It might come as a surprise to learn that there are actually 30 different levels of credit scores. Many people are unaware of this fact and, in their quest to find the best credit score, are often met with mixed and confusing information online. It can be easy to get lost down a rabbit hole of misleading advice. My name is Joe Mahlow and I have been working in financial literacy and credit repair for over 15 years. My aim is to provide you with straightforward advice on various topics, one of which is credit scores. Through my experience, I have successfully helped more than 20,000 clients improve their credit scores. In this article today, I hope to provide you with useful information that will empower you to do the same. Let's dive right in!
Contents:
Understanding Credit Scores: FICO and Vantage Models
Understanding Credit Scores
Determining an Ideal Credit Score for Mortgage Loan Qualification
Credit Score and Car Buying
Tips for Raising Your Credit Score
Insights from Joe on Improving Your Credit Score
Understanding Credit Scores: FICO and Vantage Models
Credit scores are essential in today’s society when borrowing money. Let’s take a closer look at the two different types of credit scores that are used, the FICO model, and the Vantage model. These different scoring models vary in how they calculate your credit score.
FICO Credit Score
FICO is the most commonly used credit scoring model and comes in eight different models, from FICO 2 to FICO 10. The reason for the various FICO models is that each report has a different “weight†that impacts the score. When applying for credit, lenders may pull different FICO reports depending on the type of loan you are seeking. For example, FICO 5 mortgage reports primarily consider previous mortgage history, whereas FICO 8 credit report mainly looks at credit card history. Auto lenders usually pull Fico-2 reports, where the score relies heavily on previous auto history. Each score represents a different “weight†of the credit report, which is why there are multiple FICO models. You can view all your different credit scores at www.myfico.com by signing up.
Vantage Credit Score
The Vantage Score model was developed by the three significant credit reporting agencies (Equifax, Experian, and TransUnion) and is a newer model than FICO. Vantage is gaining popularity in some sectors such as personal loans and auto lending, although it is not widely used for lending purposes. The Vantage Score provides a “general idea†of an individual's FICO score because it is hard to know your FICO score without receiving a credit report.
Accuracy of Vantage Score
The question of whether the Vantage Score is accurate or not depends on the context. Since it is not widely used for lending purposes, it will not be accurate when it comes to your actual lending score. However, I advise using your Vantage Score to provide you with the best idea of your overall scores as the Vantage Score follows today’s standards better than FICO. In fact, I believe that in the next 5-10 years, lenders will begin using the Vantage scoring model for lending as it provides better-scoring data that follows the most current standards.
Guide to Understanding Credit Scores
Both FICO and Vantage scoring models use a range from 350 to 850. The highest score of 850 indicates a very good credit score, whereas the lowest score of 350 is the opposite. To achieve the best credit score, it's crucial to be aware of your progress at all times. Here are some significant thresholds that can provide you with a clear understanding of your credit score:
1. 620 or below
Credit scores lower than 620 are usually regarded as bad credit. While such scores may imply an adverse credit history or high-balance credit card accounts, they can be improved by making timely payments and having ten active revolving credit accounts. Credit Builder Card and OpenSky Credit Card are recommended to improve your credit score. When you attain the 620 credit score range, it becomes easier to qualify for an FHA home mortgage.
2. 640-680
A credit score within this range is termed a fair score for good credit. It means you have established credit but may still have derogatory marks, accounts, or high credit card balances. Additionally, newly opened accounts can cause a temporary dip in your score. Nonetheless, scores can quickly return to their normal level.
3. 740+
Credit scores over 740 are considered "super-prime" and will provide you with the best interest rates for most loans. A score above 740 inches you closer to the top 20% of Americans with good credit scores. Constantly paying your accounts on time, and keeping balances on revolving credit card accounts paid, will keep your score in excellent shape. Congratulations if you have achieved this score because you are on the right track.
Determining an Ideal Credit Score for Mortgage Loan Qualification
The credit score requirement for your mortgage loan qualification will be based on the loan type you are applying for. Depending on the type of loan, requirements and guidelines may vary. The most common types of mortgage loans are conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans are the most commonly used loans with numerous features, including low downpayment requirements and favorable interest rates. With this loan option, you don't have to pay PMI, and the credit score requirement is typically 640 or higher, with a maximum debt-to-debt ratio of 43%.
2. FHA Loans
FHA loans are designed for individuals with lower credit scores, ranging from 580 to 619. Although FHA loans have higher interest rates, you can secure a mortgage with lower out-of-pocket costs. These loans require PMI for at least 11 years, with a debt-to-income limit of up to 50%.
3. VA Loans
The VA loan does not have a credit score requirement, but your eligibility will depend on previous defaulted loans and any past-due government debts. To qualify, you must have served a minimum of 181 days in the US Military, 90 consecutive days during wartime, or six years in the National Guard. If your spouse was in the military and passed during active duty, you are also eligible. The VA loan has the lowest interest rates, and you may not have to provide a down payment, making it an excellent option for veterans.
Credit Score and Car Buying
When you want to buy a car, having a good credit history is more important than just having a good credit score. Although a high credit score is essential, it plays a smaller role than your credit history in determining the interest rate you qualify for. When applying for an auto loan, lenders check your previous and current credit records to gauge the risk involved in extending credit.
A person who has had late payments on a previous or current auto loan or a repossession will have a tougher time getting approved for a loan than someone with a clean credit record. But, even if you have bad credit, some car dealerships can help, but they will impose specific conditions you must meet like a higher down payment and additional fees to help mitigate the risk of default, which they will have to pay. When buying a vehicle on credit, it's best to have equity or a down payment to provide you with the most leverage.
There is no precise credit score that will guarantee approval since many factors are involved, but having a credit score above 680 is ideal, and anything below this score can increase the interest rate you are charged by your private lender. An average person with a credit score of 720 or above will pay $5,500 in interest on an auto loan, but a person with a score of 580 or below will pay $15,300 in interest for the same loan. So the higher your credit score, the less interest you'll pay, leading to better overall credit.
Tips for Raising Your Credit Score
Improving your credit score requires patience and effort, but there are many things you can do right now to help. Follow these steps to help increase your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is an excellent option to help build credit scores quickly, especially for those with limited credit or looking to rebuild their credit. Consider opening a secured credit card, such as Open Sky or Credit Builder Card, which focus on your ability to pay the card on time and require no bankruptcy history in the last two years or a current income. Remember to limit the use of the card to small purchases like gas or groceries and pay your balance on time and keep it at $5-10 each time you make a payment.
2. Raise your limits:
Request a credit limit increase for your credit cards to help lower your credit utilization percentage, which can hurt your credit scores if your credit card balances exceed 30% of your overall limits. Each credit card company has its own process, but typically, you will need good payment history and income verification.
3. Pay down your balances:
Keep your balance low and close to zero, and leave a $1-5 balance on your credit cards each month when paying your bills. If you have high balances, create a game plan to pay them down gradually. Limit your credit card usage to small purchases, and avoid running up the balance again.
Insights from Joe on Improving Your Credit Score
Let's face it, many of us have experienced less than ideal credit situations. However, it is possible to improve your credit score quickly if you take a serious approach to fixing your credit and commit to putting in the necessary time and effort. Don't fall into the trap of believing that bad credit is a life sentence. Developing a great credit score takes hard work, but it's achievable for those who prioritize their credit and make good financial decisions. Start by creating a budget and identifying any harmful spending habits you may have and begin to correct them. Small changes in your spending habits can yield big improvements in your credit score. If you are struggling with your credit score and need assistance with credit repair, visit my website at www.asapcreditrepairusa.com for guidance.