It's astonishing to know that there are 30 different levels of credit scores. However, many people are unaware of this fact and approach Google in search of the best credit score. Unfortunately, the search results are usually filled with different answers, which can often cause confusion and lead you astray. As a financial literacy and credit repair expert, Joe Mahlow has spent over fifteen years in this field. He aims to provide authentic advice on various topics, including credit scores. Joe has helped more than twenty thousand clients improve their credit scores, and he hopes to share enough information to help you do the same. So without any further delay, let's dive in!
Contents:
What are the Different Credit Scoring Models?
What Qualifies as a Good Credit Score
Determining the Ideal Credit Score for Homeownership
Determining the Credit Score Range for Buying a Car
Tips for Increasing Your Credit Score
Tips from Joe: How to Improve Your Credit Score
What are the Different Credit Scoring Models?
Understanding the differences between credit scoring models is crucial for anyone who wants to improve their credit score. There are two primary types of credit scoring models, which are the FICO model and the Vantage model. It's important to understand how each of these models works, as they have different methods for calculating your credit score. This article aims to describe both models, their differences, and how they may affect your credit rating.
The FICO Credit Score Model
FICO is the most well-known and widely used credit scoring model, with eight different FICO scores ranging from FICO 2 to FICO 10. Depending on the type of lender you use, they will pull a different FICO report. For example, if you apply for a home mortgage, the lender will most likely use your FICO 5 report, whereas if you apply for a credit card, they would most likely use your FICO 8 report. Each FICO model has a different "weight," which means that critical factors will have a more significant impact on your credit score. For instance, a FICO 5 mortgage report will weigh heavily on previous mortgage history.
The Vantage Credit Score Model
Vantage is a newer scoring model developed by the three major credit reporting agencies, including Equifax, Experian, and TransUnion. It's designed to compete with the FICO scoring model, which has been used since the seventies. Although Vantage is gaining popularity in some sectors like personal loans and auto lending, FICO currently dominates the lending sector. The Vantage Score is accurate, but it's not widely used for lending purposes. Thus, it may not be completely accurate when it comes to your actual lending score. You can use your Vantage score to get a general idea of your FICO score.
Why So Many Credit Scores?
Each lender uses a particular credit score based on the type of credit you are applying for. Lenders will use different score models because they apply different weights to various factors. They pull the score that is most relevant to their needs. When you want to get a better visual representation of your different FICO scores, you can visit www.myfico.com and sign up for an account to see all your different credit scores.
Conclusion
Credit reporting agencies are data collection agencies that offer authentic and crucial information to lenders and other credit issuers. Understanding the differences between FICO and Vantage scoring models can help you track your credit scores, enhance your lending prospects, and improve your overall credit rating.
What Qualifies as a Good Credit Score
Credit scores produced by the FICO and Vantage models both range between 350 and 850. 850 is the best score you can have, while 350 is the worst. It's crucial to track your credit all the time during your credit-building process to understand where you stand on your journey towards earning the highest scores. Here are some critical score thresholds to keep in mind:
1. 620 or below:
This is considered bad credit. If you have a credit score below this threshold, it probably means you have an unfavorable credit history, high-balance credit card accounts, or no credit cards at all. To improve your scores, pay your bills on time and keep ten active revolving credit accounts open. Consider using secured credit cards like Credit Builder Card or OpenSky Credit Card to build your credit. You can start qualifying for an FHA home mortgage once you reach the 620 credit score range.
2. 640-680:
Credit scores in this range are considered fair for good credit. You probably have established credit but may have some derogatory marks or accounts on your credit or have high credit card balances that you’ll need to pay down. Opening a new account may also temporarily drop your scores.
3. 740+:
Any credit score over 740 is considered "super-prime." Having a credit score over 740 means that you are part of the 20% of the US population with this score. You will qualify for the best interest rates on most loans. Keep up the excellent work, pay your accounts on time, and keep your revolving credit card accounts paid.
Determining the Ideal Credit Score for Homeownership
To determine the credit score required for homeownership, consider the type of mortgage loan for which you hope to qualify. Although mortgage loans have similar federal regulations and government backing, each has varying requirements. The three most common mortgage types include: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are popular, and they are among the most affordable options apart from VA loans. These loans don't require private mortgage insurance (PMI), which can increase your downpayment or monthly payment. However, should you stop making payments, PMI protects the lender. Conventional loans often require a lower downpayment and have better interest rates than other loan options. You'll require a minimum credit score of 640 and a debt-to-debt ratio of no more than 43% to qualify for a conventional mortgage loan.
