It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Despite this, many individuals are likely to find conflicting information when they try to discover the best credit score available to them on Google. This can confusing, and may even lead some people down a false path. My name is Joe Mahlow, and I've dedicated over fifteen years to the financial literacy and credit repair industry. I'm committed to offering genuine advice in a range of areas, including credit scores. Over the years, I've managed to help more than 20,000 clients significantly improve their credit scores, and I'm here to do the same for you. So, let's get started.
Contents:
Understanding Different Types of Credit Scores
Understanding Credit Scores: What Makes a Good Credit Score?
Determining the Ideal Credit Score for Buying a Home
Ideal Credit Score Range for Buying a Car
Tips for Improving Your Credit Score
Insights from Joe on Credit Improvement
Understanding Different Types of Credit Scores
When it comes to credit scores, two models stand out: the FICO model and the Vantage model. Both of these models are essential to understand the differences in how they calculate your credit score.
FICO Credit Score
The FICO scoring model is the most popular and widely used. However, it has eight different models, from FICO 2 to FICO 10, which can lead to confusion. Different lenders pull different FICO reports based on the type of credit you are applying for. For example, a mortgage lender will most likely pull a FICO 5 report, while a credit card issuer will most likely pull a FICO 8 report.
Why So Many FICO Scores?
Each credit report has a different importance or "weight," meaning that each critical factor has a more significant impact on your score. For example, a FICO 5 mortgage report weighs heavily on previous mortgage history, while a FICO 8 credit report weighs more on credit card history. The different FICO scoring models cater to different lenders and their needs.
To see all your FICO scores, visit www.myfico.com and create an account.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO. Vantage is a new scoring model compared to FICO, which has been used since the seventies. While FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans, and auto lending.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, it is not widely used for lending purposes, making it less accurate when it comes to your actual lending score. Instead, it can provide you with a "general idea" of your FICO score, which can help you understand your overall scores. With Vantage's ability to provide scoring models based on modern standards, it is possible that more lenders may adopt the model in the future.
Overall, credit reporting agencies hold vast amounts of data, which positions them to provide the best scoring data. Remember: understanding the different types of credit scores can help you know where you stand and how to improve it.
Understanding Credit Scores: What Makes a Good Credit Score?
Credit scores are categorized as either FICO or Vantage models, and the scores for both models range from 350 to 850. The worst credit score you can have is 350, while the best possible score is 850. It is important to understand where you stand along your journey toward building up your scores, so to help you set your goals, below are some score thresholds you should be aware of:
620 or below:
This is considered bad credit. Having a score in this range means you most likely have some adverse credit history - possibly high-balance credit card accounts or no credit cards at all. Improving your credit score is best accomplished through timely payments and having ten active revolving credit accounts open. Secured credit cards like Credit Builder Card or OpenSky Credit Card can also help build your credit. Once your credit score reaches 620, you can start qualifying for an FHA home mortgage.
640-680:
This credit score range is considered fair for good credit. Having scored in this range usually means you have established credit, but you may have some derogatory marks or accounts reporting negatively on your credit, and you may have high balances on your credit cards that need to be paid down. Newly opened accounts can also temporarily lower scores. If you find yourself in this range, keep calm and know this is just a temporary drop.
740+:
Any credit score over 740 is considered "super-prime" and will often provide the best interest rates for most loans. If you have a score over 740, you are considered part of the 20% of the US population with this score, congratulations! Keep up the great work by always paying your accounts on time and keeping your revolving credit paid, and your strong credit score will continue to serve you well.
Determining the Ideal Credit Score for Buying a Home
When it comes to buying a home, the required credit score depends on the type of mortgage loan you want to qualify for. Similarities and differences in requirements and guidelines will often be observed in most mortgage loans because of federal regulation and government backup. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most sought-after type and usually the best option for savings outside VA loans. Conventional loans do not have any private mortgage insurance (PMI) requirements, which may otherwise increase your downpayment or monthly payment. PMI safeguards the lender if you stop payment on your loan. Conventional loans have lower downpayment requirements and better interest rates compared to other loans in the mortgage market. A typical credit score of 640 and a debt-to-income ratio of not more than 43% are required for conventional loans.
