It may come as a surprise to many, but there are 30 different levels of credit scores that individuals can possess. Finding the best credit score can be a daunting task, as a simple Google search can yield numerous different answers. Unfortunately, much of the information found on the internet can actually be confusing or even misleading, leading one down a confusing path. My name is Joe Mahlow and I've been a financial literacy and credit repair expert for over fifteen years. My goal is to provide honest and straightforward advice on various topics, including credit scores. With over twenty thousand successful clients under my belt, I'm confident that I can offer enough valuable information to help you on your journey to improving your credit score. So let's dive in!
Contents:
Different Credit Scoring Models: FICO and Vantage
Determining a Good Credit Score
Credit Score for Buying a House: What You Need to Know
Determining What Credit Score You Need to Buy a Car
Tips for Increasing Your Credit Score
Joe's Insights on Credit Improvement
Different Credit Scoring Models: FICO and Vantage
Credit scores play a significant role in determining a person's creditworthiness and financial standing. There are two main credit scoring models that lenders use to assess a borrower's creditworthiness: the FICO model and the Vantage model. In this article, we will delve deeper into both models and explain the key differences.
FICO Credit Score
FICO is the most widely used credit scoring model, with eight different FICO models from FICO 2 to FICO 10. Each of these models calculates your credit score differently, depending on your credit report. For example, if you are applying for a mortgage, your lender will most likely use your FICO 5 credit report, while your credit card history will most likely impact your FICO 8 credit report. The reason for the various FICO scores is that each credit report has a different "weight" of factors that are critical to the lender. For example, a FICO 5 mortgage report will weigh heavily on previous mortgage history, while credit card history will impact the FICO 8 score the most.
Vantage Credit Score
The Vantage Score scoring model was developed by the three main credit reporting agencies - Equifax, Experian, and TransUnion - to compete with the FICO model. It is a newer scoring model, but it is gaining traction in some sectors, such as personal loans and auto lending. Vantage scores are frequently used by credit monitoring websites to provide users with a free copy of their credit report.
Accuracy of Vantage Score
While the Vantage scoring model is accurate, it is not widely used for lending purposes. Therefore, its accuracy may vary, and it may not provide an accurate representation of your actual lending score. However, it can give a general idea of your FICO score. In the future, Vantage scores may become more widely used, providing the most up-to-date scoring models based on today's standards.
Conclusion
Credit scores are crucial factors in obtaining loans, credit cards, and other financial services. Understanding the differences between the FICO and Vantage scoring models can help individuals better manage their credit reports and financial standing. To see all your different credit scores, go to www.myfico.com and sign up for an account.
Determining a Good Credit Score
Credit scores for both the FICO and Vantage models range from 350 to 850. The lowest possible score is 350, while the highest possible credit score is 850. To help you aim for the highest scores, it's vital to understand where you stand throughout your journey of building your scores. Here are some critical score thresholds you should know:
1. 620 or Below:
Scores in this range are considered bad credit, indicating some adverse credit history, possibly high-balance credit card accounts or no credit cards at all. The most effective way to enhance your credit score is to make timely payments and keep ten active revolving credit accounts open. You can choose to apply for a Credit Builder Card or OpenSky Credit Card - secured credit cards that are designed to help you improve your credit. A credit score of 620 or higher makes you eligible for an FHA home mortgage.
2. 640-680:
Scores in this range are considered fair for good credit, indicating established credit with a few derogatory marks or accounts and high balances on credit cards. Upon opening new accounts, scores will temporarily drop. However, it does not mean you should worry about your credit score, as this is just a temporary dip.
3. 740+:
Any credit score above 740 is considered "super-prime" and offers the best interest rates for most loans. Achieving a score above 740 is excellent news as it implies you are part of the top 20% of people in the United States. Continuously paying your accounts on time and maintaining your revolving credit card accounts will keep your credit score in great shape. Congratulations on your outstanding credit score and efforts!