FHA Loan
FHA loan is designed for individuals with lower credit scores between 580 and 619. Since loan requirements vary, look for different lenders that offer the best financial options within your credit score range. Note that an FHA loan requires PMI for at least 11 years, which can increase your mortgage payment amount. This mortgage type typically has a debt-to-income ratio of 50%, allowing you to purchase more homes than with conventional loans if you have a lower income. You can purchase a home with a downpayment as low as 3.5% with an FHA loan, but the interest rate is typically higher.
VA Loan
Although there's no minimum credit score requirement needed to qualify for a VA loan, lenders consider your previous defaulted loans and government-owed past due debts during pre-qualification. You're eligible for VA loans if you served within the US military for at least 181 days, served 90 days consecutively during wartime, served 6 years with the National Guard, or your spouse passed away in the line of duty. VA loans offer the most favorable interest rates and usually don't require a down payment, making it an excellent option for veterans.
Determining the Credit Score Range for Buying a Car
When purchasing a vehicle, your credit history, not just your credit score, is a crucial factor in determining eligibility. While a higher credit score is important, it affects the interest rate to a lesser extent. Lenders assess your credit histories to determine the risks in extending credit, especially if there are tardiness or previous repossessions. Even with bad credit, certain lenders cater to anyone for a car loan, but with strict requirements such as higher down payments and additional fees. Dealerships pay a fee to ensure loan approval, prompting them to select more profitable vehicles for applicants with poor credit histories. In general, a credit score of 680 or higher is ideal, as a score lower than that can increase the interest rate and the consequent risk posed to lenders. The interest rate for car loans varies depending on a person's credit score, with a $5,500 interest rate for a credit score of 720 or higher, while someone with a 580 score or above pays an average of $13,900 to $15,300. This data emphasizes that higher credit scores lead to less interest rates and a better overall credit score. Lastly, to have the upper hand in buying a vehicle on credit, having a downpayment or equity is a plus.
Credit Score Range for a New Vehicle:
- It is the credit history, not the credit score, which is vital in determining eligibility for car loan approval.
- Bad credit lenders impose rigorous criteria, despite qualifying anyone for a car loan.
- A credit score of 680 and above is an ideal score for car loan approval while anything below increases interest rates.
- Interest rates vary between credit scores with a score of 720 or above paying an average interest rate of $5,500.
- A higher credit score leads to less interest rate and a better overall credit score.
- Having a downpayment or equity is an advantage.
Tips for Increasing Your Credit Score
To boost your credit score, it is essential to understand that it is a gradual process that requires patience and responsible financial decisions. Rushing the process often leads to poor decisions that can hurt your score further. Here are some actions you can take right away to improve your credit:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit can help you build your credit rating quickly, especially if you're starting with limited credit. Consider applying for a secured credit card, such as Open Sky, or Credit Builder Card, which assess your ability to pay the account on time instead of your credit score. Revolving credit can make up around 30-35% of your overall credit score.
2. Raise your Limits!
Request a credit limit increase for your existing credit cards to reduce your credit utilization percentage. Call your credit card company or request through your online portal, and be prepared to provide information such as your current income. A credit card company typically requires seven to fifteen months of excellent payment history before considering a credit limit increase.
3. Pay down your Balances!
Keeping your credit card balance low is crucial in maintaining or improving your credit score. Only use your credit cards for small purchases and leave a balance of around $1-$5 on your credit card when paying your bill. If you have high balances, develop a game plan with a percentage of your paycheck to pay it off. Avoid running the balance back up after making a payment. High-interest rates can result in most of your payments going towards interest and not the principal amount.
Remember, it takes time and effort to build a good credit score. Pursue responsible financial decisions, good payment habits, and use credit wisely, and you'll see your credit score gradually improve over time.
Tips from Joe: How to Improve Your Credit Score
Having a less than perfect credit score is a common problem that many of us face. If you want to see positive changes in your credit score, it is crucial to take your credit situation seriously and invest your time and effort in improving it. Don't fall into the trap of thinking that having bad credit is a lifelong problem. By prioritizing your credit, you can develop a great credit score that will enable you to access better financial opportunities. The key is to start working on yourself and your spending habits. Creating a budget and addressing any bad spending habits will directly impact your credit score. If you need guidance and assistance with credit repair, feel free to contact our office today at www.asapcreditrepairusa.com.
Here are some tips to improve your credit score:
1. Take your credit situation seriously.
2. Put in the time and effort to work on yourself and your credit.
3. Prioritize your credit and focus on your spending habits.
4. Create a budget and work towards fixing any bad spending habits.
5. Seek guidance and help with credit repair if needed.