It's surprising to learn that there are actually 30 different levels of credit scores. Many people searching for the best credit score are often met with conflicting information from search engines. Unfortunately, not all of the information available is clear, and it can be tough to navigate through it. I'm Joe Mahlow, and I've been involved in financial literacy and credit repair for more than 15 years. My aim is to provide you with practical advice on a variety of topics, including credit scores. Having helped more than 20,000 clients improve their credit scores, I'm hopeful that I can impart enough knowledge to help you too. So, let's delve into it!
Contents:
Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores
What Credit Score Do You Need to Buy a House?
Determining Your Eligibility for a Car Loan Based on Credit History
Tips for Boosting Your Credit Score
Joe's Tips on Improving Your Credit Score
Types of Credit Scores: FICO and Vantage Models
Credit scores are essential when it comes to loans and credit applications. There are two significant credit scoring models to consider: the FICO model and the Vantage model. It is vital to understand their differences in calculating your credit score.
FICO Credit Score
The FICO model is the most widely used credit scoring model. It has eight different FICO models ranging from FICO 2 to FICO 10. Each of them will provide a varying credit score based on your credit report. A mortgage lender would typically pull a FICO 5 credit report, while a credit card company would likely pull a FICO 8 credit report.
Each credit report has a different "weight" based on its critical factors. For instance, the FICO 5 mortgage report has a more significant impact on previous mortgage history than other reports. Similarly, credit card companies primarily concentrate on FICO 8 reports, while auto lenders typically focus on FICO-2 reports.
To get a better understanding of your different FICO scores, sign up for an account at www.myfico.com.
Vantage Credit Score
The three major credit reporting agencies developed the Vantage model as an alternative to the FICO model. While the FICO model has been used since the seventies, Vantage is relatively new. Vantage is becoming popular in some sectors, such as personal loans and auto lending.
Although the Vantage score is accurate, it is not widely used for lending purposes. It will not provide accurate lending scores since the FICO model is the most recognized. However, it gives the best idea of roughly where your overall scores are and can be used as a general idea of your FICO score.
It is predicted that Vantage will widely replace FICO in the coming years. Credit reporting agencies have the most significant data, and the Vantage model is based on today's standards, which gives the user a clear representation of their credit scores.
In conclusion, understanding the differences between the FICO and Vantage models is critical as credit scores play an important role in securing loans and credit applications.
Understanding Credit Scores
Both the FICO and Vantage models rate scores on a scale of 350 to 850. At 350, you have a terrible credit score, while 850 is the most desirable. It is essential to assess where you stand in terms of score thresholds when creating goals to achieve higher scores. Here are a few crucial things you should know:
1. 620 or below
Anything below this score is considered poor credit, indicating adverse credit history or high balance credit card accounts, or you do not have credit cards. To improve your score, ensure timely payments and possess ten active revolving credit accounts. Using the Credit Builder Card or OpenSky Credit Card, both secured credit cards, can assist you in building your credit. If you reach a score of 620, you can qualify for an FHA home mortgage.
2. 640-680
Scores in this range indicate fair to good credit, which means you have established credit. However, you may have derogatory marks or accounts with high balances on your credit cards that need clearing. It is common for scores to drop temporarily when opening new accounts. If you experience this, don't panic, as it is temporary, and your scores will return.
3. 740+
Credit scores higher than 740 earn you a "super-prime" title, and you will receive the best interest rates on loans. Kudos if you have a score over 740, as you belong to the 20% population that enjoys this credit score. Continue making timely payments and keep your credit card accounts settled, and you will be in an excellent position.
What Credit Score Do You Need to Buy a House?
If you are looking to purchase a home and need a mortgage loan, the score required will depend on the type of loan you are applying for. There are three commonly used mortgage loans: conventional loans, FHA loans, and VA loans, each with its own set of requirements and regulations.
Conventional Loans
Conventional loans are the most popular and offer the best interest rates outside of VA loans. These loans do not require private mortgage insurance (PMI), which can add to your down payment or monthly payment. With a credit score of at least 640 and debt-to-debt ratio less than 43%, you can qualify for a conventional loan.
