It's a little-known fact that there are actually 30 different levels of credit scores. For those who search for the best credit score, the results can often be overwhelming. Information overload can lead to confusion and even misguidance. My name is Joe Mahlow, and with over 15 years of experience in the financial literacy and credit repair industry, my aim is to provide you with unfiltered advice across various topics - starting with credit scores. Having already worked with over twenty thousand clients, I believe I have the tools to help you transform your credit score as well. So without further ado, let's dive right in!
Contents:
Different Types of Credit Scores: Comparing FICO and Vantage Models
What Constitutes a Good Credit Score?
A Good Credit Score is Needed to Buy a House
Ideal Credit Score for Buying a Car
Tips to Increase Your Credit Score
Tips from Joe for Improving Your Credit Score
Different Types of Credit Scores: Comparing FICO and Vantage Models
Credit scores play a critical role in determining your eligibility for loans and interest rates. Among the different types of credit scores, the FICO model and the Vantage model are popular credit scoring models that you should become familiar with. It is crucial to understand the differences in how they calculate your credit score.
1. FICO Credit Score
The FICO credit scoring model, with eight different FICO score versions between FICO 2 and FICO 10, is widely used in the lending sector. However, you will usually get different scores depending on the credit report that lenders pull. For instance, a mortgage lender would most likely pull your Fico 5 credit report, whereas a credit card issuer would most likely pull your Fico 8 credit report.
Why so many FICO scores? It's because each credit report weighs the factors critical to lenders differently. For example, a FICO 5 mortgage report will weigh heavily on previous mortgage history, while a FICO 8 credit report will weigh heavily on previous credit card history.
If you want to see all your different FICO scores, go to www.myfico.com and sign up for an account.
2. Vantage Credit Score
Developed by Equifax, Experian, and TransUnion, the Vantage Score is a competitor to the FICO Score. Even though it has been in use since the seventies, the FICO model currently dominates the lending sector. Nonetheless, Vantage is gaining popularity in some sectors such as personal loans and auto lending.
Is the Vantage Score accurate? One must consider the context in which the Vantage Score is being used. While it is accurate, its accuracy can vary since it is not widely used for lending purposes. Therefore, the Vantage Score is a good "general idea" of your FICO score.
In the next 5-10 years, I believe lenders nationwide will widely use the Vantage scoring model because of its ability to provide the best scoring models based on today's standards. In contrast, I find the FICO scoring model outdated and not giving the user a clear representation of their credit scores. Credit reporting agencies are the most significant data collection agencies outside social media companies, and with the data they have, they possess the upper hand in providing the best scoring data, period.
What Constitutes a Good Credit Score?
A credit score is an essential aspect of your financial well-being. The FICO and Vantage models are used to calculate credit scores that typically range from 350 to 850. A score of 350 is considered the worst, while 850 is viewed as the best credit score. As you work towards raising your score, it's important to be aware of certain vital score thresholds.
Here are some guidelines to follow:
620 or below - this score is considered bad credit.
If you fall below this range, you probably have a history of adverse credit or hold high-balance credit card accounts, or may not hold any credit cards at all. To boost your score, make timely payments and have ten active revolving credit accounts open. For example, applying for Credit Builder Card or OpenSky Credit Card can help you improve your credit profile. When your score hits the 620 range, you can qualify for an FHA home mortgage.
640-680 - This is considered fair or good credit.
Your score falls in this range if you have established credit, but may have some negative marks or accounts on your credit profile. You may also have some high balances on your credit cards, which should be paid off. Newly opened accounts can also temporarily impact your credit score. Don't worry; scores tend to recover after a brief period.
740+ - this score is considered "super-prime" and offers the best interest rates for most loans.
If you have a score over 740, congratulations! You're part of the 20% of the US population with this score. Keep maintaining this score by paying your accounts on time and maintaining low balances on your revolving credit card accounts.
A Good Credit Score is Needed to Buy a House
To determine what credit score is needed to buy a house depends on the type of mortgage loan you are applying for. Federal regulations and government support ensure the similarity in mortgage loan requirements and guidelines. The three common types of mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans:
- The most popular loan option and typically the best savings loan outside of the VA loan.
- No need for private mortgage insurance (PMI) means fewer added costs, resulting in a lower down payment or monthly payment.
- Lower down payment and better interest rates compared to other mortgage loans.
- The typical credit score requirement for conventional loans is 640, and debt-to-debt ratio must not exceed 43%.
