It is a common misconception that there is only one credit score. In fact, there are as many as 30 different levels of credit scores. The problem with trying to find the best credit score online is that there is a lot of conflicting information out there, making it confusing and overwhelming. As someone who has been in the financial literacy and credit repair space for more than 15 years, my name is Joe Mahlow and my goal is to provide you with straightforward advice on various topics, including credit scores. With my expertise, I have been able to help more than twenty thousand clients improve their credit scores, and I am confident that I can help you too. So, let's dive in and explore the world of credit scores together.
Contents:
What are the Different Credit Scoring Models?
Credit Score Ranges and What They Mean
Determining the Ideal Credit Score to Secure a Home Loan
The Ideal Credit Score for Buying a Car
Tips to Boost Your Credit Score
Joe's Perspectives on Improving Your Credit Score
What are the Different Credit Scoring Models?
When it comes to understanding credit scores, it's important to know that there are two main scoring models used: the FICO model and the Vantage model. Both models use different methods to calculate a credit score, and knowing the difference between the two can help you better understand how your credit score is determined.
FICO Credit Score
The FICO credit scoring model is the most widely used and popular scoring model used today. There are eight different FICO models, from FICO 2 to FICO 10, and each will provide a different credit score depending on the credit report used. This can be confusing, but it's important to note that different lenders may use different FICO models to calculate your score.
For example, if you're applying for a mortgage, the lender will most likely pull your FICO 5 credit report, while a credit card company will most likely pull your FICO 8 credit report. This is because each report places different weight on different factors. A FICO 5 mortgage report will weigh heavily on previous mortgage history, while a FICO 8 report will weigh more heavily on credit card history.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion. Compared to the FICO model, Vantage is newer and less widely used for lending purposes. However, many credit monitoring websites offer a free copy of your Vantage credit report.
While the Vantage Score can give you a general idea of your credit score, it's important to note that it may not be as accurate as your FICO score when it comes to applying for loans or credit. This is because FICO is still the most recognized scoring model in the lending sector, but the Vantage model is gaining popularity in some sectors such as personal loans and auto lending.
So, while the Vantage Score can give you an idea of your credit score, it's essential to use your FICO score for a more accurate representation. It's expected that, in the next 5-10 years, Vantage will become more widely used as a scoring model due to its ability to provide the best scoring data based on current standards.
Credit Score Ranges and What They Mean
Credit scores are important when it comes to borrowing money and making big financial decisions. Both the FICO and Vantage models score from 350 to 850, with higher scores indicating better credit. It's essential to know where you stand on the scale to improve your creditworthiness. Here are a few critical score thresholds to keep in mind:
1. 620 or below:
This is considered a bad credit score and usually means you have defaulted on loans, have high balances on credit cards, or have no credit at all. The best way to improve your score is to make timely payments and have multiple active credit accounts.
2. 640-680:
This is a fair to good credit score, indicating you have established credit but may still have some derogatory marks or high balances on credit cards. Newly opened accounts can also temporarily affect your score.
3. 740 and above:
A super-prime score denotes excellent creditworthiness, indicating you have the best chance of getting the lowest interest rates on loans. Only 20% of Americans have a score in this range, which is a considerable achievement. Keep paying your accounts on time and maintain low balances on your credit cards to stay in great shape.
Determining the Ideal Credit Score to Secure a Home Loan
The credit score required to obtain a home loan will depend on the type of mortgage you are interested in. Due to government regulations and backing, the prerequisites and frameworks for most mortgage loans are similar yet can differ. The following are the three most commonly used loan types: Conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans have become popular with borrowers, notably without VA loans. They waive the need for private mortgage insurance (PMI), which can add to the downpayment or monthly payment cost. PMI shields the lender if the borrower discontinues making payments. Conventional loans have lower downpayment requirements and offer better interest rates than other loans. A reasonable credit score of 640 and a debt-to-debt ratio of less than 43% are typical requirements for conventional mortgage loans.
