time. It is crucial to understand that building a good credit score is a gradual process and doesn't happen overnight. Patience is a vital element when building credit to avoid making irrational and poor decisions related to credit. The following are the things you can do now to improve your credit:
- Open 3-5 Revolving Credit accounts
- Raise Your Credit Limits
- Pay Down Your Balances
Revolving credit accounts, mainly credit cards, are among the best options for maximizing your credit scores. They are also the best chance to get approval, especially if you have limited credit or are rebuilding it. Secured credit cards that focus more on your payment ability than credit score, such as Open Sky or Credit Builder Card, are highly recommended. Revolving credit makes up about 30-35% of your credit score, and it can take 2-4 months for the improvements to reflect. Ensure you pay your balance on time and keep it low - $5-10 per payment, limited to small purchases like gas or groceries.
Request a credit limit increase for your active revolving credit accounts. This increases your overall credit limits and lowers your credit utilization percentage, which is a critical factor in credit scores. Most credit card companies allow you to request a credit limit increase online or through a call. Ensure you have an excellent payment history of 7-15 months and be ready to provide income information.
Keep your credit card balances low and close to zero. It's not mandatory to use your credit cards every month, but when you do, limit the usage to small purchases. When paying the bill, leave a $1-5 balance on the card. If you have a high balance, plan to use some percentage of your paycheck each month to pay the credit card down or stop using it. Limit your credit card usage and avoid running the balance back up. High-interest rates can be costly, and most payments go towards interest and not the principal amount.
Tips from Joe for Improving Your Credit Score
Whether due to circumstances beyond your control or some bad decisions, anyone can have trouble with their credit score at some point. However, if you make a conscious effort to improve your credit, you can see significant changes in a short amount of time. It's easy to fall into the trap of thinking that your credit situation is hopeless, but with dedication and hard work, you can overcome any obstacles. Building a good credit score requires discipline and focus on your spending habits. Begin by developing a budget and identifying areas where you can make changes that will reflect positively on your credit. This article provides valuable insights into credit and how it works. So, if you need guidance or assistance with credit repair, we invite you to contact our office at any time. Visit www.asapcreditrepairusa.com to learn more.
Here are the key takeaways:
- Every person can have credit problems at some point.
- Working hard and making an effort can show significant improvement in your score.
- A good credit score requires focus and discipline regarding spending habits.
- Developing a budget can help in identifying areas for improvement.
- Professional advice and support can be helpful in repairing credit.