It may come as a surprise to most people that there are actually 30 different levels of credit scores. Many individuals may search for the best credit score on Google, only to come across varying answers. With so much conflicting information available, it's easy to become confused and misled when trying to improve your credit score. My name is Joe Mahlow, and I've spent over fifteen years in the financial literacy and credit repair field. My aim is to provide you with truthful advice on a range of topics, including credit scores. Having helped over twenty thousand clients elevate their credit scores, I hope to give you enough knowledge to do the same. Let's delve deeper into this topic.
Contents:
Different Types of Credit Scores: FICO vs Vantage Model
Understanding What Constitutes a Good Credit Score
What Credit Score Do You Need to Buy a House?
Determining the Credit Score Needed to Buy a Car
Tips to Improve Your Credit Score
Joe's Insights on Improving Your Credit
Different Types of Credit Scores: FICO vs Vantage Model
Credit scores are critical determinants of a person's creditworthiness when applying for loan services. There are two main credit scoring models, namely FICO and Vantage, both of which are essential for understanding and calculating credit scores. Here's what you need to know about these two different types of credit scores:
FICO Credit Score
The FICO model is the most widely used credit scoring model in America, with eight different FICO models from FICO 2 to FICO 10. FICO scoring models vary depending on the lender pulling your credit report, depending on the type of credit you are applying for. For instance, a mortgage lender will most likely pull your FICO 5 report, while a credit card company is more likely to pull your FICO 8 report. This is because different credit reports have varied weights, meaning that critical factors get more emphasis than others, depending on the type of credit you are applying for.
Vantage Credit Score
To compete with the FICO model, the three major credit reporting agencies created the Vantage scoring model. Unlike the FICO model, which has been used for decades, Vantage is relatively new but is becoming popular in some sectors, such as personal loans and auto lending. While Vantage provides a good "general idea" of your FICO score, it isn't widely used for lending purposes; therefore, its accuracy varies.
Is the Vantage Score Accurate?
The accuracy of the Vantage score depends mainly on the context within which it is applied. Although it is accurate in providing general information about your credit score, it isn't so accurate for lending purposes. FICO remains the most recognized and widely used credit scoring model, although Vantage may soon become more popular because it captures scoring data in line with modern standards in the industry. Given that credit reporting agencies have the most significant data collection capacity outside social media companies, they are well-positioned to offer the best credit scoring data.
Understanding What Constitutes a Good Credit Score
Credit scores are evaluated using both the FICO and Vantage scoring models, with the scores ranging from 350 to 850. A score of 350 is considered the worst possible credit score, while 850 represents the best score. If you aim to achieve the highest score possible, it's crucial to comprehend where you stand and the vital score thresholds that you need to work towards. Here are some score thresholds to help guide you:
1. 620 or below:
This is regarded to be a bad credit score. If your score falls below this threshold, it's likely that you have negative credit history, possibly linked to high-balance credit card accounts or no credit card accounts at all. To increase your credit scores, make sure you make timely payments and have at least ten active revolving credit accounts open. Consider using a Credit Builder Card or OpenSky Credit Card to build your credit. Once you hit the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680:
This is considered fair for good credit. If your score falls in this range, you have likely established some credit, but you might have some derogatory marks or accounts on your credit history. Additionally, you may have high balances on your credit cards that you need to pay off. Opening new accounts can also temporarily reduce your scores. If you've recently opened a new account, don't worry since this is only a temporary dip in your scores, and your scores will rebound.
3. 740+:
Any credit score higher than 740 is considered "super-prime" and will guarantee the best interest rates for most loans. Congratulations if you have a score of over 740 since you are part of the 20% of the population in the US who have this score. Continue to make timely payments on your accounts and pay off your revolving credit card accounts to keep your score in good standing.
What Credit Score Do You Need to Buy a House?
