It may be surprising to learn that there are actually thirty varying levels of credit scores. Despite this fact, many people remain unaware, causing them to seek out answers online when searching for the best possible credit score. However, the amount of information available on the topic can often be confusing and even misleading, directing individuals toward the wrong path. My name is Joe Mahlow - as someone who has been active in the financial literacy and credit repair field for over a decade, I want to offer you honest advice about credit scores and other similar matters. Through my extensive experience, I have aided over twenty thousand clients in boosting their credit scores and I aim to impart comparable knowledge to you. With that said, let's delve into the topic at hand.
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores: What Constitutes a Good One?
Credit Score Requirements for Different Mortgage Loans
What is the Ideal Credit Score for Buying a Car?
Strategies to Increase Your Credit Score
Final Thoughts from Joe on Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage Models
Credit reports play a crucial role in everyone's financial lives. But, do you know how credit scores are calculated? In fact, there are two different credit scoring models that you should become familiar with, the FICO Model, and the Vantage Model. Here are the differences in how these models calculate your credit score:
1. FICO Credit Score
The FICO credit scoring model is the most commonly used scoring model. With eight different FICO models ranging from FICO 2 to FICO 10, your credit score will change based on the scoring model used to calculate it.
The reason for having these multiple FICO scoring models is that each report assigns different "weights" to the various credit factors, with critical ones having more weight than others. For instance, mortgage lenders mostly use FICO 5, while credit card companies mostly use FICO 8. This means that your mortgage history will have a more significant impact on your score when applying for a mortgage, whereas your credit card history will influence your score more on applying for a credit card.
2. Vantage Credit Score
The three significant credit reporting agencies (Equifax, Experian, and TransUnion) created the Vantage Score model to compete with FICO. Compared to FICO, Vantage is a newer scoring model and is growing in popularity in sectors such as personal loans and auto lending.
While Vantage is accurate, it's not widely used in the lending context and, therefore, may not align with your actual lending score. It's best to consider the Vantage score as a good "general idea" of your FICO score. You can use your Vantage score to estimate where your overall scores lie since knowing your FICO score may require payment or having a lender pull your credit report.
Nevertheless, I see Vantage scoring models potentially dominating the lending sector in the next 5–10 years. Its development by credit reporting agencies offers them an upper hand in providing the best scoring data based on current lending standards, unlike FICO, which is quite outdated and less transparent. If you want to see all your different credit scores, you can go to myfico.com and sign up for an account.
Understanding Credit Scores: What Constitutes a Good One?
Credit scores for both the FICO and Vantage models range from 350 to 850, with the latter being the best score and 350 being the worst credit rating one can have. In developing a strategy to achieve high scores, it’s important to be aware of where you stand along the way, so we’ve outlined some important score thresholds below.
620 or below
This is deemed a poor credit score. It's likely that you have negative credit history, high balances on your credit accounts, or no credit cards at all. To increase your credit score, you need to make timely payments and keep ten active revolving credit accounts open. Issued as secured credit cards, the Credit Builder Card and OpenSky Credit Card are good options to help build your credit. Once you hit the 620 credit score range, you'll qualify for an FHA home mortgage.
640-680
This is considered an average score. If your score is in this range, it indicates that you have established credit, albeit with some derogatory marks or accounts on your credit report. You may have to pay off your high credit card balances and recently opened accounts can momentarily lower your scores. If you’ve recently opened a new account and find yourself in this range, don’t take fright; it's just a short-term setback, and your scores will soon rebound.
740+
A credit score of 740 or higher is classified as "super-prime", and it's considered the top score that most banks usually use to provide the best interest rates. Congratulations if you possess a credit score that lies above 740 because you are part of the 20% of the US population who share this credit score. Continue paying your accounts on time and maintain a good standing with your revolving credit card accounts and you'll be in excellent shape.
