It may surprise you to learn that there are actually 30 different tiers of credit scores. Many individuals may not be aware of this fact, and as a result, when searching for the best credit score, they can often find themselves overwhelmed with varying results from Google. Navigating through this information overload can be challenging, and some of the data can even be misleading. My name is Joe Mahlow, and for the past fifteen years, I have been working in the financial literacy and credit repair industry. My purpose is to provide you with straightforward advice on a variety of subjects, including credit scores. Throughout my career, I have helped more than twenty thousand clients enhance their credit scores, and now, I'm excited to share that knowledge with you. So, let's dive in!
Contents:
Exploring Different Types of Credit Scores
Understanding Good Credit Scores
Credit Score Requirements for Different Mortgage Loans
Recommended Credit Score to Purchase a Car
Tips for Improving Your Credit Score
Insights from Joe: How to Improve Your Credit Score
Exploring Different Types of Credit Scores
Credit scores are essentially numerical representations of your creditworthiness. There are two prominent credit scoring models that consumers should be aware of: the FICO model, and the Vantage model. Understanding the differences between these models is important because the approach they take to the calculation of your credit score differs.
FICO Credit Score
The FICO credit scoring model is the most widely used and popular model available. Generally speaking, there are eight different FICO models, with the specific one used depending upon the lender or type of credit inquiry. Mortgage lenders, for instance, will typically pull your FICO 5 credit report, while a credit card application may lead to an enquiry for your FICO 8 credit report.
Why so many FICO scores?
Different credit reports can carry "different weights" – meaning that certain factors critical to the lender will carry greater impact when determining your credit score. As an example, a FICO 5 mortgage report will place greater weight on a borrower's previous mortgage history. Hence, if you have a good payment history on a previous mortgage, it will be reflected in your credit score. Similar considerations apply to all the different FICO scoring models.
Vantage Credit Score
The Vantage Score was developed by the three major credit reporting agencies – Equifax, Experian, and TransUnion – as direct competition to the dominance of the FICO model. Credit monitoring sites throughout the US often use the Vantage Score to provide consumers with free credit reports. While FICO is still the most widely used scoring model, Vantage is gaining popularity among sectors such as personal loans and auto lending.
Is the Vantage Score Accurate?
While the Vantage Score is accurate in and of itself, the purpose of the score is also important. As Vantage is not widely used for lending purposes, it may not be entirely accurate in determining your lending score. Since FICO is the most recognized scoring model in this regard, the accuracy of Vantage can vary. Nonetheless, the Vantage scoring model can be a useful indication of your FICO score, which can be challenging to access without lender requests.
Finally, lenders may increasingly turn to the Vantage scoring model in the future because of its more modern approach to credit scoring. In contrast, the FICO scoring model has been in use for decades and may not offer as accurate a measure of your credit score in today's context. It is worth noting that credit reporting agencies hold an extensive amount of data, which puts them at an advantage in terms of providing the best scoring data possible.
Understanding Good Credit Scores
Credit scores from both FICO and Vantage range from 350 to 850, with 850 being the highest and 350 being the lowest score. If your goal is to achieve high scores, it's crucial to understand where you stand on your credit journey. Here are some score thresholds to consider:
620 or below
This range is considered bad credit. It may indicate adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your scores, make timely payments and have at least ten active revolving credit accounts. Consider using secured credit cards like Credit Builder Card or OpenSky Credit Card. Reaching 620 credit score range means qualifying for an FHA mortgage.
640-680
Scores in this range are considered fair for good credit. It usually means you have established credit, but derogatory marks or accounts and high balances on credit cards drag your scores down. Opening a new account may also temporarily reduce your scores, so don't panic.
740+
Any score above 740 is considered "super-prime," giving you the best interest rates for most loans. Bravo if you're in this range because you belong to 20% of the American population. Keep paying your accounts on time and avoid revolving credit card accounts.
Credit Score Requirements for Different Mortgage Loans
When it comes to buying a home, your credit score is an important factor that determines your eligibility for mortgage loans. Depending on the type of loan you are looking for, the credit score requirements may vary. The three most common types of mortgages are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and typically the best savings option outside of VA loans. While these loans have lower downpayment requirements and better interest rates, they typically require a credit score of at least 640 and a debt-to-debt ratio no higher than 43%. Additionally, private mortgage insurance is not required for these loans, which could otherwise increase your downpayment and monthly payments.
