Were you aware that there are actually a total of 30 different credit score levels? It's true! However, most individuals are unaware of this fact and may end up with conflicting information when they search for the "best" credit score online. The sheer amount of credit score information available on the internet can be overwhelming and even misleading at times. That's where I come in. My name is John Smith and I've spent the last 15 years working in the financial literacy and credit repair industry. My goal is to provide you with reliable and straightforward advice on a variety of credit-related topics, including credit scores. I've been fortunate enough to help over 20,000 clients improve their credit scores, and I'm eager to share the knowledge I've gained with you! Let's dive in and explore all you need to know about credit scores.
Contents:
Different Types of Credit Scores: An Overview
Understanding Credit Scores: A Guide to Good Credit
Good Credit Score for Buying a House
Credit History vs. Credit Score: What Matters More When Buying a Car
How to Improve Your Credit Score
Insights from Joe on Improving Your Credit Score
Different Types of Credit Scores: An Overview
Credit scores are critical factors in obtaining loans or making purchases on credit. There are two primary types of credit scoring models: the FICO model and the Vantage model. Understanding the difference between these models is crucial to understanding how your credit score is calculated and how to improve it.
FICO Credit Score
The FICO scoring model is the most common and widely used model in the lending industry. With eight different FICO models in use, each model is designed to weigh specific factors more heavily, depending on the type of credit being applied for. For example, if you are applying for a mortgage, a Fico 5 credit report will be pulled, whereas a Fico 8 credit report might be pulled if you are applying for a credit card.
This is because different lenders give more weight to different factors when assessing creditworthiness. For example, mortgage lenders give more weight to previous mortgage history than credit card lenders do, and auto lenders might look more closely at your previous auto loan history.
Vantage Credit Score
The Vantage scoring model is a newer model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. While the Vantage model is not yet as widely used as FICO, it is growing in popularity for personal loans and auto lending.
While the Vantage scoring model can be a good general indicator of your FICO score, it is not typically used by lenders to assess creditworthiness. However, it can be a helpful tool for obtaining a general idea of your overall credit scores.
Are Vantage Scores Accurate?
The accuracy of Vantage scores depends on the context in which they are used. While the Vantage scoring model is accurate in its own right, it may not accurately reflect your lending score since lenders primarily use FICO models. Nonetheless, the Vantage model is becoming increasingly popular, and we can expect to see it gain wider use in the lending industry eventually.
In conclusion, both FICO and Vantage scoring models play significant roles in determining your credit score and how lenders view your creditworthiness. Understanding both models and their differences can help you take control of your credit score. If you want to see all your credit scores in one place, you can sign up for an account on www.myfico.com.
Understanding Credit Scores: A Guide to Good Credit
Both the FICO and Vantage credit score models have a range from 350 to 850, where 850 is the best score and 350 is the worst. It's important to set achievable goals to gradually improve your credit score. To help you stay on track, here are some crucial score thresholds to keep in mind:
620 or below
If your score is within this range, it's considered bad credit, and you might have some adverse credit history, high-balance credit card accounts, or no credit cards at all. You can improve your credit scores by making timely payments and having ten active revolving credit accounts open. Consider getting a secured credit card like the Credit Builder Card or OpenSky Credit Card to build your credit. Once you reach a credit score of 620, you can start qualifying for an FHA home mortgage.
640-680
This range is considered fair for good credit. You may have established credit, but you might also have derogatory marks or accounts on your credit or high balances on your credit cards that you need to pay down. Newly opened accounts can also cause a temporary drop in your scores. Don't worry if you recently opened a new account and your scores dropped; they will return.
740+
Any score higher than 740 is considered "super-prime" and will give you the best interest rates for most loans. Congratulations if you're part of the 20% of the US population that has a score higher than 740! Continue paying your accounts on time and keeping your revolving credit card accounts paid to maintain your great credit.
Good Credit Score for Buying a House
Before applying for a mortgage loan to buy a house, it's important to know which type of loan you want to qualify for. Mortgage loans vary depending on the type, such as conventional, FHA, and VA loans. Each loan type has different criteria and guidelines, so it's important to understand the basics before applying.
