It's common knowledge that there are various credit scores, with around 30 different levels to choose from. What's not so well understood is how to determine which score is best for you. A quick search on Google can leave you with more questions than answers, and some of the information can even be misleading. That's where I come in! My name is Joe Mahlow, and for over 15 years, I have been working in the financial literacy and credit repair space. My objective is to offer you sound advice on different financial topics. Today, we'll discuss credit scores. Throughout my career, I have aided over 20,000 clients in improving their credit. In this article, I aim to provide you with enough information to do the same. Let's dive straight in!
Contents:
Differentiating Between FICO and Vantage Credit Scores
Understanding Good Credit Score Ranges
Determining an Ideal Credit Score for Buying a House
The Impact of Credit Scores on Car Loan Approval
Tips for Improving Your Credit Score
Joe's Insights on Credit Improvement
Differentiating Between FICO and Vantage Credit Scores
Two primary credit scoring models exist, the FICO model and the Vantage model, both of which are crucial to comprehend. Familiarizing oneself with each model is important due to variations in calculating credit scores by both.
FICO Credit Score
FICO is the most popular credit scoring model, and it provides eight different models ranging from FICO 2 to FICO 10. The credit score you receive usually depends on your credit report. When you attempt to apply for credit, different lenders use diverse FICO scores, such as FICO 5 for home mortgages or FICO 8 for credit cards.
Why So Many FICO Scores?
Each credit report weighs differently, and FICO models calculate scores differently. For instance, FICO 5 mortgage reports focus heavily on previous mortgage payments, whereas FICO 8 reports lean toward your credit card payment history. Auto lenders primarily use FICO-2 reports.
To obtain a report of your different FICO scores, create an account at myfico.com.
Vantage Credit Score
The three significant credit reporting agencies developed the Vantage Score to rival the FICO model. Vantage models are relatively new, having been introduced recently. Although the FICO scoring model dominates the lending sector, Vantage is rapidly gaining popularity in some sectors, such as personal loans and auto lending.
Vantage Score Accuracy
The Vantage Score is accurate, but it depends on context. Since it is not widely used for lending purposes, it is not the most reliable representation of your actual lending score. However, the Vantage Score provides a good general idea of a credit score, especially if you cannot pay for FICO scores. Data collection agencies like credit reporting agencies have a significant impact since they have the necessary data.
In conclusion, the FICO scoring model is outdated and inadequate. However, since it is currently the most commonly used, it remains essential to know both FICO and Vantage scores.
Understanding Good Credit Score Ranges
Both the FICO and Vantage models' credit score ranges from 350 to 850. While the former is the worst credit score that you can have, the latter is the best score. At all stages of your credit-building journey, it is essential to be aware of where you stand to set higher goals for yourself. Here are some of the essential score thresholds:
1. 620 or below:
This credit score range is considered bad credit, indicating a history of adverse credit events, high balance credit card accounts, or no credit cards in general. Ten active revolving credit accounts and timely payments are the keys to improving your credit scores. You can opt for Credit Builder Card or OpenSky Credit Card, both of which are secured credit cards that help improve your credit. Once you reach the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680:
This range indicates a fair or good credit score, implying established credit but with derogatory marks or accounts on your credit report. High balances on credit cards and newly opened accounts can also affect scores temporarily. If you have recently opened an account, and your score is in this range, don't panic, as it will bounce back soon.
3. 740+:
Any credit score above 740 is considered super-prime, providing the best interest rates for most loans. You are part of the 20% of the US population with this score if your credit score is over 740. Keep up your good work by paying your accounts on time and maintaining your revolving credit card accounts. Well done!
Determining an Ideal Credit Score for Buying a House
To determine the ideal credit score that you need when buying a house, you must first look into the type of mortgage loan that you intend to qualify for. Various mortgage loans come with different requirements and guidelines. The common types of mortgage loans include conventional loans, VA loans, and FHA loans. Each of these loans has unique features that can help you make an informed decision when choosing a mortgage type.
Conventional Loans
Conventional loans are the most popular and the best savings loan option apart from VA loans. One advantage of conventional loans is that you don't have to pay private mortgage insurance (PMI), which can increase your downpayment or monthly payment. Additionally, they hardly have any downpayment requirements and interest rates lower than other loans. To qualify for a conventional mortgage, you need a credit score of 640 and a debt-to-debt ratio of 43%.
