It may come as a surprise, but your credit score can actually fall into any of 30 different levels. This is a fact that many individuals are unaware of. When searching for the best credit score, Google can provide a diverse range of responses, leading to confusion and even false information. As a financial literacy and credit repair professional for the past 15 years, my name is Joe Mahlow and my aim is to provide you with trustworthy and straightforward advice, starting with an explanation of credit scores. Over the course of my career, I have successfully assisted more than 20,000 clients in improving their credit scores. It is my hope that the insights I provide will prove to be valuable to you as well. So, let's dive into the topic at hand.
Contents:
Different Credit Scoring Models: Understanding FICO and Vantage
Understanding a Good Credit Score
What Credit Score Do You Need to Buy a House?
Determining the Appropriate Credit Score for Purchasing a Vehicle
Tips for Improving Your Credit Score
Joe's Insights on Improving Your Credit Score
Different Credit Scoring Models: Understanding FICO and Vantage
When it comes to credit scores, two main scoring models are used: the FICO model and the Vantage model. It is crucial to understand the differences between the two models, especially how they calculate credit scores.
FICO Credit Score
FICO is the most widely used credit scoring model with eight different FICO models from FICO 2 to FICO 10. Each model looks at your credit report differently, so depending on the lender you use; you will get a different credit score. For example, a mortgage lender will most likely pull your FICO 5 credit report, while a credit card company primarily uses the FICO 8 report.
So why are there so many FICO scores? The weight of the factors varies for each credit report. For example, a FICO 5 mortgage report weighs heavily on previous mortgage history, while a FICO 8 credit card report weighs heavily on your credit card history.
To see all your FICO scores, create an account at www.myfico.com.
Vantage Credit Score
The Vantage Score was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. While FICO has been widely used since the seventies, Vantage is a newer model. Although 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. Thus, it might not provide an accurate lending score. However, it can provide you with a general idea of your FICO score since it is hard to obtain a FICO score.
In conclusion, credit reporting agencies have access to lots of data, and the more scoring models they have, the better it is for consumers. In the next 5-10 years, Vantage is likely to be widely used by lenders as it provides the best scoring models based on today's standards.
Understanding a Good Credit Score
Credit scores are determined by the FICO and Vantage scoring models, which range from 350 to 850. Achieving the highest scores should be a goal, and it's important to know where you fall among these ranges. Check out these vital score thresholds:
1. 620 or below:
This is a bad credit score and may suggest a history of adverse credit or high-balance credit card accounts. It's best to aim for timely payments and have at least ten active revolving credit accounts open. Secured credit cards like Credit Builder or OpenSky can be used to help build your score. Reaching a 620 credit score will allow you to qualify for an FHA home mortgage.
2. 640-680:
This is considered a fair score and usually means you have established credit, but there may be some derogatory marks or accounts on your credit. Recently opened accounts can temporarily drop scores. If you're in this range, don't panic; your score will recover.
3. 740+:
A credit score over 740 is considered "super-prime" and will give you the best interest rates for most loans. Having a score over 740 puts you in the top 20% of the US population. Maintain good habits such as paying your accounts on time and keeping your revolving credit card accounts paid in order to keep your score in top shape. Congratulations on your achievement!
What Credit Score Do You Need to Buy a House?
The minimum required credit score to obtain a mortgage loan depends on the type of loan you're looking for. There are three common loan options: conventional loans, FHA loans, and VA loans. Despite similar federal regulations and government backing, each loan has its own requirements and guidelines.
Conventional Loans
Conventional loans, often considered the best "savings" loans outside of VA loans, have lower interest rates and down payment requirements. Borrowers are not required to maintain private mortgage insurance (PMI), which raises costs for down payments or monthly payments, and the typical credit score requirement is 640, with a debt-to-debt ratio no higher than 43%.
FHA Loans
FHA loans are perfect when searching for lower credit score loans, typically falling between 580 and 619. PMI must be maintained for a minimum of 11 years, and debt-to-income limits can be as high as 50%. Down payment requirements for FHA loans are lower because it can be as low as 3.5% of the purchase price. However, the interest rates can be significantly higher than those of conventional loans.
VA Loans
Although there is no minimum credit score requirement for a VA loan, pre-qualification by a military veteran or spouse requires investigating previous defaulted loans and any government-owed, past-due debts. 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 must have lost his or her life during active duty. As a perfect tribute to American veterans, VA loans offer attractive interest rates with no down payment requirement.
Determining the Appropriate Credit Score for Purchasing a Vehicle
When purchasing a vehicle, your credit history is more important than your credit score in determining your eligibility for a loan. Though a good credit score is essential, its impact on determining the interest rate you qualify for is minimal. Therefore, the lender will review your previous and current credit histories to evaluate the risk in extending credit. If you have had issues with previous loans or vehicle repossessions, getting approval for a loan might become more challenging than if you hadn't. Even with a poor credit history, special finance lenders might still qualify you for a car loan, but they'll set specific criteria that you must meet, such as a higher down payment and additional fees to the dealership. Dealerships may select a vehicle for approval that has higher profit margins to cover the fee and make a markup on the purchase price. Ultimately, having equity or a down payment will give you the most advantage when buying a car on credit.
Credit Score Parameters for a New Vehicle
Eligibility for a loan does not depend on a particular credit score due to various factors at play, but a favorable credit score would be over 680. If your credit score is below this limit, you become a bigger risk to the lender, increasing your interest rates, which could lead to a higher cost of financing. The following table provides an example of how your credit score may impact your payment in interests:
For individuals with a credit score of 720 or above, the average interest payment on a loan is $5,500.
For individuals with a credit score of 680 and above, the average interest payment on a loan is $6,600.
For individuals with a credit score of 650 and above, the average interest payment on a loan is $8,100.
For individuals with a credit score of 615 and above, the average interest payment on a loan is $10,200.
For individuals with a credit score of 580 and above, the average interest payment on a loan is $13,900.
For individuals with a credit score of 580 or above, the average interest payment on a loan is $15,300.
By analyzing this data, it is apparent that the higher your credit score, the less interest you will pay, which impacts your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score is a process that takes time and effort. Being patient and making rational decisions with your credit is crucial in building a good credit score. Here are some steps you can take to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is one of the best options for building credit. A secured credit card like Open Sky or Credit Builder Card can be a good starting point for those with limited credit or seeking to rebuild their credit. Revolving credit makes up 30-35% of your overall credit score, and regularly using and paying off these accounts can quickly improve your credit score.
2. Raise your limits:
Requesting a credit limit increase online or by phone can increase your overall credit limits and lower your credit utilization percentage, which is a factor that can negatively affect your credit score. Most credit card companies want to see a good payment history before agreeing to increase your limit.
3. Pay down your balances:
Keeping your balances low and close to zero is important for your credit score. Using credit cards for small purchases and leaving a small balance each month can help, but it's crucial to pay the balance in full and avoid carrying a high balance.
Remember to use your credit cards responsibly and make timely payments, and your credit score will gradually improve over time.
Joe's Insights on Improving Your Credit Score
We have all experienced the struggle of having poor credit, but it's important to take it seriously and invest the time and effort needed to improve it. Sadly, most people with bad credit believe that they will never be able to have good credit again. However, by putting in the necessary work and focusing on your credit and spending habits, you can make impressive changes to your credit score in a short amount of time. Developing a strong credit score takes determination, but it's achievable if you make it a priority. Begin by creating a budget and addressing any negative spending habits that you may have; this will positively affect your credit score. If you need further guidance on credit repair or improving your credit score, visit www.asapcreditrepairusa.com to contact our office.