It may come as a surprise that your credit score actually ranges across 30 different levels. With so much information available on the internet, it's understandable that people can become overwhelmed when searching for the best credit score. Unfortunately, much of this information can be confusing and may lead you astray. Fortunately, my name is Joe Mahlow, and I've been working in financial literacy and credit repair for over fifteen years. My aim is to provide you with honest and straightforward advice on various financial topics, including credit scores. Throughout my career, I've helped over twenty thousand clients transform their credit scores for the better, and I hope to do the same for you. So, without further ado, let's dive into this topic and help you on your way to a better credit score!
Contents:
Understanding Different Credit Score Models: FICO vs. Vantage
Understanding Good Credit Scores
What Credit Score is Needed to Purchase a Home?
Determining the Ideal Credit Score for Buying a Car
Tips on Improving Your Credit Score
Joe's Words of Wisdom on Improving Your Credit
Understanding Different Credit Score Models: FICO vs. Vantage
Credit scores play a significant role in an individual's financial life, and different scoring models exist. Two prominent models are the FICO model and the Vantage model. Both models have significant differences in their calculation method, making it essential to understand how they work.
1. FICO Credit Score
The FICO model is widely used and popular among lenders, with different versions ranging from FICO 2 to FICO 10. Lenders use specific versions based on the type of credit applied. For instance, mortgage lenders typically use FICO 5, while credit card companies favor FICO 8. Each FICO score weighs various factors differently, considering the context of the credit applied.
2. Vantage Credit Score
Developed by major credit reporting agencies, Equifax, Experian, and TransUnion, the Vantage model is new compared to the FICO model used since the seventies. Although not widely used for lending purposes, Vantage reports are prevalent among credit monitoring websites, providing a free credit report. The Vantage model gaining popularity in some sectors, such as personal loans and auto lending.
Accuracy of Vantage Score
While the Vantage score is deemed accurate, its precision relative to FICO depends on the context. The Vantage score may give a general idea of a borrower's FICO score. However, since FICO scores dominate the lending sector, it varies when considering the lending context. As credit reporting agencies have a vast pool of credit data, Vantage could replace the FICO model in the near future.
In conclusion, knowing the difference between FICO and Vantage models is essential in understanding credit scores. Borrowers can check their various FICO scores on www.myfico.com, while the Vantage model provides a reasonable general idea of their overall score. As credit report agencies have the most extensive data collection agency, Vantage may provide the best scoring models in the future, surpassing the outdated FICO model.
Understanding Good Credit Scores
Credit scores are measured by both the FICO and Vantage models and range from 350 to 850, with 350 being the worst and 850 being the best score you can have. When striving for the highest score possible, it's crucial to know where you stand as you build your credit. Here are some essential score thresholds to consider:
1. 620 or below
This falls under the category of bad credit. A score within this range indicates adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your scores, you need to make timely payments and keep active revolving credit accounts. Secured credit cards like the Credit Builder Card or OpenSky Credit Card would be helpful in building your credit. Once you reach the 620 score range, you'll qualify for an FHA home mortgage.
2. 640-680
This range is fair for good credit. It implies that you've established credit, but you may have derogatory marks or accounts, high balances on credit cards, or newly opened accounts that temporary lower your scores. Paying down high balances and avoiding new accounts can improve your credit scores.
3. 740+
A credit score above 740 is considered "super-prime" and gives you the most favorable interest rates for most loans. Having a score above 740 takes you to the top 20% of the US population. Always make timely payments and diligently maintain revolving credit card accounts to keep your credit score in this range. If your credit score falls into this range, congratulations, you're in great shape!
What Credit Score is Needed to Purchase a Home?
The minimum credit score required to purchase a home varies based on the type of mortgage loan you are interested in. Most mortgage loans have similar requirements due to government regulation and backing, but there are differences. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and usually the most affordable option, aside from VA loans. They do not require private mortgage insurance (PMI), but they do have a credit score requirement of at least 640 and a debt-to-income ratio of no higher than 43%. Conventional loans also have lower down payment requirements compared to other mortgage loans and offer better interest rates.
