Have you ever been curious about how many levels of credit scores there are? It may come as a surprise, but there are actually 30 different levels! However, navigating the confusing and often misleading information online when searching for the best credit score can be a daunting task. My name is Joe Mahlow, and I have been working in credit repair and financial literacy for over 15 years. My aim is to provide you with straightforward and honest advice on various topics, including credit scores. With my experience of transforming the credit scores of over 20,000 clients, I hope to equip you with the knowledge you need to do the same. So, let's dive in and explore credit scores!
Contents:
Different Types of Credit Scores: FICO and Vantage
Explaining Credit Score Ranges
What Credit Score Do You Need to Buy a House?
Determining What Credit Score is Needed to Buy a Car
Tips for Improving Your Credit Score
Joe's Advice on Improving Your Credit
Different Types of Credit Scores: FICO and Vantage
Credit scores are vital when applying for credit because they reflect your financial stability and determine your creditworthiness. Credit scores range between 300 and 850, and the higher your score, the better your credit profile. There are two major credit scoring models: the FICO model and the Vantage model, and both are crucial to understand and compare to calculate your credit score accurately.
FICO Credit Score
FICO is the most popular credit scoring model used by lenders to analyze a borrower's creditworthiness. There are eight different FICO models, from FICO 2 to FICO 10, and each provides a different score. It can be confusing, but the reason behind having different FICO models lies on the type of report pulled by the lender. For example, mortgage companies often use the FICO 5 credit report, while credit card companies use FICO 8. Each FICO score has a separate set of weight factors, meaning that the critical factors to the lender affect your credit score more than less important ones. Therefore, FICO scores can vary based on the type of report pulled, and borrowers usually have different scores.
Vantage Credit Score
To compete with the FICO model, the three significant credit reporting agencies (Equifax, Experian, and TransUnion) came up with the Vantage scoring model. Vantage is relatively new, compared to FICO, which has existed since the seventies. Vantage provides a free credit report to consumers, but the model is not widely used for lending purposes. It is becoming more popular in specific sectors like auto lending and personal loans, but FICO still dominates the lending sector.
Is the Vantage Score Accurate?
The Vantage score is accurate, but its accuracy is context-dependent. Since it is not widely used for lending purposes, its accuracy varies compared to FICO. However, the Vantage model provides a good "general idea" of a borrower's creditworthiness. It gives you a better idea of where your overall scores lie and becomes crucial when trying to determine your credit scores. Despite FICO dominating the lending sector, it is likely that lenders will widely integrate the Vantage scoring model within the next 5-10 years. Data is power, and since credit reporting agencies hold the most significant data outside of social media companies, they generally hold the upper hand in providing the best scoring data.
Explaining Credit Score Ranges
The levels for both the FICO and Vantage scoring models range from 350 to 850, with the lowest score being 350 and the highest being 850. While striving for a high credit rating, it is important to know where you stand during the journey of building your credit. Below are some crucial credit thresholds you should keep in mind.
1. 620 or below
Getting a score of 620 or below is considered bad credit. If you find yourself with a score below this threshold, it's highly likely that you have a history of poor credit, high-balance credit card accounts or you don't have any credit cards. To enhance this situation, making regular timely payments and having ten revolving credit accounts open will help. The Credit Builder Card or the OpenSky Credit Card can help you build your credit since they are secured credit cards. You will be qualified for an FHA home mortgage once you reach the 620 score range.
2. 640-680
Having a score between 640 to 680 is considered fair for good credit. Having scores in this range means you have created a credit history, but you may have derogatory marks or accounts on your credit. You may also have high balances on your credit cards that you need to pay down. Furthermore, opening new accounts can cause a temporary drop in your scores; however, you don’t need to worry about this if you are in this category. Your scores will eventually bounce back.
3. 740+
Any score above 740 is regarded as "super-prime" and implies that you will get the best interest rates for most loans. If you possess a credit score above 740, congratulations because you are part of the 20% of the US population with this score. Always ensure you pay your accounts on time and keep your revolving credit card accounts paid to maintain your good credit standing.
What Credit Score Do You Need to Buy a House?
When considering buying a home, it is important to know the credit score requirements for the type of mortgage loan you're interested in. Federal regulations and government backing often mean similar requirements and guidelines for most mortgage loans. There are three common mortgage loan types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are popular savings loan options, besides VA loans. These loans do not require private mortgage insurance (PMI), meaning lower downpayment requirements and better interest rates than other mortgage loans. A typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43% are necessary.
2. FHA Loan
FHA mortgage loans are available for lower credit scores ranging typically from 580 to 619. Although within the credit score limits, shop around for different lenders to get the most suitable financial options. Be wary of the mandatory PMI that will last for a minimum of 11 years, which increases your mortgage cost. A higher debt-to-income limit of up to 50% is available, allowing the purchase of more homes than conventional loans. The downpayment requirements are lower at 3.5% of the purchase price, although be prepared for a higher interest rate.
