It may surprise you to learn that there are actually 30 different levels of credit scores. Despite this fact, many people are in the dark when they begin researching the best credit scores, often receiving conflicting and potentially misleading information from search engines. As someone who has spent over fifteen years working in the financial literacy and credit repair industry, my name is Joe Mahlow, and my aim is to offer you direct guidance on topics such as credit scores. Through helping over twenty thousand clients improve their credit scores, I believe I can provide ample insight to help you do the same. Let's dive right in.
Contents:
Explaining the Different Types of Credit Scores
Understanding Credit Scores: A Guide to Good Credit
What Credit Score is Needed to Buy a House?
Determining the Credit Score Needed to Buy a Car
Helpful Tips to Improve Your Credit Score
Thoughts from Joe on Overcoming Bad Credit
Explaining the Different Types of Credit Scores
There are two primary credit scoring models that consumers should be aware of: the FICO model and the Vantage model. While both are important, understanding their differences is crucial when it comes to calculating your credit score.
FICO Credit Score
The FICO model is the most commonly used credit scoring model, with eight different versions. The model versions range from FICO 2 to FICO 10, and each one may result in a different credit score depending on your credit report. Various lenders may pull different FICO reports. For example, if you are applying for a mortgage, the lender is likely to pull your FICO 5 credit report, while a credit card company may use FICO 8.
But why are there so many FICO scores? Different reports carry different weights. Crucial factors for lenders will have a more significant impact on a credit score than less important ones. For example, if you have a great payment history on a previous mortgage, it will weigh more in your favor on a FICO 5 report than if you had no history or negative history. This applies to all the different FICO scoring models. Previous credit card history is likely to impact FICO 8 scores the most as credit card companies primarily use them. Meanwhile, FICO 2 reports are commonly used by auto lenders, where previous auto history weighs heavily on scores.
If you want to see your various FICO scores, head to www.myfico.com and create an account.
Vantage Credit Score
The Vantage model is a new scoring model as compared to FICO, which has been in use since the 1970s. The credit reporting agencies Equifax, Experian, and TransUnion created the Vantage Score to rival the FICO scoring model. Credit monitoring websites often provide free credit reports based on Vantage Score. Although FICO continues to dominate the lending sector, Vantage Score is gaining popularity in some areas, including personal loans and auto lending.
Is the Vantage Score Accurate?
Whether the Vantage Score is accurate or not is subjective as it depends on context. While the Vantage Score is indeed accurate, it is not widely employed for lending purposes, so it will not necessarily reflect your actual lending score. As a credit score is only as accurate as your ability to receive a loan, and FICO is the most recognized and frequently-used scoring model, Vantage's accuracy can vary. Instead, the Vantage Score is a solid "general idea" of your FICO score. It can give a rough idea of your overall scores since obtaining your FICO score without a lender's credit report or payment for getting it can be tough.
It's possible that loan providers across the nation will embrace the Vantage scoring model in the coming 5-10 years as its best scoring models are based on current standards. In my opinion, the FICO scoring model is outdated and does not give a clear picture of a user's credit scores. Remember, credit reporting agencies collect the most data aside from social media firms and have the upper hand in providing the most reliable scoring data.
Understanding Credit Scores: A Guide to Good Credit
Credit scores are essential when it comes to making major purchases or securing loans. Both the FICO and Vantage models score ranging from 350 to 850, with 850 being the best score and 350 being the worst. Here are some vital score thresholds to help you set your goals in building your scores:
620 or below
If your score falls under this threshold, your credit is considered bad. This may indicate that you have adverse credit history, high-balance credit card accounts, or no credit cards at all. The best way to improve your score is by making timely payments and having ten active revolving credit accounts open. You can start improving your score by using secured credit cards like Credit Builder Card or OpenSky Credit Card. Once your score reaches 620, you can start qualifying for an FHA home mortgage.
640-680
Scores within this range are considered fair for good credit. This indicates that you have established credit, but there may be derogatory marks or accounts on your credit report, high balances on your credit cards, or recently opened accounts that can temporarily drop your score. Pay down balances and continue to make timely payments to improve your score.
740+
If you have over a 740 credit score, you are part of the 20% of the US population with a "super-prime" score. Congratulations on your excellent credit! Keep paying your accounts on time and maintaining your revolving credit card accounts paid to reap the benefits of the best interest rates for most loans.
What Credit Score is Needed to Buy a House?
The credit score required to purchase a home varies depending on the type of mortgage loan you're seeking. While most mortgage loans have similar requirements and guidelines, federal regulations and government backing can create differences.