Credit Score for Buying a House: What You Need to Know
To determine the credit score you need to purchase a house, you must know which type of mortgage loan you want to apply for. Each mortgage loan comes with different requirements and guidelines, although some similarities may exist due to federal regulation and government backing. The three most popular mortgage loans are conventional loans, FHA loans, and VA loans. Below are the credit score and other requirements for each type of mortgage loan:
1. Conventional Loans
- The most widely used mortgage loans, which can provide significant savings outside of VA loans
- No obligation to maintain private mortgage insurance (PMI), and this additional cost can increase your down payment or monthly payment
- Offers lower down payment requirements and better interest rates than other mortgage loans
- Requires a typical credit score of 640 and a debt-to-debt ratio of up to 43%
2. FHA Loan
- Designed for lower credit scores between 580 and 619
- Requires PMI for at least 11 years, which can add cost to your mortgage
- Typically has a higher debt-to-income limit, giving you the ability to buy a home with a lower income and a higher interest rate
- Low down payment requirements, which can be as little as 3.5% of the purchase price
3. VA loan
- No official credit score requirement, but loan eligibility is based on previous defaulted loans and government-owed past-due debts
- Available to military personnel who have served for at least 181 days or lost their lives during active duty
- Usually offers the best interest rates without requiring a down payment
- A great benefit for veterans to fully utilize
Determining What Credit Score You Need to Buy a Car
Your credit history is the most crucial factor when it comes to qualifying for a car loan, not just your credit score. While a high credit score does matter, it doesn't play as significant a role in qualifying for a good interest rate as your credit history does.
This is because lenders look at your current and previous credit history to assess the risk of extending credit. For example, if you have had a repossession or a history of late car loan payments, it will be more challenging to get approved for a car loan, compared to someone with a good credit history. However, if you have bad credit, some lenders will still qualify you, but they will add specific criteria, such as higher down payments and additional fees to mitigate the risk.
The credit score range you need to qualify for a new car loan is not precise since several factors determine approval. However, a credit score above 680 is ideal. A score below this range will increase the interest rate you'll be charged, given you're posing more risk to the lender.
For example, someone with a 720 credit score or above pays an average interest of $ 5,500 on a loan, while someone with a 580 credit score or above pays $ 15,300 in interest on the same loan. This shows the lower your credit score, the more interest you'll pay, which will ultimately affect your overall credit score. Lastly, when buying a car on credit, you'll have more leverage if you have equity or a downpayment.
Tips for Increasing Your Credit Score
Improving your credit score is not an overnight process as it takes time and dedication. It's crucial to be patient because impulsive decisions with your credit card can worsen your financial problems. Here are some effective ways to boost your credit score:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is one of the best ways to enhance your credit score. It can be challenging to get approval for a large loan if you have a limited credit rating or are rebuilding your credit. A secured credit card that focuses on your ability to make on-time payments can provide the best chance of approval. You can start with an Open Sky or Credit Builder Card. Revolving credit accounts for 30-35% of your total credit score, and timely payments and a low balance can enhance your credit score.
2. Raise your Limits!
Raising your credit limits can help increase your overall credit limits and lower your credit utilization percentage. To increase your credit limits, request a "Credit Limit Increase" from your credit card company, providing information such as your current income. Credit card companies usually want to see 7-15 months of excellent payment history on your credit card before approving a credit limit increase.
3. Pay down your balances!
Reducing your balance and keeping it low is vital for enhancing your credit score. Limit your credit card usage and use them for small purchases only. Leave a small balance of $1-5 on your credit card and create a game plan to pay off your balances each month. This will prevent you from paying high interest rates and negatively impacting your credit score.
Joe's Insights on Credit Improvement
No one is exempt from having a less-than-ideal credit score, but it’s crucial to take it seriously and put in the necessary effort to take control of it. By doing so, you’ll see a drastic change in your credit score rather quickly. There is a common cycle among individuals with bad credit that makes them feel like there is no hope for them to have a favorable credit score. Nevertheless, it takes a lot of effort and prioritization to achieve an excellent credit score. You can start by creating a budget and working on any negative spending habits you have. This will directly impact your credit score. If you need help with improving your credit score or require credit repair, reach out to my office today at www.asapcreditrepairusa.com. This article is here to guide you in better understanding credit.