2. FHA Loans
FHA loans are meant for individuals with lower credit scores, typically between 580 and 619. These loans have a higher debt-to-income limit of up to 50% and a downpayment requirement as low as 3.5%. However, you need to maintain private mortgage insurance for at least 11 years, which means additional costs are added to your mortgage.
3. VA Loans
VA loans are specific to veterans and do not technically have a credit score requirement. However, VA loan providers look for previous defaulted loans and government-owed past-due debts during the pre-qualification process. As long as you meet the eligibility requirements and served in the military for at least 181 days, you can enjoy low-interest rates without any downpayment requirements.
Recommended Credit Score to Purchase a Car
Credit history is the most important factor in determining car loan eligibility, rather than solely relying on credit scores. A high credit score is imperative, but it has a lesser impact on the interest rate that you qualify for. When applying for a car loan, lenders examine previous as well as current credit history to determine the risk of extending credit. Therefore, a person who has been late in their previous or current auto loan payment or has faced repossession faces a more challenging time in getting loan approval. In such cases, special lenders may approve car loans, but with added criteria such as a higher down payment and additional fees to the dealership. Dealerships also have to pay a fee to approve such loans to reduce the risk of loan default. Having equity or a down payment gives people more leverage when buying a car on credit.
Credit Score Range for Buying a New Car
There is no specific credit score that guarantees car loan approval as eligibility is influenced by multiple factors. However, having a credit score over 680 is ideal. Those with scores below 680 face more significant risks and may be charged higher interest rates. The following table is a testament to how interest rates vary based on credit scores:
For those with 720 cred scores or above, they would pay $5,500 on average in interest on a car loan
Those with 680 credit scores or above would pay an average of $6,600 in interest on a car loan
Those with 650 credit scores or above would pay an average of $8,100 in interest on a car loan
Those with 615 credit scores or above would pay an average of $10,200 in interest on a car loan
Those with 580 credit scores or above would pay an average of $13,900 in interest on a car loan
Those with credit scores of 580 or above will pay an average of $15,300 in interest on a car loan
It is clear that the higher the credit score, the lower the interest rate charged, which can impact overall credit scores.
Tips for Improving Your Credit Score
Improving your credit score is a process that requires time and patience. Making impulsive decisions with your credit can worsen your financial problems. Here are some things you can do to increase your credit score:
1. Open 3-5 Revolving Credit Accounts
Obtaining a large loan to build credit takes a lot of work. Therefore, opening a secured credit card like Open Sky or Credit Builder Card can give you a better chance of approval while building your credit score. Revolving credit accounts make up 30-35% of your credit score and can help you achieve a good credit score quickly. It's important to pay your balance on time and keep it at $5-$10 when making payments.
2. Request a Credit Limit Increase
Requesting a credit limit increase for your active revolving credit card accounts can help increase your overall credit limits and lower your credit utilization percentage. If your credit card balances exceed 30% of your overall limits, it can negatively impact your credit score. Most credit card companies require an excellent payment history of 7-15 months before agreeing to increase your credit limit.
3. Pay Down Balances
Keeping your balance low and close to zero is crucial. You don't have to use your credit cards every month. Using them for small purchases and paying a $1-$5 balance each month can help improve your credit score. If you have high balances, make a plan to pay them down gradually.
Improving your credit score is achievable by following these tips. Remember, patience and consistency are key to a better credit score.
Insights from Joe: How to Improve Your Credit Score
Many individuals have experienced the challenges of dealing with poor credit. However, taking a proactive approach toward improving your credit situation can lead to significant positive changes in your credit score. Unfortunately, some people get stuck in a cycle of having bad credit and believe that there is no hope of ever achieving good credit again. The truth is that it takes time and effort to build a solid credit score, but those who prioritize and actively work towards this goal will eventually succeed. Creating a budget and overcoming negative spending habits are the first steps toward improving your credit score. At our office, we offer guidance and support to those who need assistance with credit repair. Visit www.asapcreditrepairusa.com to learn more.