It may surprise you to know that there are 30 distinct levels of credit scores. Unfortunately, many people are unaware of this fact and are often presented with different and often confusing answers when they search for information on the best credit score. This misinformation can be misleading, leading many of us down a confusing path. My name is Joe Mahlow and I have over fifteen years of experience in the financial literacy and credit repair space. My aim is to provide you with sound advice on various topics, including credit scores. I have successfully assisted over twenty thousand clients in improving their credit scores and I am confident that with the information I present to you here, you too can achieve the same results. So let's dive in!
Contents:
An Overview of Different Credit Scoring Models
Understanding Good Credit Scores
What is a Suitable Credit Score for Buying a House
What Credit Score Do You Need to Buy a Car?
Tips for Boosting Your Credit Score
Joe's Advice on Improving Your Credit Score
An Overview of Different Credit Scoring Models
Credit scoring models are essential when it comes to calculating your credit score. There are primarily two types of credit scoring models that you should be familiar with: FICO and Vantage models. Understanding the differences between these two models is crucial in assessing your creditworthiness.
FICO Credit Score
The most widely used credit scoring model is the FICO scoring system. With eight different FICO models ranging from FICO 2 to FICO 10, depending on your credit report, you will usually get a different credit score. The reason for so many models is that each credit report has a different level of importance. Lenders will consider critical factors in your credit report to make informed decisions. For instance, a mortgage lender will mostly pull your FICO 5 credit report, whereas a credit card company will typically use the FICO 8 report.
Why So Many FICO Scores?
Every FICO scoring model has a different “weight†where certain factors are more critical than others when it comes to calculating your credit score. For instance, a FICO 5 mortgage report will weigh more heavily on your previous mortgage history than other factors. Similarly, credit card companies primarily use the FICO 8 report and focus more on your credit card history. For auto lenders, FICO-2 reports are the standard, and your auto history weighs heavily in the scores.
To get a better picture of your FICO scores, you can sign up for an account on www.myfico.com.
Vantage Credit Score
The Vantage Score scoring model was introduced to compete with the FICO scoring model. Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), Vantage is relatively new compared to FICO, which has been in use since the seventies. Although FICO is the dominant scoring model, Vantage is gaining popularity in personal loans and auto lending, among other sectors.
Is the Vantage Score Accurate?
The Vantage score is an accurate assessment of your credit score, but its accuracy varies depending on the context. Vantage is not widely used for lending purposes, so it may not give an accurate score on your actual lending report. However, it can provide a good “general idea†of your FICO score. By comparing your Vantage scores to your FICO scores, you can get a rough estimate of where your overall scores fall. Although FICO is the current industry standard, I believe Vantage will gain more prevalence in the next five to ten years, as it reflects today's credit score standards better. Ultimately, credit reporting agencies have the most significant influence on providing the best scores based on their extensive data.
Understanding Good Credit Scores
Credit scores can range from 350 to 850 for both the FICO and Vantage models, with 850 being the best and 350 being the worst. Building a good credit score is crucial, and it's essential to know where you stand in the process. Here are some essential score thresholds to guide you:
1. 620 or Below:
Scores up to 620 are considered bad credit, indicating adverse credit history or high-balance credit card accounts, or no credit history at all. Making timely payments and having at least ten active revolving credit accounts can help you improve your credit score. Credit Builder Card or OpenSky Credit Card are recommended as secured credit cards for credit-building. A credit score of 620 qualifies for an FHA home mortgage.
2. 640-680:
With scores in this range, you can be sure of a fair credit rating. You have established credit, but you may still have derogatory remarks in your credit score or high balances on your credit cards. It is also common to experience temporary drops in credit scores, usually caused by newly opened accounts that should return to normal soon.
3. 740+:
A credit score of 740 or higher is considered "super-prime." If you have this rating, you are part of the 20% of the US population with the highest score and can enjoy the best interest rates for most loans. Paying your accounts on time and keeping your revolving credit card accounts paid will help you maintain a good credit score. Congrats, if you are in this category, and keep up the great work!
