It's surprising to learn that credit scores have 30 different levels. However, many individuals are unaware of this fact when they search for the best credit score. Often, Google provides multiple answers, some of which can be confusing or even misleading, leading people down a frustrating path. I'm here to help as an experienced financial literacy and credit repair specialist with over fifteen years' experience. My objective is to provide you with unfiltered guidance on various topics, including credit scores. Across my career, I have aided over twenty thousand clients to improve their credit scores and hope to empower you with enough knowledge to do the same. Now, let's dive right in!
Contents:
Different Types of Credit Scores: A Comparison of FICO and Vantage Models
Determining a Good Credit Score
Credit Score Requirements for Different Mortgage Loans
Determining the Credit Score Range for Buying a Car
Tips on Improving Your Credit Score
Final Thoughts from Joe
Different Types of Credit Scores: A Comparison of FICO and Vantage Models
Credit scores are vital for lenders when deciding whether or not to approve a credit application, and the two most popular scoring models used are the FICO model and the Vantage model. In this article, we will explain the differences between these two models, how they calculate your credit score, and why you have different scores depending on the context.
FICO Credit Score
The FICO credit scoring model is the most widely used credit scoring model. The eight different FICO models, ranging from FICO 2 to FICO 10, will give you different credit scores depending on your credit report. The reason for having several FICO scores is that lenders have varying criteria, which require different levels of emphasis on certain factors. For example, a mortgage lender would most likely pull your FICO 5 credit report, which heavily weighs previous mortgage history. In comparison, a credit card company would use the FICO 8 report, which mainly factors in the credit card history.
Vantage Credit Score
The Vantage Score was developed by the three major credit reporting agencies, Experian, TransUnion, and Equifax. It was created to compete with the FICO model and is frequently used by credit monitoring websites to provide free copies of credit reports. While not yet widely utilized in the lending sector, Vantage is gaining popularity in personal loans and auto lending.
Is the Vantage Score accurate?
The Vantage Score is accurate, but it depends on the context. It may not be accurate when it comes to your actual lending score, as FICO is the most recognized model in the lending sector. Vantage is best used as a "general idea" of your FICO score, which is recognized as the most important lending model.
Why is there a need for so many FICO scores?
Different lenders have different criteria, making it necessary to have different FICO scores. Furthermore, each credit report has a different "weight" based on the factors that are critical to the lender. Your previous credit history will have the most significant impact on your scores, which is why different types of lenders will require different reports.
Conclusion
Credit scores are essential, and understanding the different credit scoring models available helps to ensure a good credit score. Although FICO remains the most recognized and dominant model in the lending sector, the emergence of the Vantage model offers diverse options for personal loans and auto lending. To get a better idea of your credit scores, signing up for an account with www.myfico.com will provide a visual representation of all your different FICO scores.
Determining a Good Credit Score
Credit scores for both FICO and Vantage models range between 350 and 850. A score of 350 is the worst possible credit score, while 850 is the best score achievable. If you aim to achieve the highest score, it's essential to know where you stand throughout your journey. Here are some critical score thresholds:
1. 620 or below
If your score is 620 or below, it is considered bad credit. You may have some adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit score, make timely payments and open ten active revolving credit accounts. I recommend getting a secured credit card like the Credit Builder Card or OpenSky Credit Card. Once you hit the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680
Scoring within this range is considered fair for good credit. It means that you have established credit, but you may have some derogatory marks or accounts and high balances on your credit cards that you need to pay down. The temporary drop in your score may occur if you've recently opened a new account.
3. 740+
If your credit score is over 740, it is considered "super-prime," and you'll receive the best possible interest rates for most loans. Congratulations if you fall under this score range, as you are part of the 20% of the US population with this rating. Keep the great work up by paying your accounts on time and maintaining your revolving credit card accounts paid.