2. FHA Loans
FHA loans are designed for those with lower credit scores, typically between 580 and 619. Although they have a lower credit score requirement, FHA loans require PMI for at least 11 years, which may result in increased monthly payments. The debt-to-income limit with an FHA loan is up to 50%, which may allow you to afford more homes if you have a lower income. While the down payment for an FHA loan can be as low as 3.5%, the interest rate is typically higher.
3. VA Loans
There is technically no credit score requirement for a VA loan, but lenders assess applicants for previous defaulted loans and past-due debts owed to the government. The VA loan is exclusively for those who have served in the military for at least 181 days, served 90 consecutive days during wartime, or served 6 years with the National Guard. VA loans typically offer the best interest rates and do not require a down payment, making them the most advantageous loan option for veterans.
Determining the Ideal Credit Score for Buying a Car
Your credit history is the most significant factor in determining your eligibility for a car loan, but while a high credit score is crucial, it does not significantly affect the interest rate you qualify for. When applying for a car loan, lenders assess the risk involved by examining your current and previous credit history. Late payments or a series of repossession can make approval more difficult. However, specialized lenders can provide loans to anyone with terrible credit scores, but with particular criteria, such as a higher down payment.
To get the most out of buying a car with credit, you should have equity or provide a down payment.
There is no specific credit score that guarantees approval, as many elements come into play, but having a credit score above 680 is considered ideal. Having a credit score below this may increase the interest rate charged. The higher your credit score, the less interest you will pay for your car loan, as illustrated in the following example:
1. A person with a credit score of 720 or above typically pays an average of $5,500 in interest on their loan
2. A person with a credit score of 680 or above typically pays an average of $6,600 in interest on their loan
3. A person with a credit score of 650 or above typically pays an average of $8,100 in interest on their loan
4. A person with a credit score of 615 or above typically pays an average of $10,200 in interest on their loan
5. A person with a credit score of 580 or above typically pays an average of $13,900 in interest on their loan
6. A person with a credit score of below 580 typically pays an average of $15,300 in interest on their loan
As you can see, a higher credit score translates to significantly less interest charges, which will ultimately affect your overall credit score.
Tips on Improving Your Credit Score
To improve your credit score, you must be patient and committed. Building an excellent credit score takes time, and rushing the process can lead to irrational decisions that will harm your credit score further. The following measures can boost your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, can give you the best chance of approval, especially if you have limited credit or are rebuilding it. Opt for a secured credit card, such as Open Sky or Credit Builder Card, as they focus on your ability to pay on time rather than your credit score. Revolving credit makes up 30-35% of your credit score, and using your credit cards for small purchases like gas or groceries and keeping the balance at $5 to $10 will reflect positively on your credit score in 2-4 months.
2. Raise Your Credit Limit
Requesting a credit limit increase for your credit cards can enhance your overall credit limits and decrease your credit utilization percentage, which affects your credit score. You can request a credit limit increase online or by calling your credit card company. They will evaluate your payment history for 7-15 months before agreeing to increase your limit.
3. Pay Down Your Balances
Keeping your balance low and paying your bills on time is critical. If you have high balances, you can pay a percentage of your paycheck each month to pay the credit card down while not using them. Limiting your credit card usage ensures that you don't accumulate high-interest rates and damage your credit score.
Joe's Words of Wisdom on Improving Your Credit
We've all experienced a less than satisfactory credit score at some point. However, by dedicating time and effort to improving your credit, substantial changes can be made in a short amount of time. Unfortunately, many individuals with poor credit perpetuate a cycle of ongoing credit issues, convincing themselves that restoring good credit is unattainable. The truth is, a great credit score takes hard work and dedication, but anyone who prioritizes their credit and spending habits can succeed. To begin your journey, establish a budget and focus on improving any negative spending habits. These actions will ultimately reflect positively on your credit score. This article serves as a helpful guide to understanding credit. If you're seeking credit repair guidance and support, contact my office at www.asapcreditrepairusa.com.