What is a Suitable Credit Score for Buying a House
The answer to this query is dependent on the type of mortgage loan you opt for. Federal regulation and government backing mean that most mortgage loan requirements and guidelines will be either similar or different. Conventional loans, FHA loans and VA loans are the three most common loan types.
Conventional Loans
Conventional loans are the most popular and offer excellent savings outside of VA loans. Also, conventional loans do not require you to maintain Private Mortgage Insurance (PMI), an added cost that can increase your down payment or monthly payment. The PMI protects the lenders in case you stop payments. Conventional mortgage loans have a credit score requirement of 640 and a debt-to-debt ratio no higher than 43%. These loans also have lower down payment requirements and better rates than other loans.
FHA Loan
FHA loans are for lower credit scores, typically between 580 and 619. Different loan programs have varying requirements, so if you are within the credit score limits, shop around for different lenders that will provide the best financial option for you. FHA loans require you to keep PMI for at least 11 years. Also, its high debt-to-income limit of up to 50% enables you to purchase more homes than with a conventional loan if you have a lower income. The down payment requirements on this loan are as low as 3.5% of the purchase, so you could get into a mortgage with less money out of pocket. However, note that you will typically have a higher interest rate.
VA loan
Although there isn't technically a credit score requirement for a VA loan, they will pre-qualify you based on any previous defaulted loans and any government-owed past-due debts. To screen for eligibility, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a spouse who lost their life while in military service. VA loans have the best interest rates available, and they do not usually require a down payment. The VA Loan program is an excellent way to pay our veterans a fitting tribute.
What Credit Score Do You Need to Buy a Car?
Your credit history is the most crucial factor in determining your eligibility to purchase a vehicle; however, having a good credit score still plays a significant role in the interest rate you qualify for. When applying for a car loan, the lender assesses your current and previous credit histories to determine your creditworthiness. Individuals with a history of late loan payments, repossession, or other credit issues might have a hard time securing a car loan. Subprime lenders would still approve people with poor credit or adverse histories for car loans, but they may add specific requirements such as a hefty down payment and additional dealership fees. In some cases, the dealership has to pay the lender a fee to reduce the risk of defaulting on the loan. A credit score of over 680 is ideal when purchasing a new car. The lower your credit score, the higher the interest rate you'll pay on a loan, with those having a credit score over 720 paying the least in interest charges.
Tips for Boosting Your Credit Score
Building a good credit score is a time-consuming process that requires patience. However, by taking certain steps, you can make considerable progress towards enhancing your credit score. Below are some things you can do to improve your credit:
1. Obtain 3-5 revolving credit accounts
Revolving credit makes up approximately 30-35% of your credit score and is a quick way to boost it. You can start by opening a secured credit card like Open Sky or Credit Builder Card, which focus more on your ability to pay on time rather than your credit score. To maximize your credit score, ensure you pay your balances on time and keep them at $5-10 for each payment.
2. Raise your credit limits
You can quickly request a credit limit increase for your credit cards to help increase your overall credit limits and lower your credit utilization percentage. Most companies allow you to do this online through your online portal or by calling. Credit card companies usually require you to have 7-15 months of excellent payment history before considering a limit increase.
3. Pay your balances down
Ensure you keep your balance low and close to zero. Try not to use your credit cards each month, but if you must, use them for small purchases. When paying your bill, leave about a $1-5 balance on your credit card. If you have high balances and are unable to pay them off, create a game plan to take a certain percentage of your paycheck each month to pay down the credit card. Most importantly, limit your credit card usage to avoid running up the balance again. Remember, credit card spending habits significantly impact your overall credit score, and limiting usage is crucial.
Joe's Advice on Improving Your Credit Score
Let's face it; many of us have experienced less-than-impressive credit scores. However, taking the necessary steps to evaluate your credit circumstances and dedicating time and effort to improve them can lead to significant progress in a short amount of time. Frequently, individuals with bad credit are stuck in a repetitive cycle that seems insurmountable. But creating an effective plan and being diligent in fixing poor spending habits are crucial factors in enhancing your credit score. Begin by establishing a budget and identifying areas where you can reduce expenses. These actions can directly impact your credit score. For comprehensive guidance on credit repair, contact my office at www.asapcreditrepairusa.com. This article aims to help you gain a better insight into credit improvement.