Credit Score Requirements for Different Mortgage Loans
The required credit score to qualify for a mortgage loan varies depending on the type of loan you choose. There are three common mortgage loans: conventional loans, FHA loans, and VA loans, and each has its own requirements and guidelines. Here’s what you need to know:
1. Conventional Loans:
- Most popular and cost-effective loan option
- Typically requires a FICO credit score of 640 or higher
- Offers lower down payment requirements and better interest rates compared to other loan programs
- Does not require private mortgage insurance (PMI), which can add extra costs to your loan
2. FHA Loans:
- Designed for borrowers with lower credit scores, between 580 and 619
- Allows for a down payment as low as 3.5% of the purchase price
- Requires PMI for at least 11 years
- Has a debt-to-income limit of up to 50%, making it possible for buyers with lower incomes to purchase a home
3. VA Loans:
- No minimum credit score requirement, but previous defaulted loans and past-due debts are considered
- Available for U.S. military personnel and veterans, offering special benefits and financial assistance
- Typically offers the most competitive interest rates
- Does not require a down payment
Note that while these are the general requirements, each lender may have different criteria, so it's important to shop around and weigh your options carefully.
What is the Ideal Credit Score for Buying a Car?
When considering purchasing a car, rather than focus solely on your credit score, your credit history is the most vital element in determining what you qualify for. While a high credit score is important, it is less critical in determining the interest rate you are eligible for. If you're looking to apply for a car loan, the lender will evaluate your current and previous credit histories to determine potential risks involved with extending credit. Late payments on a previous or current loan, as well as repossessions, are indicators of creditworthiness and may impact your chances of being approved for a loan. Notably, even with bad credit, you can still be approved for an auto loan; however, certain qualifying criteria must be met, such as a higher down payment and additional fees to the dealership. Dealerships will also pay a fee to extend this loan to you and may choose the vehicle you will be approved for based on a higher markup on the car to cover the fee. Finally, having equity or a downpayment can increase your bargaining power when purchasing a car on credit.
While there is no specific credit score that determines approval, a score over 680 is seen as ideal for a new vehicle purchase.
A score below this figure may increase the interest rate charged due to the risk you pose to the lender. It's interesting to note that someone with a 720 credit score or above will pay, on average, $5,500 in interest on a loan, while someone with a 680 credit score could pay an average of $6,600 in interest for a loan. Moreover, as one's credit score decreases, so too does their eligibility for lower interest rates. For instance, someone with a credit score of 580 or above might face an average interest rate of $13,900 or more. Based on this data, we can observe that higher credit scores offer lower interest rates, impacting your overall credit score.
Strategies to Increase Your Credit Score
Building a good credit score takes effort and time, and there are simple things you can do now to help improve your credit. Patience is key since making rash decisions leads to worsening problems. Here are some steps you can take now to boost your credit score:
Open 3-5 Revolving Credit Accounts
Revolving credit is the best way to improve your scores quickly, mainly if you have limited or bad credit. Opening secured credit cards that do not focus on credit scores but on paying on time and having an income is recommended. Revolving credit constitutes 30-35% of your final scores. Keep the card balance at $5-$10 and limit the purchases made to gas or groceries. It takes 2-4 months to show an increase in scores.
Raise Your Limits
Requesting a credit limit increase lowers your credit utilization percentage. Most credit card companies have different processes, and offering a 7-15 month excellent payment history is ideal.
Pay Down Your Balances
Keeping a low balance is critical. Limiting your credit card usage and leaving a $1-$5 balance on your credit cards while paying down high balances is recommended by allocating a percentage of your paycheck each month to avoid a high rate of interest payments.
Final Thoughts from Joe on Improving Your Credit Score
We've all experienced falling short on credit score at some point in our lives. However, if you take your credit situation seriously and dedicate time and effort towards working on it, you can observe vast improvements in your score in a relatively short time. It's common for individuals with poor credit to become stuck in the vicious cycle of credit issues, making them believe that regaining good credit is beyond their reach. Elevating your credit score demands diligence, and those who prioritize their credit and spending habits come out on top. Commence by developing a budget and addressing any negative spending patterns, and soon, your credit score will reflect these changes. To better understand credit, this article is a valuable read. If you require guidance or solutions regarding your credit score or repair, visit www.asapcreditrepairusa.com, and reach out to my office.