FHA Loans
People with lower credit scores mostly qualify for FHA mortgage loans. This type of mortgage loan requires a credit score range of between 580 and 619. However, different lenders provide various financial options, and it is best to shop around for the best offer. FHA mortgage loans require you to maintain PMI for at least 11 years, which can affect your budget. The maximum debt-to-income ratio with an FHA loan is 50%, meaning you can purchase more homes despite your low income. The downpayment requirement is as little as 3.5%; thus, you can acquire a mortgage with little cash. However, the interest rates may be higher than with other loans.
VA Loans
VA loans do not have a credit score requirement. However, they look for previous defaulted loans and government-owed past-due debts when pre-qualifying you. To qualify for a VA loan, you must have served in the U.S military for 181 days, 90 consecutive days during wartime, served for 6 years in the National Guard, or have a deceased spouse who was in active duty. VA loans usually have the best interest rates available, and they often do not require any down payments. This type of loan is particularly beneficial for veterans.
The Impact of Credit Scores on Car Loan Approval
When searching for a vehicle, it's crucial to understand that your credit history possesses a more significant role in determining loan approval compared to your credit score. Although having a good credit score can be beneficial, other factors play a more significant role in assessing your creditworthiness. Auto loan firms scrutinize your existing and previous credit records to evaluate risk when lending money. If a borrower has a history of late or defaulted payments or car repossession, lenders consider it risky to extend a loan to them. However, certain loan providers are willing to work with individuals with unfavorable credit records, albeit with higher down-payments and added charges to minimize their risk. Dealerships may also request a fee to cover their risk, including designating a particular vehicle for the borrower, which may not be tailored to their requirements. In conclusion, having equity in the car or making a down payment during the purchase can significantly improve the chances of obtaining an auto loan on favorable terms.
The Target Credit Score Range for Auto Loans
It's difficult to determine an exact credit score required for approval, as several factors are involved. However, a credit score above 680 is considered ideal, indicating that borrowers pose a lower risk to lenders. Scores below this value result in higher interest rates, as lenders compensate for the increased likelihood of the borrower defaulting on the loan. To illustrate further, consider the given interest rates for various credit scores:
A borrower with a credit score of 720 or above can expect to pay an average interest of $5,500 on their loan.
A borrower with a credit score between 680 and 720 can expect to pay an average interest of $6,600 on their loan.
A borrower with a credit score between 650 and 680 can expect to pay an average interest of $8,100 on their loan.
A borrower with a credit score between 615 and 650 can expect to pay an average interest of $10,200 on their loan.
A borrower with a credit score between 580 and 615 can expect to pay an average interest of $13,900 on their loan.
A borrower with a credit score below 580 can expect to pay an average interest of $15,300 on their loan.
Therefore, maintaining an excellent credit score increases approval chances while providing lower interest rates and positively impacting credit scores on the whole.
Tips for Improving Your Credit Score
Improving your credit score requires patience and effort, as it is not an overnight process. However, there are several steps you can take right away to increase your credit score:
1. Apply for 3-5 revolving credit accounts, such as credit cards.
This is one of the easiest ways to build credit, especially if you have limited credit or are trying to rebuild your credit. Look for secured credit cards like Open Sky or Credit Builder Card, which focus more on your ability to pay on time rather than your credit score.
2. Request a credit limit increase for your credit cards.
This can help increase your overall credit limits and lower your credit utilization percentage, which can impact your credit score negatively. Contact your credit card company and request a “Credit Limit Increase.â€
3. Pay down balances and keep them low.
It's crucial to avoid using credit cards excessively, so make a plan to pay off any high balances. Also, try to keep a small balance of $1-5 on your credit cards when paying your bills.
Remember that good credit habits take time to build, but with consistency and patience, you'll be on your way to achieving a better credit score.
Joe's Insights on Credit Improvement
We are all familiar with the struggles of poor credit scores. However, a serious commitment to improving your credit can yield remarkable results in a short period. Don't succumb to the cycle of life-long credit issues and the belief that good credit is unattainable. Building great credit takes significant effort and those who prioritize their credit and spending habits will reap the benefits. Begin by setting up a budget and addressing any bad spending habits to see a positive impact on your credit score. For further understanding and assistance with credit repair, please visit my office at www.asapcreditrepairusa.com.