It might surprise you to learn that there are actually 30 different levels of credit scores. Despite this fact, many people searching for information on credit scores are often met with conflicting answers and confusing advice. Not only can this be overwhelming, but it can also lead to misleading information that ends up doing more harm than good. As someone who has spent over 15 years in the financial literacy and credit repair industry, my mission is to provide unbiased and insightful advice on topics like credit scores. With a track record of helping over 20,000 clients achieve better credit scores, I hope to share my knowledge and experience with you. So, let's dive into this important topic!
Contents:
Understanding Different Credit Scores: FICO and Vantage Models
Understanding Good Credit Scores
What Credit Score Is Needed To Buy a House
Determining a Good Credit Score for Buying a Car
Tips for Increasing Your Credit Score
Joe's Insights on Credit
Understanding Different Credit Scores: FICO and Vantage Models
When it comes to credit scores, it's essential to know that there are mainly two types of scoring models used by lenders and financial institutions: FICO and Vantage scores. Though both models are critical to understand, there are differences in how each calculates your credit score.
1. FICO Credit Score
The FICO scoring model is by far the most widely used with eight different FICO models (FICO 2 to FICO 10). Each model can give you a different score depending on the credit report you receive. Different lenders will pull different FICO reports, depending on the type of credit you are looking for- if it's a mortgage, it'll most likely be FICO 5, a credit card, FICO 8.
So, why are there many FICO scores? Each FICO model assigns different weights to the factors that determine creditworthiness. For example, a FICO 5 mortgage report will weigh heavily on the previous mortgage history, while FICO 8 scores for credit cards will weigh heavily on credit card history.
2. Vantage Credit Score
Vantage is a newer credit scoring model compared to FICO. The model, developed by the three major credit reporting agencies, is used by credit monitoring websites to provide free credit reports to consumers. Although not widely used in the lending sector, the Vantage model is gaining popularity for personal loans and auto lending.
But, is the Vantage score accurate? The answer is slightly different depending on the context. Since Vantage is not widely used for lending purposes, it may not accurately represent your actual lending score. However, Vantage can still be a good "general idea" of your FICO score.
In conclusion, the FICO scoring model is still the most commonly used scoring model in the lending sector. However, the Vantage model is gaining popularity, especially in non-lending sectors. It's essential to know and keep track of both your FICO and Vantage scores and use them as a guide to help you boost your overall creditworthiness.
Understanding Good Credit Scores
Credit scores can be measured by either the FICO or Vantage models, with scores ranging from 350 to 850. The ideal score is 850, while 350 is considered the worst possible score. Throughout your journey of building your credit score, it's essential to remain mindful of where you stand and set goals for the highest scores. The following milestones are critical:
1. 620 or below:
If you have a score below this range, you are considered to have bad credit and may have a history of adverse credit. Work towards making timely payments and opening ten active revolving credit accounts. Secured credit cards like Credit Builder Card or OpenSky Credit Card can provide a useful starting point. Once you reach the 620 score range, FHA home mortgages will become more accessible.
2. 640-680:
Falling within this range, your scores are considered fair for good credit. Though you have established credit, you may still have some derogatory marks, high balances, or newly opened accounts that can impact your scores temporarily. Plan on paying dues on time while keeping your revolving credit accounts paid.
3. 740+:
Any score over 740 is deemed "super-prime," and such individuals enjoy the best interest rates for most loans. Congratulations if you are part of the 20% of the US population with this score. Continue making regular payments and work on keeping your revolving credit card accounts paid. Maintaining your score at this level is critical for future borrowing.
What Credit Score Is Needed To Buy a House?
The required credit score to buy a house will depend on the type of mortgage loan you are interested in qualifying for. Mortgage loans are regulated by federal guidelines which cause similarities or differences between the requirements and guidelines of most mortgage loans. There are three common mortgage loan types available: Conventional loans, FHA loans, and VA loans.