FHA Loan
FHA loans accommodate lower credit scores, usually between 580 to 619. Since all lenders have different provisions, explore different options to determine which one offers the best financial deal if you meet the credit score requirements. Keep in mind that an FHA loan obligates you to retain PMI for no less than 11 years, which translates to additional expenses. With a credit limit of 50%, this loan provides a high debt-to-income allowance, allowing you to purchase houses within a lower income range than a conventional loan. Finally, mortgage requirements are as low as 3.5%, giving you the opportunity to invest less money in a mortgage than a conventional loan, but with a higher interest rate.
VA Loan
Technically, VA loans do not have a specific credit score requirement, but stressed borrowers are checked for past defaulted loans and outstanding government debts during pre-qualification. To qualify, serve in the US military for no less than 181 days, 90 consecutive days during war, six years with the National Guard, or be a military spouse who died during active duty. VA loans have the best interest rates and do not require a down payment. I strongly recommend the VA loan because it honors our veterans in the best way possible.
The Ideal Credit Score for Buying a Car
When it comes to purchasing a car, your credit history is more important than your credit score. However, a higher credit score can still impact your interest rate. Lenders look at your credit history to determine the risk involved in extending credit. Individuals with a poor credit history, such as late loan payments or repossession, may have difficulty obtaining loan approval, while lenders who specialize in poor credit loans may increase the requirements, such as a higher down payment or additional fees. Despite charging higher interest rates, these lenders are willing to qualify almost anyone for a loan. In addition, dealerships may charge a fee to cover the risk of defaulting on the loan. To have the best chance of obtaining a vehicle on credit, it is important to have a down payment or equity.
While there is no definite credit score to determine approval
A score of over 680 is recommended when financing a new vehicle. Anything below this score may increase the interest rate charged by the lender. A good credit score can also impact the overall amount paid in interest. For instance, someone with a 720 credit score or higher will pay an average interest of $5,500, while someone with a credit score of 580 or higher will pay an average interest of $15,300. With this data, it is evident that a higher credit score can lead to lower interest rates, which can affect the overall credit score.
Tips to Boost Your Credit Score
Improving your credit score isn't an overnight process, but there are simple steps you can take right now to start seeing positive results. Patience is crucial when it comes to building credit because impulsive decisions usually lead to further problems.
Here are some ways to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, is a great way to maximize your credit score, especially if you have limited credit or want to rebuild it. Starting with a secured credit card like Open Sky or Credit Builder Card could increase your approval chances. Keep your balance between $5 and $10 and pay it on time.
2. Increase your limits:
Lowering your credit utilization percentage can help you increase your overall credit score. Requesting a credit limit increase is a quick way to do this, but most companies require seven to fifteen months of good payment history.
3. Pay down your balances:
Keeping your balance close to zero is crucial. Make a plan to pay your balance or a percentage of it each month and stop using credit cards as much as possible.
Remember, improving your credit score takes time and effort, so be patient and responsible with your credit.
Joe's Perspectives on Improving Your Credit Score
We all have experienced times of bad credit. However, if you approach your current credit situation with earnestness and spend enough time and effort to work on yourself and your credit, you will notice significant improvements to your credit score in no time. Often individuals with low credit scores get trapped in a negative cycle and resign themselves to having poor credit forever. Nonetheless, building a great credit score requires dedication and a focus on your spending habits. You can start by preparing a budget and addressing any negative spending habits that you may have, as these behaviors directly impact your credit score. If you would like to learn more about credit or need support raising your credit score, feel free to contact my office at www.asapcreditrepairusa.com.
Joe's Recommendations on Improving Your Credit Score:
- Joe stresses that achieving a good credit score requires persistence and dedication.
- He suggests focusing on your spending habits, creating a budget, and eliminating bad financial practices to improve your credit score.
- Once you understand credit better, you can seek guidance from Joe's credit repair service to further improve your credit.