FHA Loan
If you have a credit score ranging between 580 and 619, you can opt for an FHA loan. However, you will be required to maintain PMI for at least 11 years, which can increase your mortgage cost. The loan requires a debt-to-income limit of up to 50%, making it suitable for low-income borrowers. The down payment requirement is as low as 3.5%, but the interest rate is typically higher.
VA loan
If you have served at least 181 days, 90 consecutive days during wartime, or six years with the National Guard, you may qualify for a VA loan. These loans do not require a down payment and offer the best interest rates possible. There is no credit score requirement, but having a history of defaulted loans or past-due debts owed to the government may impact your loan eligibility.
Determining your eligibility for a car loan
is primarily dependent on your credit history and not solely on your credit score. While having a good credit score is advantageous, it's not the only determining factor for your interest rate. To evaluate your loan application, lenders scrutinize your previous and current credit history to ascertain the risk involved in approving your loan. Late payments or repossession of a current or previous vehicle can make it difficult to get approved for a loan, whereas a clean credit history increases the chances of approval. It's notable that special finance lenders can extend credit to people with bad credit, but with requirements to be met such as a higher down payment and dealership fees. A downpayment or equity adds leverage for buying a vehicle on credit. Ideally, a credit score above 680 is ideal for a car loan, and anything below can increase your interest rate. The table below demonstrates how interest rates increase as credit scores decline. The higher your credit score, the lower the interest rate and a more favorable outcome for creditors.
Credit Score Range and Interest Rates for a New Vehicle Loan
1. Someone with a 720 credit score or above will pay an average interest of $5,500 on a loan.
2. Someone with a credit score of 680 or above will pay an average of $6,600 interest on a loan.
3. Someone with a credit score of 650 or above will pay an average of $8,100 interest on a loan.
4. Someone with a credit score of 615 or above will pay an average of $10,200 interest on a loan.
5. Someone with a credit score of 580 or above will pay an average of $13,900 interest on a loan.
6. For someone with less than a 580 credit score, the average interest on a loan is $15,300.
Tips for Boosting Your Credit Score
Improving your credit score requires a lot of patience because it takes time, but there are simple steps you can take right now to achieve a better score. Rushing to improve your score can lead to irrational decisions that will worsen your situation. Here are three things you can do to increase your credit score:
1. Open 3-5 revolving credit accounts
Revolving credit accounts, such as credit cards, have a significant impact on your credit score, making up 30-35% of it. For someone with limited or poor credit, applying for a big loan can be challenging. Opening a secured credit card such as Open Sky or Credit Builder Card can help you establish your credit score. Ensure you pay your balance on time and keep it low to make the most of this opportunity.
2. Raise your credit limits
Requesting a credit limit increase for your active revolving credit card accounts can help boost your credit score. A higher credit limit will reduce your credit utilization percentage, preventing credit score damage. Call your credit card company and ask for a "Credit Limit Increase," and provide your current income information. A credit card company would like to see a good payment history before agreeing to increase your credit limit.
3. Pay off your balances
Keeping your credit card balance low is vital. Spend only as much as you need and limit your credit card usage. It's not compulsory to use your credit card each month. Maintain about $1-$5 balance on your credit card, and if you have high balances, you might want to take an “x†percentage of your paycheck to pay it down gradually.
Joe's Tips on Improving Your Credit Score
We've all been in a position where our credit score is less than perfect. However, taking your credit situation seriously and putting in the time and effort to improve your credit can yield significant results. Many individuals with poor credit believe that it's impossible to regain excellent credit. Still, by prioritizing your credit and spending habits, you can achieve a great credit score. Begin by creating a budget and fixing any bad spending habits you have; this will have a positive effect on your credit score. This article aims to assist you in understanding more about credit. If you're looking for help with your credit score or require credit repair, don't hesitate to contact my office at www.asapcreditrepairusa.com. Follow these tips to see improvements in your credit score in no time: