It's important to be aware that there are 30 different levels of credit scores. Many individuals may not know this as they search for the best credit score and can often be overwhelmed by the abundance of information. While some of the data may be confusing and even misleading, it's critical to understand how your credit score works. My name is Joe Mahlow, and I have worked in the financial literacy and credit repair industry for more than a decade. I aim to provide you with valuable and candid advice on a range of topics, beginning with credit scores. To date, I have helped 20,000 clients improve their credit scores, and I am hopeful that I can offer you enough insights to do the same. So, let's dive in!
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Your Credit Score
Finding the Appropriate Credit Score to Buy a House
Determining a Suitable Credit Score for Purchasing a Car
Tips for Boosting Your Credit Score
Tips from Joe for Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage
Credit scores play a significant role in the lending industry. Before going for any credit, one should be aware of the different credit scoring models like FICO and Vantage. Knowing about them can help you understand the differences in how they calculate your credit score.
1. FICO Credit Score
The FICO credit scoring model has eight different models ranging from FICO 2 to FICO 10. Each model produces a different credit score depending on your credit report. For example, a mortgage lender will pull a FICO 5 credit report, while a credit card company will pull a FICO 8 credit report. The different FICO models are used because different lenders value different factors. For instance, a mortgage report weighs heavily on previous mortgage history, while a credit card report considers previous credit card history.
2. Vantage Credit Score
The Vantage scoring model was developed by Equifax, Experian, and TransUnion to compete with the FICO model since the 1970s. The Vantage score is free and is used by credit monitoring websites all over the United States to give you a copy of your credit report. It's becoming popular in personal loans and auto lending but not widely used for lending purposes. It serves as an excellent “general idea†of your FICO score since FICO is the most recognized scoring model.
3. Accuracy of the Vantage Score
The accuracy of the Vantage score can depend on the context. Since it's not widely used for lending purposes compared to FICO, it might not represent your actual lending score. However, it's accurate when used as a general idea of your credit scores. In the next 5-10 years, the Vantage scoring model might be widely used by lenders since it can provide the best scoring models based on today's standards. Although FICO is the most popular model, the Vantage score is not inaccurate, and credit reporting agencies will always have the upper hand in providing the best scoring data.
If you want to see your different FICO scores, you can sign up for a free account on www.myfico.com.
Understanding Your Credit Score
Your credit score is crucial when it comes to borrowing money or making big purchases. Two popular models, FICO and Vantage, both range from 350 to 850. A score of 350 is considered terrible, while 850 is the best possible score. To achieve high credit scores, it is essential to know what the thresholds mean - we've highlighted the most critical ones below.
1. 620 or below:
If your score is in this range, then you have bad credit and may have a history of adverse credit, high-balance credit card accounts, or no credit cards in general. To improve your score, make timely payments and have ten active revolving credit accounts. Secured credit cards, such as the Credit Builder Card or OpenSky Credit Card, can be incredibly helpful in building your credit. With a score in the 620 range, it's possible to qualify for an FHA home mortgage.
2. 640-680:
Scores between 640 and 680 are considered fair for good credit. If your scores fall in this range, it indicates an established credit history, but you may have derogatory marks or accounts, high balances on your credit cards, or newly opened accounts that can temporarily impact your score. Don't panic if your score drops due to a new account.
3. 740 and above:
A score of 740 or higher is considered “super-prime,†and it opens the door to the best interest rates for most loans. If your score is in this range, congratulations! You're part of the top 20% of Americans. Keep up the excellent work by always paying your accounts on time and maintaining low balances on your revolving credit accounts.
Finding the Appropriate Credit Score to Buy a House
The answer to this question primarily depends on which type of mortgage loan you plan to avail. Most mortgage loans available in the market have almost similar guidelines and requirements because of government backing and federal regulations, but differences may still exist. The three most common mortgage loans are: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular options and provide the best possible savings aside from VA loans. These loans do not require you to acquire private mortgage insurance, which may result in a higher downpayment or monthly payments. It aims to protect the lender if you stop making payments on your loan. Conventional mortgages generally have better interest rates and lower downpayment requirements compared to other mortgage loans. The usual credit score required for this type of loan is 640, with a debt-to-debt ratio no greater than 43%.
FHA Loan
For credit scores ranging from 580 to 619, you can apply for an FHA mortgage loan. It is important to note that while different loan programs exist, it is essential to shop around for different lenders who offer the best financial option that suits your needs. PMI is required for at least 11 years for FHA loans, adding to the cost of your mortgage, making it essential to consider if you are on a tight budget. This type of loan, however, has a debt-to-income limit of up to 50%, making it possible to buy more homes if you happen to have lower income levels than with conventional loans. Lastly, the minimum downpayment for an FHA loan is only 3.5% of the purchase, making it possible to obtain a mortgage with fewer upfront costs than conventional loans, even though the interest rates may be higher.