2. FHA Loans:
- Ideal for those with lower credit scores ranging from 580 to 619.
- Available at different lenders within credit score limits gives you the best financial option.
- Requires you to have PMI for eleven years, which is an added cost to the mortgage and should be considered.
- A higher debt-to-income limit of up to 50% allows you to purchase more homes than with a conventional loan if your income is low.
- Down payment requirements are as low as 3.5%, allowing you to get a mortgage with less money out of pocket. However, you will have a higher interest rate.
3. VA Loans:
- No specified credit score requirement, but pre-qualifying you involves scrutinizing recent defaulted loans and any government-owed past-due debts.
- Must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was in the military and died during active duty.
- The best interest rates are available and usually do not require a down payment, perfect for giving back to veterans.
Ideal Credit Score for Buying a Car
When it comes to purchasing a car, your credit history is vital in determining your eligibility, not just your credit score. While a good credit score is advantageous, it is not the only factor that influences the interest rate you receive. Your current and past credit histories are evaluated to determine the risks involved in granting credit, making late payments or missed payments on previous auto loans, or a repossession more problematic. However, bad credit or special finance lenders usually have lower criteria for approving car loans, often requiring a higher down payment and additional dealership fees to lessen the risk. If shopping at a dealership with bad credit, the chosen car may have an increased markup to cover the dealership fee. Lastly, a down payment or equity in a car may provide additional leverage while applying for a car loan on credit.
Credit Score Range for a New Car
There is no set credit score for approval, as several factors are taken into consideration. However, a credit score exceeding 680 is ideal, and anything lower than that can affect your interest rate, due to your perceived risk as the borrower. From the data below, a 720 credit score will pay an average of $5,500 in interest on a loan, while the same loan for a 580 credit score pays an average of $15,300 in interest.
Loan Interest Rates Based on Credit Score:
720 credit score and above:
$5,500 average loan interest
680 credit score and above:
$6,600 average loan interest
650 credit score and above:
$8,100 average loan interest
615 credit score and above:
$10,200 average loan interest
580 credit score and above:
$13,900 average loan interest
Below 580 credit score:
$15,300 average loan interest
In conclusion, having a higher credit score works to reduce the amount of interest paid on a loan, affecting your overall credit score positively.
Tips to Increase Your Credit Score
Building a good credit score takes time, and increasing it requires little effort. But without patience, you may make irrational decisions and worsen your problems. Here are some things you can do:
1. Open 3-5 Revolving Credit accounts to maximize your credit scores.
Revolving credit makes up 30-35% of your overall credit score, making it the best option to help build credit scores quickly. Start with a secured credit card that doesn't focus on your credit score and pay your balance on time. Limit the use to small purchases like gas or simple groceries.
2. Request a credit limit increase for your credit cards to help lower your utilization percentage.
Call your credit card company and request a "Credit Limit Increase". They may want to see 7-15 months of excellent payment history before they agree to do this.
3. Pay down your balances by keeping them low and close to zero.
You can use your credit card for small purchases, but leave about a $1-5 balance on it when it comes to paying your bill each month. If you have high balances, make a game plan to take a percentage of your paycheck each month to pay it down and ultimately stop using your credit card altogether. Remember to limit your credit card usage since it plays a significant role in your overall credit score.
Tips from Joe for Improving Your Credit Score
We've all been through times when our credit rating is anything but great. If you're willing to be serious about your current credit situation, and you have the determination to work on yourself and your credit, you'll notice a significant improvement in your credit score before long. Many people with poor credit end up stuck in a cycle where they continue to face credit-related problems for the rest of their lives, often feeling like their credit situation is unsalvageable. It takes significant effort to achieve an outstanding credit score, and those who are able to prioritize their credit standing and concentrate on their spending patterns are the ones who come out on top. You should begin by establishing a budget and making a concerted effort to fix any negative spending habits; this will have a direct and positive impact on your credit score. This article provides valuable insight into the world of credit, and if you need guidance on improving your credit score or require credit repair services, don't hesitate to contact my office via www.asapcreditrepairusa.com.
Joe advises taking your credit situation seriously and working hard on improving it.
Prioritize your credit standing and focus on your spending patterns, and you'll see significant improvement.
Developing an outstanding credit score takes a lot of work, but you can achieve it with the right strategy.
Start with creating a budget and working on eliminating negative spending habits.
This article offers useful information on understanding credit and helping you improve your credit score.
For assistance with credit repair or improving your credit score, reach out to Joe's office at www.asapcreditrepairusa.com.