3. VA loan
VA loan eligibility is available to those who have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or lost their spouse during active duty. There are no strict credit score requirements, but pre-qualifying involves assessing previous defaulted loans and outstanding government debts. VA loans usually offer the best interest rates available and do not require a down payment during purchase. It is a fitting option to give back to veterans, according to many.
Determining What Credit Score is Needed to Buy a Car
When it comes to purchasing a car, your credit history carries more weight than your credit score. Although having a higher credit score can be beneficial, it is not the deciding factor for your loan's interest rate. If you have credit issues when applying for a car loan, lenders will assess your previous and current credit histories, assessing the risk of extending credit. Your ability to qualify for a loan heavily depends on your creditworthiness. An individual who has a history of late payments or repossession will face difficulties in securing a loan compared to someone who has the opposite. However, special finance lenders will still qualify anyone for a car loan despite credit history. They add specific criteria to the approval process, including higher down payment and additional fees. The dealership has to pay a price to help lower the risk, which it will pass on to the borrower. A higher down payment will increase your equity and offer more leverage when buying a car on credit.
Credit Score Range for a New Vehicle Loan
To secure a new vehicle loan, there is no precise credit score that ensures approval. Many criteria come into play, such as credit history, which we previously discussed. A credit score of 680 or higher is ideal when applying for a car loan. Scores below 680 increase the interest rate charged to the lender because of the risk the borrower poses. The amount of interest charged to borrowers increases as their credit score decreases, as shown in the following example:
1. Borrower with a 720 credit score or above will pay an average of $5,500 in interest on the loan.
2. Borrower with a 680 credit score or above will pay an average of $6,600 in interest on the loan.
3. Borrower with a 650 credit score or above will pay an average of $8,100 in interest on the loan.
4. Borrower with a 615 credit score or above will pay an average of $10,200 in interest on the loan.
5. Borrower with a 580 credit score or above will pay an average of $13,900 in interest on the loan.
6. Borrower with a credit score of 580 or above will pay an average of $15,300 in interest on the loan.
As indicated in this data, those with higher credit scores are charged less interest, improving their overall credit score.
Tips for Improving Your Credit Score:
Improving your credit score involves putting in some effort, but it is achievable. However, building a good credit score takes time and cannot be achieved overnight. Therefore, patience is essential when working on your credit score, so you do not make irrational decisions that will worsen the situation. Here are some tips to improve your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards):
Revolving credit is an excellent way to increase your credit score, and it is easier to obtain approval, especially if you have limited credit or are rebuilding your credit. A secured credit card that focuses on your ability to pay on time is an excellent option to start with. Revolving credit makes up 30-35% of your credit score, and making small purchases such as gas or simple groceries and ensuring that you pay your balance on time and keep it at $5-$10 each time you make a payment can help you build your credit.
2. Request a Credit Limit Increase:
If you have active revolving credit card accounts, requesting an increase in your credit limit can help lower your credit utilization percentage, increasing your overall credit limit. You can do this by calling your credit card company and requesting a “Credit Limit Increase.†Ensure that you have a history of excellent payment for about 7-15 months on your credit card before making this request.
3. Pay Down Your Balances:
Keeping your balances low and paying them down is critical to improve your credit score. Limiting your monthly usage to small purchases and leaving about $1-$5 balance each month can help improve your credit score. If you have high balances and cannot pay your credit cards off, make a game plan to pay a certain percentage of your paycheck each month towards paying the card down and eventually stop using them. This is better than running the balance back up and paying more interest than principal. Remember, your credit card spending habits play a massive role in your overall credit score.
Joe's Advice on Improving Your Credit
Many of us have experienced having poor credit, but the good news is that if you take your credit situation seriously and commit time and effort to improving it, you can see significant improvements in a short period of time. It's common for those with bad credit to feel like they will never be able to achieve good credit again, but it is possible with hard work and dedication. Improving your credit score requires effort, and those who prioritize their credit and spending habits will reap the rewards. The first step is to create a budget and work on correcting any negative spending patterns, which will positively impact your credit score. This article aims to help you gain a better understanding of credit. If you need assistance with improving your credit score or require credit repair services, contact my office today at www.asapcreditrepairusa.com.
Key points:
1. Taking your credit situation seriously and putting in effort leads to substantial improvements in your credit score.
2. It's possible to rebuild your credit score, even if it's been poor for a long time.
3. Prioritizing your credit and focusing on your spending habits is crucial.
4. Creating a budget and improving negative spending patterns can boost your credit score.