1. Conventional Loans
Conventional mortgage loans are the most popular, and they provide the best option for savings outside the VA loan. PMI is not required, which avoids an added cost to your downpayment or monthly payment, and this type of loan usually has lower downpayment requirements and better interest rates than other mortgage loans. To qualify for a conventional loan, your credit score should be at least 640, and your debt-to-debt ratio should not exceed 43%.
2. FHA Loan
If your credit score is between 580 and 619, then you may consider applying for an FHA mortgage loan. Different lenders offer different deals, even within the credit score limits. FHA loans require you to keep PMI for at least 11 years, which is something to keep in mind when budgeting, and this loan typically has a higher debt-to-income limit of up to 50%. You might be eligible for an FHA loan if you're on a tight budget and you only have 3.5% of the purchase price to use towards a down payment. However, be aware that the interest rate will be higher than the rate on a conventional loan.
3. VA Loan
Veterans or current service members of the US Military, as well as their spouses, are eligible for the VA Loan. Technically, there isn't a credit score requirement, but lenders look for prior defaulted loans and any past-due debts with the government as part of the pre-qualification process. This is a great loan option for qualifying veterans because it usually offers the best interest rates, and no down payment is required. To qualify for this loan, you must have served for at least 181 days in the military, served for 90 consecutive days during wartime, served in the National Guard for six years, or be the spouse of a service member who lost their life on active duty.
Credit History vs. Credit Score: What Matters More When Buying a Car
When it comes to purchasing a car, your credit history holds more weight in determining what you qualify for than your credit score alone. While a higher credit score is important, it doesn't necessarily guarantee you a lower interest rate. Lenders take into account your previous and current credit histories to evaluate the risk involved with extending credit. If you have a poor credit history with late payments or repossessions, you'll likely face more challenges securing a loan compared to someone with a clean credit history. However, even those with bad credit can qualify for car loans from specific lenders, albeit with stricter criteria such as higher down payments and additional fees. To obtain the best deal on a car loan, it's recommended to have equity or a down payment.
While there's no single credit score that guarantees approval, having a credit score above 680 is ideal for purchasing a new vehicle. Anything below this score can increase the interest rate you're charged due to the perceived risk. As shown in the interest rate examples below, a higher credit score can save you thousands of dollars in interest payments:
Interest Rate Examples:
- 720 or above: $5,500 in interest
- 680 or above: $6,600 in interest
- 650 or above: $8,100 in interest
- 615 or above: $10,200 in interest
- 580 or above: $13,900 in interest
- Below 580: $15,300 in interest
In conclusion, while having a good credit score helps, it's essential to have a good credit history and meet or exceed a lender's specific criteria to obtain a car loan with the best terms possible.
How to Improve Your Credit Score
There are several ways to increase your credit score, but it takes time and requires patience. Here are some things you can do right now to improve your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is an excellent option to help maximize your credit scores. Starting with a secured credit card such as Open Sky or Credit Builder Card can give you the best chance of approval. Revolving credit makes up 30-35% of your overall credit score, so make sure you pay your balance on time and keep it at $5-10 each time you make a payment. Limit the use of the card to small purchases like gas or simple groceries.
2. Raise your 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 credit card companies have different processes, so call your company and request a credit limit increase. They typically want to see excellent payment history on a credit card for 7-15 months before agreeing to do this.
3. Pay down your balances!
Keeping your balance low and close to zero is crucial. Only use your credit cards for small purchases and leave about a $1-5 balance each month. If you have high balances, create a plan to pay them down. Limit your credit card usage, as your credit card spending habits play a massive role in your overall credit score.
Insights from Joe on Improving Your Credit Score
Admit it, we have all experienced having less than ideal credit scores at some point. Don't lose hope, though. If you take your credit situation seriously and dedicate time and effort in improving your finances, you will witness significant changes to your credit score in no time. Most individuals with poor credit believe that they will never have good credit again, perpetuating a never-ending cycle of credit issues. However, developing an impressive credit score requires consistent hard work, determination, and a focus on your spending habits. To get started, create a budget plan and address any negative spending practices to directly impact your credit score. This article aims to provide you with a better understanding of credit scores. For assistance with credit repair or guidance in improving your credit score, feel free to contact my team at www.asapcreditrepairusa.com.