The credit score needed to buy a house varies depending on the type of mortgage loan you are seeking. Federal regulation and government backing usually result in comparable requirements and guidelines for most mortgage programs, but not all may apply. Three of the most popular types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most commonplace and usually the best option outside of the VA loan. With conventional loans, PMI is not necessary, thereby avoiding additional costs which can raise down-payment and monthly payments. PMI is in place to protect the lender if you default on your loan payments. Conventional loans normally have lower down-payment requirements and better interest rates than other mortgage loans. A conventional mortgage loan would require a typical credit score threshold of 640 and require a debt-to-debt ratio of no higher than 43%.
FHA Loan
If your credit score falls between 580 and 619, then the FHA mortgage loan will suit you. As loan programs can vary, search around for the best lenders that offer the most favorable financial benefits. You will be obligated to maintain PMI for a minimum of 11 years under FHA loans, which is an additional consideration, especially if you have budget constraints. The debt-to-income limit under this loan is typically higher, reaching up to 50%, enabling you to purchase more homes when you have a lower income. The down-payment requirements under FHA loans are as low as 3.5%, so aim to enter the mortgage with less outlay than with a conventional loan, though you will likely encounter a higher interest rate.
VA Loan
Unlike other loans, VA loans do not technically have credit score requirements. The focus is on previous defaulted loans and owed past-due debts to properly prequalify you. To qualify, you need to have served in the United States Military for 181 days or more, served 90 consecutive days during wartime, served National Guard for six years, or you are a military spouse whose partner lost their life during active duty. The VA loan has some of the most favorable interest rates, and down payments are typically not required. The VA Loan is an excellent way of showing appreciation for our veterans.
Determining the Credit Score Needed to Buy a Car
When purchasing a car, your credit history takes precedence over your credit score. While having a high credit score is important, it is not the sole determinant of your interest rate qualification. Your present and past credit histories are assessed to gauge the risk of extending credit. Late payments or car repossession impact the likelihood of loan approval, and subprime lenders impose stringent criteria on approval, including additional down payment and dealership fees. To reduce the possibility of default, the dealership pays a fee to provide loan approval even for those with bad credit. Equity or downpayment has the most weight when buying a car on credit. As for the ideal credit score range for purchasing a new vehicle, there is no exact number. However, a credit score over 680 is preferable, while below this threshold results in a higher interest rate due to increased risk to the lender. A person with a score of 720 or higher would typically be charged $5500 in interest on a loan; a person with a credit score of 580 or above would pay $13300 on average. This data shows that better credit scores lead to lower interest rates.
Tips to Improve Your Credit Score
Improving your credit score requires time and patience. Rushing into decisions can lead to mistakes that can further damage your credit score. Here are some steps you can take to improve your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Opening revolving credit accounts, such as credit cards, can help you maximize your credit score. Consider applying for secured credit cards like Open Sky or Credit Builder Card, as they focus more on your ability to make timely payments. Revolving credit accounts make up 30-35% of your credit score and may take 2-4 months to show their effect. Remember to use the credit card only for small purchases and maintain a balance of $5-10 while making payments.
2. Request a credit limit increase
Request a credit limit increase for your active revolving credit card accounts. Increasing your overall credit limits can lower your credit utilization percentage. It is crucial to lower your utilization percentage because exceeding 30% of your overall limit can affect your credit score. Different credit card companies have various methods for processing credit limit increase requests.
3. Pay down your balances
Keep your balances low and close to zero by paying them down. If you cannot afford to pay off high balances in full, create a game plan to allocate a percentage of your paycheck each month to pay down your credit card debt. Ultimately, aim to stop using credit cards altogether. Limiting your credit card usage will significantly impact your overall credit score.
Joe's Insights on Improving Your Credit
We've all been in a situation where our credit isn't where it should be. However, taking action and making a commitment to fixing your credit can lead to significant improvements in your credit score in a short amount of time. Unfortunately, many individuals with poor credit believe that it's impossible to recover, leading them to accept the cycle of credit struggles. Building a strong credit score takes dedication and consistent effort. If you're focused on improving your credit, start by developing a budget and addressing any negative spending habits. These changes will have a positive impact on your credit score. If you need guidance or support with credit repair, contact my office at www.asapcreditrepairusa.com. This article provides insights into understanding how credit works.