1. Conventional Loans:
These loans do not require Private Mortgage Insurance (PMI), which is an added cost that could increase your monthly payment or down payment. PMI serves as a protection plan for the lender in case you stop payments. Conventional loans have lower down payment requirements and better interest rates than other loan options. A credit score of 640 and a debt-to-debt ratio no higher than 43% are typical credit score requirements for conventional mortgage loans.
2. FHA Loan:
FHA mortgage loans are for lower credit scores, usually between 580 and 619. Different loan programs have different requirements; therefore, if you’re within the credit score range, it’s wise to shop around for the best lender that suits you. You will be required to maintain PMI for at least 11 years, which could become an additional cost for you. The loan also has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than a conventional loan if you have a lower income. While you can secure an FHA loan with a down payment of just 3.5%, the interest rate will be higher.
3. VA Loan:
Technically, there is not a credit score requirement with the VA loan; instead, they look for any previous defaulted loans and any government-owed past-due debts when pre-qualifying you. You must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard or your spouse was in the military and lost their life during active duty to qualify for this loan. VA loans typically have the best available interest rates and do not require you to make a down payment. It is a perfect opportunity to give back to our veterans.
Determining a Good Credit Score for Buying a Car
When seeking financing for a car, credit history is more critical than the credit score. Even though a higher credit score is beneficial, the interest rate you qualify for is mainly based on credit history. Lenders examine the credit history, both past and present, to interpret the risk of lending to you. A person with late payments or a previous repossession faces more significant challenges in acquiring a loan than an individual without such issues. Poor credit or special finance lenders qualify anyone for a car loan, even those with previous repossessions, with additional criteria such as higher down payment and extra fees to protect themselves from risk. The dealership also pays a fee to help reduce the danger of defaulting on the loan and looks at equity or a down payment when you buy a car on credit.
Credit Score Ranges for Buying a New Car
There is no magic number that determines if you qualify for a loan, but a score of at least 680 is ideal. Anything less increases the interest rate charged due to the risk to the lender. For example, individuals with scores above 720 paid an average of $5,500 in interest on loans, compared to $15,300 for those with a score below 580. As this data demonstrates, a higher credit score means less interest, which contributes to a better overall credit rating.
Tips for Increasing Your Credit Score
Building a good credit score takes time and effort. It is important to exercise patience during the process, as impulsive decisions can make things worse. However, there are several things you can do right now to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, can be easier to obtain approval for and can help maximize your credit score. To build credit quickly, consider starting with a secured credit card, such as Open Sky or Credit Builder Card, that doesn't focus on your credit score but rather your ability to pay the balance on time. Revolving credit accounts make up 30-35% of your credit score, so it is important to pay the balance on time and keep it low ($5-$10).
2. Raise Your Limits
Requesting a credit limit increase for your credit cards can decrease your credit utilization percentage and increase your overall credit limits. Most credit card companies allow you to do this online or by calling them directly. Make sure you have a good payment history before requesting an increase.
3. Pay Down Your Balances
Keeping your balance low and close to zero is important. If your balances are high, make a plan to pay a percentage of your paycheck each month towards the credit card debt until it is paid off. Leave a small balance ($1-$5) on the card each month and limit usage to small purchases. Remember, credit card usage plays a major role in your overall credit score, so it is important to limit your usage and avoid running up balances.
Remember, building a good credit score takes time and patience, but by following these tips, you can improve your credit score with little effort.
Joe's Insights on Credit
Let's face it - we've all experienced the frustration of having less than perfect credit. However, if you're willing to put in the time and effort to improve your credit situation, you'll be amazed by how quickly your credit score can improve. Unfortunately, many people with poor credit fall into a never-ending cycle, feeling like they can never achieve good credit again. The truth is, building a great credit score requires hard work and dedication, but those who make their credit a priority can achieve success. Start by creating a budget and identifying and addressing any problematic spending habits; this will have a direct impact on your credit score. For more information and support on improving your credit score or for credit repair assistance, visit www.asapcreditrepairusa.com.