Are you aware that there are 30 different levels of credit scores? Perhaps you've searched for the best credit score only to receive conflicting answers from various sources on the internet. This abundance of information can be puzzling and even misleading at times. As someone who's been in the financial literacy and credit repair industry for over fifteen years, my name is Joe Mahlow, and I aim to offer straightforward guidance on diverse topics, including credit scores. Over the years, I've successfully helped more than twenty thousand clients improve their credit scores, and I hope to share enough tips for you to do the same! So, without further ado, let's dive into it.
Contents:
Types of Credit Scores: Understanding FICO and Vantage Models
Understanding a Good Credit Score
Credit Scores Needed to Qualify for Different Mortgage Loans
Determining the Credit Score Range for a Car Loan
Tips for Improving Your Credit Score
Insights from Joe on Credit Improvement
Types of Credit Scores: Understanding FICO and Vantage Models
Credit scores are crucial in determining whether you qualify for a loan and how much interest you'll pay. There are two main credit scoring models that you should be familiar with: the FICO model and the Vantage model. Understanding the differences in how they calculate your credit score is essential.
FICO Credit Score
The FICO model is the most popular and extensively used credit scoring model today, offering eight different FICO models from FICO 2 to FICO 10. Depending on your credit report, you'll usually get a different credit score, which can be confusing. Every time you apply for credit, a lender will pull a different FICO report. For example, when applying for a mortgage, the lender will probably pull your FICO 5 credit report, whereas a credit card application may prompt a lender to pull your FICO 8 credit report.
Why so many FICO scores?
The reason for multiple FICO scores is that each credit report considers different factors to weigh a score. For instance, the FICO 5 mortgage report heavily weighs on previous mortgage history, thereby impacting your score. Similarly, credit card companies primarily rely on the FICO 8 report, wherein your past credit card history will impact this score the most. Auto lenders usually pull the FICO-2 report, and your scores will weigh heavily on your previous auto history.
To learn more about your different FICO scores, create an account on myfico.com.
Vantage Credit Score
Equifax, Experian, and TransUnion developed Vantage Score to challenge FICO. Vantage is a new scoring model in contrast to the FICO model, but it's gaining popularity in some sectors, with credit monitoring websites using it to offer free credit reports. Although FICO dominates the lending sector, Vantage is popular among personal loan and auto lenders.
Is the Vantage Score accurate?
The Vantage Score is accurate, but it's not widely used for lending purposes. It may not be accurate when it comes to your actual lending score since FICO is the most popular scoring model today. However, it provides a good 'general idea’ of your FICO score. If you don't know your FICO score and want an estimate, use your Vantage score.
In conclusion, credit scores can be essential in obtaining loans. While FICO currently dominates the market, Vantage is a solid alternative. The credit reporting agencies are significant data collection agencies, and with the data, they can provide the best scoring data available today.
Understanding a Good Credit Score
Both FICO and Vantage credit scores range from 350 to 850, with the lowest being 350 and the highest being 850. To achieve a higher credit score, it's vital to know where you stand in your credit score journey. Here are some critical score thresholds to keep in mind:
1. 620 or below
A credit score below 620 is considered bad credit and is typically accompanied by a problematic credit history or high-balance credit accounts. To increase your credit scores, aim to make timely payments and have ten active revolving credit accounts. You can use a secured credit card such as the Credit Builder Card or OpenSky Credit Card to build your credit. Once you achieve a credit score of 620 or above, you can qualify for an FHA home mortgage.
2. 640-680
A credit score in this range is considered a fair or good credit score. However, it might indicate some derogatory marks or accounts on your credit report, high balances on your credit cards, or newly opened accounts that can temporarily decrease your scores. Don't worry! Keep up the good work, pay your accounts on time, and pay down your revolving credit accounts.
3. 740+
A credit score over 740 is "super-prime" and will get you the best interest rates on loans. Only 20% of the US population scores over 740, so congratulations on achieving such a score! Continue paying your accounts on time and keeping your revolving credit card accounts up to date to sustain your excellent credit score.
Credit Scores Needed to Qualify for Different Mortgage Loans
The credit score requirements when applying for a mortgage loan depend on the loan type. Federal regulation and government backing have made the criteria and guidelines for most mortgage loans alike or in some cases varying. Typically, there are three types of mortgage loans: conventional loans, FHA loans, and VA loans. Here are the credit score requirements and other important details for each type:
1. Conventional Loans
Conventional loans are the most popular savings loan option except for the VA loan. They do not impose private mortgage insurance (PMI) that can lead to extra costs and a higher downpayment or monthly payment. The minimum credit score requirement for conventional mortgage loans is around 640, with a debt-to-debt ratio of not more than 43%. These loans also usually have lower downpayment requirements and better interest rates than other mortgage loans.
2. FHA Loan
The FHA mortgage loan is for individuals with lower credit scores, typically between 580 and 619. Remember that different lenders have varying loan programs, so shop around to find the best financial option for you. FHA loans mandate for PMI retention for at least 11 years, so budget wisely. Moreover, with higher debt-to-income limits of up to 50%, lower-income individuals might purchase more homes than with a conventional loan. The downpayment requirement is as low as 3.5% of the purchase, enabling you to purchase a mortgage with less money out of pocket than with a conventional loan, but you will typically have a higher interest rate.
3. VA Loan
Although there is no fixed credit score requirement with the VA Loan, you'll have to watch out for previous defaulted loans and government-owed past-due debts when pre-qualifying. It requires that you must have served in the United States military for over 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a spouse who passed away during active duty. The VA loan offers the best available interest rates and does not usually need a down payment, and it is viewed as an ideal way to give back to our veterans perfectly.
Determining the Credit Score Range for a Car Loan
When it comes to buying a car, having a good credit history is more critical than your credit score. While a high credit score is essential, it is less significant in deciding the interest rate you qualify for. When you apply for a car loan, lenders scrutinize your credit history to assess the associated risk. Thus, irrespective of your credit score, previous and current credit records play a crucial role in whether you get approved for a loan. Factors such as late auto loan payments or a repossession can make it challenging to secure approval, while some special finance and subprime lenders will approve almost anyone for a car loan but at higher interest rates and with added criteria. Moreover, choosing to pay an increased down payment or extra dealership fees can increase your chances of getting approved. Lastly, having a down payment or equity can significantly increase your negotiating power when shopping on credit.
Ideal Credit Score Range for Purchasing a Car
There is no cut-and-dry credit score that guarantees approval, as several underlying factors can influence the outcome. A credit score of over 680 is usually ideal for buying a new car. Going below this threshold can attract higher interest rates, reflecting the level of risk you pose to lenders. For instance, loan interest rates for someone with a credit score of 720 or above are different from those of someone with a credit score of 580. Data shows that someone with a higher credit score typically pays less interest. A comparison between various credit scores and average interest loan rates indicates that the lower the credit score, the higher the interest rate.
Tips for Improving Your Credit Score
Improving your credit score can take time and effort, but there are a few things that you can do right now. Practicing patience is important because building a good credit score is not an overnight process. In fact, impatience can lead to irrational and harmful credit decision-making.
Here are three ways to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Consider opening a secured credit card, such as those offered by Open Sky or Credit Builder Card. These cards focus more on your ability to pay on time rather than your credit score. Revolving credit makes up a significant portion of your overall credit score. Use your new cards for small purchases like groceries and gas, and be sure to pay off the balance on time.
2. Raise Your Limits
If you have active revolving credit card accounts, you may be able to request a credit limit increase. Doing so can increase your overall credit limits and lower your credit utilization percentage, which can, in turn, help your credit score. Each credit card company has different processes for requesting a limit increase, so it's best to call and ask how to proceed.
3. Pay Down Your Balances
Keeping your credit card balance low and close to zero is critical, as high balances can hurt your credit score. Try to pay more than the minimum payment each month, and aim to leave a small balance of $1-$5 on your credit card. If you have high balances, consider making a plan to pay them down with a percentage of your paycheck each month.
Insights from Joe on Credit Improvement
Undeniably, poor credit is a common issue that many people have experienced. However, by putting in the necessary effort and commitment, it is possible to make significant strides in improving your credit score. Sadly, some individuals with bad credit resign to living with the unwanted consequences, assuming that a good credit score is unattainable. Conversely, building a praiseworthy credit score takes hard work, with those who prioritize their credit and adopt good financial habits being the ultimate beneficiaries. To kick-start the process, start by creating a budget and addressing negative spending behaviors that impact your credit score negatively. This expert article aims to help you build a better comprehension of credit. If you require assistance with credit improvement or repair, don't hesitate to contact our office at www.asapcreditrepairusa.com.