VA loan
The VA Loan does not have a specific credit score requirement, but lenders will examine prior defaulted loans and unsettled government debts when pre-qualifying you. To be eligible for this loan, you must have completed at least 181 days of service for the US Military, served 90 consecutive days during wartime, and served 6 years with the National Guard. Additionally, if your spouse was in the military and lost their lives on active duty, you would be qualified to apply for this loan option. The VA loan generally provides the most competitive interest rates, and it does not require a down payment with no PMI, making it an ideal choice for veterans.
Determining a Suitable Credit Score for Purchasing a Car
Credit history is a critical factor used to determine car loan qualifications, not just credit scores. Although having a high credit score is important, it is less significant in qualifying for an interest rate. Creditors assess previous and present credit histories to evaluate the risks that come with loan expansion when there are credit problems. Applicants with past or present vehicle loan delinquencies, or repossessions, find it harder to secure loan approval compared to those without such issues. Special finance lenders approve almost anybody, regardless of past repossessions, although approval criteria, such as larger down payments and dealership surcharges, must be met. Dealerships might charge additional fees to cover costs incurred when extending loans to high-risk customers. This could result in them selecting a car that has a high markup instead. Finally, being able to supply equity in, or a down payment towards, a car purchase is important when it comes to obtaining any negotiating power.
The Appropriate Credit Score Range for a New Automobile
It is not possible to pinpoint the precise credit score that guarantees loan approval because many factors affect it, as mentioned above. However, having a credit score of 680 or higher is considered the ideal score range, as anything below that may increase the interest rate due to the risks that lenders assume. The interest rate that someone pays for a loan typically depends on their credit score, as shown in the following example:
An individual with a credit score of at least 720 pays, on average, $5,500 in interest on a loan.
An individual with a credit score of at least 680 pays, on average, $6,600 in interest on a loan.
An individual with a credit score of at least 650 pays, on average, $8,100 in interest on a loan.
An individual with a credit score of at least 615 pays, on average, $10,200 in interest on a loan.
An individual with a credit score of at least 580 pays, on average, $13,900 in interest on a loan.
An individual with a credit score of at least 580 pays, on average, $15,300 in interest on a loan.
The above data shows that the credit score significantly affects the amount of interest paid on a loan, as a higher score means less interest paid, which positively impacts the borrower's overall score.
Tips for Boosting Your Credit Score
Building a good credit score is a time-consuming process that requires patience. Making rational decisions with your credit is key to achieving your credit goals. However, there are several things you can do to improve your credit score quickly and easily.
Here's how you can boost your credit score:
Open 3-5 revolving credit accounts
Raise your credit limits
Pay down your balances
Revolving credit accounts, such as credit cards, are one of the best ways to boost your credit score. It may be challenging to obtain a large loan to build credit for someone with limited credit, or who is trying to rebuild their credit. Therefore, opening a secured credit card, like Open Sky or Credit Builder Card, can increase your chances of approval since they focus more on your ability to pay back the card on time and your income situation. Revolving credit accounts carry more weight in your credit score, making up 30-35% of your overall credit score.
Requesting a credit limit increase for your revolving credit card accounts can help increase your overall credit limits and lower your credit utilization percentage. A high utilization percentage can hurt your credit score if your credit card balance exceeds 30% of your overall limit. Call your credit card company to request a limit increase, and they will usually ask for information about your current income. Typically, you need to have an excellent payment history on a credit card for 7-15 months before a credit card company will agree to increase your credit limit.
Keeping your balance low or close to zero is critical to building a good credit score. Use your credit cards only for small purchases and leave a balance of $1-$5 when paying your bill each month. If you currently have high balances and cannot afford to pay them off, create a repayment plan to reduce your debt gradually. Ideally, you should stop using credit cards while paying off your balance. Your credit card spending habits play a significant role in your overall credit score, and high credit card rates can make it difficult to pay off your principal balance.
Tips from Joe for Improving Your Credit Score
Many people struggle with poor credit, but there is hope for turning things around. By taking your credit issues seriously and making a concerted effort to improve your financial habits, you can see real progress in a short amount of time. Don't fall into the trap of believing that bad credit is a life sentence; anyone can work towards building a great credit score with some effort and determination. Begin with creating a budget and pinpointing areas where you need to make changes to your spending habits. These steps will directly impact your credit score, allowing you to take control of your finances. To learn more about credit and how to improve your score, check out this article. If you need help repairing your credit or guidance on how to raise your score, my office is here to help. Visit us today at www.asapcreditrepairusa.com.