2. FHA Loan
FHA loans are suitable for lower credit scores, usually between 580 and 619. Given the differences in loan programs, look around for different lenders to secure the best financial option within the credit score limits. You are required to have PMI on your FHA loan repayment for at least 11 years, regardless of other expenses on the mortgage, making it a critical expense to consider, especially if operating on a budget. It has a higher debt-to-income limit of up to 50%, ensuring you can purchase more homes than conventional loans, mainly if your income is lower. Furthermore, the downpayment requirements for FHA loans are as little as 3.5%, allowing you to get a mortgage with less out-of-pocket expenses than a conventional loan, but the interest rates are often higher.
3. VA Loan
Technically, there is no credit score requirement for VA loans, but pre-qualification involves checking for previous defaulted loans and any unsettled debts owed to the government. To be eligible, you must have worked for the US military for at least 181 days, served 90 consecutive days during wartime, or served six years with the National Guard. Alternatively, your spouse must have been in the military and died while on active duty. VA loans usually have the best interest rates, and they rarely require any down payment. It is an excellent way to give back to our veterans and show appreciation for their service.
Ideal Credit Score Range for Buying a Car
When it comes to buying a car, your credit score is not the only factor that determines your qualification for a loan. Instead, your credit history plays a crucial role in deciding if you are eligible for a car loan. Even though a higher credit score is beneficial, it isn't the only key factor for determining the interest rate you qualify for.
To better understand it, lenders scrutinize your previous and current credit histories when you apply for a car loan. If you have credit issues, such as being late on previous or current auto loans or having a repossession, it becomes challenging to get approved for a loan. However, even with poor credit, some lenders still qualify applicants for loans, albeit under strict conditions, such as a higher down payment or additional dealership fees. Dealerships, in turn, charge more fees on such loans to mitigate the risk of default. If you have bad credit, you may have first-hand experience in this scenario, where dealerships pick the vehicle you'll be approved for since there's a higher markup on the car to cover the added fee. Lastly, when purchasing a car on credit, having equity or a down payment gives you the most bargaining power.
Credit Score Range for a New Car
It's challenging to determine the exact credit score that guarantees loan approval since several aspects come into play, as discussed above. Nonetheless, a credit score of over 680 is ideal. Should your credit score fall below this range, you'll be charged a higher interest rate since you pose a higher risk to the lender.
Here's an example of how different credit scores affect loan interest rates:
- Someone with a credit score of 720 or higher will pay, on average, $5,500 in interest on a loan.
- Someone with a credit score of 680 or higher will pay, on average, $6,600 in interest on a loan.
- Someone with a credit score of 650 or higher will pay, on average, $8,100 in interest on a loan.
- Someone with a credit score of 615 or higher will pay, on average, $10,200 in interest on a loan.
- Someone with a credit score of 580 or higher will pay, on average, $13,900 in interest on a loan.
- Someone with a credit score of less than 580 will pay, on average, $15,300 in interest on a loan.
From the above data, it's apparent that a higher credit score reduces your interest rates and improves your overall credit rating.
Tips for Improving Your Credit Score
Improving your credit score requires effort and patience, as it takes time to build a good credit history. Rushing the process can lead to bad decisions that further worsen your credit problems. Here are three things you can do to increase your credit score:
Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is an excellent option to increase your credit score, as it makes up 30-35% of your overall credit score. Start with a secured credit card like Open Sky or Credit Builder Card, which focuses more on your ability to pay on time.
Raise your credit limits:
Request a credit limit increase for your active revolving credit card accounts to increase your overall credit limits and lower your credit utilization percentage. Most credit card companies allow you to do this online or by calling in.
Pay down your balances:
Keep your balance low and close to zero. Use your credit cards for small purchases and leave about $1-5 balance on them when paying your bill each month. If you have high balances, make a plan to pay them down with a percentage of your paycheck each month and ultimately stop using them.
Remember, your credit card spending habits play a massive role in your credit score, so it's important to limit the use of your credit cards and pay them on time.
Insights from Joe on Credit Improvement
Undeniably, many of us have experienced less than satisfactory credit scores. However, by taking an earnest approach to improving credit and investing time and effort, we can expect significant progress in our credit scores within a short time span. Often, those with unpleasant credit histories get caught in a cycle of poor credit throughout their existence and deem it unattainable to have good credit again. Building an outstanding credit score requires significant effort, and those who prioritize their credit and monitor their expenses diligently will emerge successful. Commence your credit reconstruction journey by creating a budget and rectifying any reckless spending habits, which will positively affect your credit score. This article facilitates a better understanding of credit. To seek guidance and assistance with credit score management or to consider credit repair, contact my office immediately at www.asapcreditrepairusa.com.