Conventional Loans
Conventional loans are the most common mortgage type, and they often offer the best interest rates. With a credit score requirement of 640 and a debt-to-debt ratio no higher than 43%, you can avoid paying private mortgage insurance (PMI) and enjoy a lower down payment.
FHA Loans
On the other hand, FHA loans are designed for those with lower credit scores (typically between 580 and 619), making them a viable option. While they offer lower down payment requirements and a higher debt-to-income limit of up to 50%, you'll have to maintain PMI for a minimum of 11 years, which can increase your expenses.
VA Loans
Lasty, the VA loan is an excellent option for veterans as they offer the best interest rates and typically do not require a down payment. The credit score requirement varies, but previous defaulted loans and government-owed past-due debts can affect pre-qualification. To qualify for a VA loan, you must have served in the United States Military for at least 181 days or other qualifying criteria.
Determining the Credit Score Needed to Buy a Car
When considering financing a vehicle purchase, the credit history is a crucial factor rather than just the credit score. Although a high credit score holds importance, it contributes less toward the interest rate for which one qualifies. Lenders assess credit history regarding previous and current loans and identify the risk factor before loan approval. For instance, borrowers who have been late on a previous or current auto loan or have undergone repossession face more difficulty getting loan approval. In such cases, special finance lenders qualify almost anyone for a car loan, but borrowers must fulfill specific requirements, such as paying a higher down payment or dealership fees. These fees help dealerships cope with the risk of a borrower defaulting on a loan and approving them for the loan. It is essential to have equity or a down payment while buying a vehicle on credit to have the best leverage.
Credit Score Range for Purchasing a New Vehicle
A suitable credit score for purchasing a vehicle is above 680, though there is no specific score used for loan approval since a lender assesses various factors. Anything above the score mentioned usually keeps interest rates in check, and any score below may result in higher interest rates and pose a higher risk. The following data serves as a current example of how different credit scores can impact the interest rate.
- A score of 720 or above results in an average interest rate of $5,500 on a loan.
- A score of 680 or above results in an average interest rate of $6,600 on a loan.
- A score of 650 or above results in an average interest rate of $8,100 on a loan.
- A score of 615 or above results in an average interest rate of $10,200 on a loan.
- A score of 580 or above results in an average interest rate of $13,900 on a loan.
- A score of 580 or below results in an average interest rate of $15,300 on a loan.
This data shows that a higher credit score results in lower interest rates, ultimately affecting the borrower's credit score positively.
Helpful Tips to Improve Your Credit Score
Improving your credit score takes time and effort, and it’s important to cultivate patience. Rushing the process can lead to irrational decisions that make your credit problems worse. However, there are steps you can take right now to boost your credit score with relatively little effort.
Here are some actionable tips to improve your credit score:
1. Open 3-5 revolving credit accounts
Revolving credit, like credit cards, is an excellent way to maximize your credit score. For people with limited credit, or those rebuilding credit, obtaining a large loan to build credit can be challenging. Starting with a secured credit card that doesn’t focus on credit scores can give you a better chance of approval. Since revolving credit accounts for 30-35% of your overall credit score, it's the best option to improve your score quickly. But ensure you make payments on time and maintain a balance of $5-$10.
2. Raise your limits
Requesting a credit limit increase can increase your overall credit limits and lower your credit utilization rate. A high utilization rate can hurt your credit score significantly. Each credit card company has a different process to request a limit increase, but you can typically fill out a form with current income details. Before approving a request, most card companies look for 7-15 months of excellent payment history.
3. Pay down your balances
Keeping your balance low can have an enormous positive impact on your credit score. If you currently have high balances and cannot pay them off immediately, establish a payment plan to pay a percentage of your paycheck each month and ultimately stop using your cards. Limiting usage is crucial because credit card spending habits play a huge role in determining your overall credit score. Besides, credit card interest rates are usually high, and most payments go towards interest and not principal.
Improving your credit score is essential to your financial well-being. These steps can improve your score quickly and help build a solid credit foundation over time.
Thoughts from Joe on Overcoming Bad Credit
We've all faced the challenges of having poor credit at some point. The key is to take ownership of your current credit situation and commit to investing time and effort in improving both your credit and yourself. Many consumers feel resigned to a lifetime of bad credit, but with the right focus, you can make significant progress toward a better credit score. Developing great credit takes hard work and vigilance, but those who prioritize their credit and adjust their spending habits can come out on top. Start by creating a budget and addressing any bad habits to see a direct improvement in your credit score. For further understanding and assistance with credit repair, you can connect with our team at www.asapcreditrepairusa.com. Consider today as the starting point of your path toward better credit.