It might surprise you to learn that credit scores have 30 different levels. Despite this, many people who search for the best credit score don't realize that they will often get conflicting answers from Google. Unfortunately, some of the credit score information available online is not only confusing, but also potentially misleading. My name is Sarah Oaks, and I have been working in the financial literacy and credit repair industry for fifteen years. I'm here to offer you practical advice on various topics, including credit scores. With my assistance, I've helped more than 20,000 clients improve their credit scores. And now, I'm here to help you. Let's start by diving into the details.
Contents:
Different Types of Credit Scores: A Comparison between FICO and Vantage Models
Understanding Credit Scores
What is a Good Credit Score to Qualify for a House Loan?
What Credit Score is Good for Buying a Car?
Tips for Boosting Your Credit Score
Advice from Joe
Different Types of Credit Scores: A Comparison between FICO and Vantage Models
Credit scoring plays an essential role in determining whether an individual should receive a loan or credit. There are two popular models used to evaluate one's credit score, the FICO and Vantage scoring models. Both models differ in how they calculate credit scores, which is fundamental to understand.
FICO Credit Score
The FICO scoring model is the most recognized and widely used model that lenders pull from. It has eight different models, from FICO 2 to FICO 10, influencing one's credit scores depending on the report pulled. FICO scores vary depending on the lender's type that pulls the report; for instance, mortgage lenders prefer FICO 5, while credit card lenders prefer FICO 8. Each FICO model has a different "weight" that gives distinctive importance to each factor examined. Therefore, it is crucial to know which FICO report lenders use so that you can identify and improve on critical areas for a better score.
Vantage Credit Score
The three major credit reporting agencies came up with the Vantage scoring model to compete with FICO. Although the Vantage model is new compared to FICO, it is gaining popularity in some sectors, like auto lending and personal loans. Vantage aims to provide a free credit report to users and is mostly used as a "general idea" of one's credit score, but it is not an accurate representation of lending scores.
Is the Vantage Score accurate?
The Vantage Score is accurate, but its accuracy depends on how well a loan-seeker can obtain a loan since FICO is more recognized. Lenders nationwide might widely use the Vantage scoring model in the next 5–10 years as it provides relatively better scoring models based on today's standards. The FICO model may seem outdated and confusing to some individuals. Nonetheless, the credit reporting agencies that have the most significant data collection provide the best score data. If they have the data, they have the upper hand against social media companies.
Understanding Credit Scores
Your credit score is a vital metric that lenders use to gauge your creditworthiness when deciding if they should lend you money. Scores for both the FICO and Vantage models range from 350 to 850, and the higher the score, the better your credit. Here are some critical score thresholds to keep in mind when building your credit history:
620 or below:
This is considered bad credit, with a high possibility of adverse credit history, high-balance credit card accounts, or no credit cards at all. Timely payments and ten active revolving credit accounts are recommended to improve credit scores. Consider using secured credit cards like the Credit Builder Card or OpenSky Credit Card. Once you hit the 620 mark, you can start qualifying for an FHA home mortgage.
640-680:
This is considered fair to good credit and means you have established credit, although you may have some derogatory marks or accounts on your credit report. You may also have high balances on your credit cards that you need to pay down. If you opened a new account recently, don't worry; a temporary drop in credit scores is common.
740+:
Any score above 740 is considered super-prime and places you in the top 20% of the US population. It also gives you access to the best interest rates for most loans. You should keep up the great work by paying your accounts on time and keeping your revolving credit card accounts paid.
What is a Good Credit Score to Qualify for a House Loan?
The requirements for a good credit score to qualify for a house loan will depend on the type of mortgage loan you apply for. The most common mortgage loan types include conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular loans and often provide the best savings option outside of the VA loan. They have lower down payment requirements and better interest rates than other mortgage loans. Conventional mortgage loans usually require a credit score of at least 640 and a debt-to-debt ratio no higher than 43%. Additionally, with conventional loans, you won't need to keep private mortgage insurance (PMI), which can add up as an extra cost.
FHA Loans
The FHA mortgage loan is ideal for lower credit scores, typically between 580 and 619 credit score. With FHA loans, you could have a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan if you have a lower income. However, FHA loans require PMI for at least 11 years, which can be a burden to your mortgage. Additionally, the down payment requirements are low, around 3.5% which can be helpful in allowing you to get into a mortgage but you will typically end up with a higher interest rate.
VA Loan
There isn’t any credit score requirement with the VA loan; however, the lenders look for previously defaulted loans and any past-due debts to the government when pre-qualifying you. You must have either served for 181 days in the US Military, served 90 consecutive days during wartime, have served 6 years with the National Guard, or be a surviving spouse. The VA loan typically has the best interest rates available and does not usually require a down payment, making it among the most attractive loan options for many borrowers. As the VA loan mainly favors veterans, it is an excellent way of giving back to our veterans.
What Credit Score is Good for Buying a Car?
When it comes to buying a car, it's natural to wonder what credit score is necessary for approval. While credit score does play a role, the most critical factor is your credit history. When applying for a car loan, lenders look at your previous and current credit histories to assess the risk associated with extending credit. A credit score over 680 is considered ideal, but a low score could result in a higher interest rate.
Here's a breakdown of how credit score impacts interest rates:
A score of 720 or above will pay around $5,500 in interest on a loan.
A score of 680 or above will pay around $6,600 in interest on a loan.
A score of 650 or above will pay around $8,100 in interest on a loan.
A score of 615 or above will pay around $10,200 in interest on a loan.
A score of 580 or above will pay around $13,900 in interest on a loan.
It's worth noting that having a bad credit score doesn't necessarily prevent you from securing a car loan. Special finance lenders will extend a loan, but it will include specific criteria such as a higher down payment and added fees to lower the risk of default. Additionally, dealerships may select the vehicle you're approved for, ensuring they have a higher markup to cover the fee they have to pay. Ultimately, it's useful to have equity or a down payment to have maximum leverage when buying a vehicle on credit.
Tips for Boosting Your Credit Score
Improving your credit score requires time and patience. It is a gradual process that involves avoiding bad decisions and making good ones. Here are some things you can do right now to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit such as credit cards is a good option to maximize your credit score. For individuals with limited credit, getting approved for a large loan can be difficult. However, secured credit cards like Open Sky or Credit Builder Card can be a good starting point if you have no bankruptcy history and a steady income. Revolving credit makes up a significant portion of your overall credit score, so using these accounts responsibly can boost your score in just a few months. It is important to pay your balance on time and keep your usage within $5-$10.
2. Raise your limits:
Requesting an increase in your credit limits can help lower your credit utilization percentage. You can do this online or by calling your credit card company, but they usually want to see a good payment history on your card before granting the request.
3. Pay down your balances:
Keeping your balances low is critical to maintaining a good credit score. Using your credit cards for small purchases and leaving a small balance of $1-$5 can be helpful. If you have high balances, create a plan to pay them down gradually to avoid worsening your score. Most importantly, minimize your credit card usage to avoid falling back into debt.
Advice from Joe
We've all experienced the struggle of having less-than-ideal credit. Nevertheless, if you're serious about improving your credit situation, putting in some effort and dedicating time to work on yourself can lead to significant improvements in your credit score. Many people with poor credit feel like it's an inescapable cycle, but by prioritizing your credit and being mindful of your spending habits, you can develop an excellent credit score. Starting by preparing a budget and addressing detrimental spending habits directly correlates to boosting your credit score. In this article, you will gain a better understanding of credit, but if you require professional guidance to repair your credit score, don't hesitate to reach out to my office at www.asapcreditrepairusa.com.