Credit Score Requirements for Different Mortgage Loans
The credit score requirements for buying a house depend on the type of mortgage loan you want to qualify for. Federal regulation, as well as government backing, ensures that most mortgage loans have similar, if not identical, requirements and guidelines. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular options for mortgage loans. They offer better interest rates and lower downpayment requirements when compared to other mortgage loans. One of the benefits of conventional loans is that you do not have to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment. Conventional loans require a minimum credit score of 640 and a debt-to-debt ratio of no higher than 43%.
2. FHA Loans
FHA loans are designed for individuals with lower credit scores, typically between 580 and 619. Each loan program has specific requirements, so it is best to shop around for lenders that offer the best financial options for you. Although it offers low downpayment requirements of 3.5%, FHA loans require you to keep PMI for at least 11 years. They also have a higher debt-to-income limit of 50%, allowing you to purchase more homes with a lower income. Interest rates on FHA loans are typically higher than interest rates on conventional loans.
3. VA Loans
The VA loan is open to individuals who have served in the United States Military for at least 181 days or 90 consecutive days during wartime. They can also be eligible if they have served for six years with the National Guard. Spouses of military personnel who have lost their lives during active duty are also eligible. Although there isn’t a specific credit score requirement for VA loans, they consider previous defaulted loans and government-owed past-due debts during the pre-qualification process. VA loans have the best interest rates available and do not require a down payment.
Determining the Credit Score Range for Buying a Car
Getting approved for a car loan depends on various factors, among which your credit history plays a significant role. Your credit score matters, of course, but it is not the ultimate factor in determining the interest rate you qualify for. In fact, lenders will scrutinize your past and current credit history to ascertain the risk involved in extending credit. In the case of auto loans, if you have a history of late payments or repossession of vehicles, you may find it challenging to get approved. However, bad credit or special finance lenders are often more lenient towards extending car loans to people with bad credit histories. They may qualify you based on specific criteria, such as a higher down payment and additional fees to the dealership. These fees help to lower the risk of you defaulting on the loan. Equity or a downpayment on the vehicle can also give you more leverage when buying a vehicle with credit.
Ideal Credit Score Range for Buying a Car
It is challenging to state an exact credit score that guarantees approval for a car loan. However, having a credit score over 680 is essential since scores below this might increase the interest rate and risk to the lender. The table below shows how credit scores affect the interest rates charged on auto loans:
720 and above: Average interest rate of $5,500 on a loan
680 and above: Average interest rate of $6,600 on a loan
650 and above: Average interest rate of $8,100 on a loan
615 and above: Average interest rate of $10,200 on a loan
580 and above: Average interest rate of $13,900 on a loan
Below 580: Average interest rate of $15,300 on a loan
As demonstrated in the table, the higher your credit score, the lower the interest rate you will pay, which ultimately affects your overall credit score.
Tips on Improving Your Credit Score
Improving your credit score takes time and effort. It's important to exercise patience and avoid making irrational decisions that could worsen your credit problems. Here are some things that you can do right now to boost your credit score:
Open 3-5 revolving credit accounts
Revolving credit is a great way to maximize your credit scores. For those with limited or bad credit, obtaining a large loan could be difficult, which makes opening a secured credit card the recommended option. Companies such as Open Sky or Credit Builder Card focus more on your ability to pay on time rather than credit scores. Revolving credit contributes 30-35% to your overall credit score.
Raise your limits
Requesting a credit limit increase can help increase your overall credit limits and lower your credit utilization percentage. This is important as exceeding 30% of credit card balances can hurt your credit score. Different credit card companies have different processes, but you can call them and request a “Credit Limit Increase.†This usually requires seven to fifteen months of excellent payment history.
Pay down your balances
Keeping your credit card balance low is crucial, and you should aim to pay them off entirely. Using your credit cards for small purchases and leaving a $1-5 balance on them each month can help maintain a good credit score. If you currently have high balances and can't pay them off immediately, allocate a portion of your paycheck to pay the credit card down each month. Remember, your credit card spending habits play a big role in your credit score, so it's important to limit your usage.
Final Thoughts from Joe
Credit issues are not uncommon and can happen to anyone. However, those who take their credit situation seriously and put in the necessary time and effort to improve their credit score can see significant changes quickly. Unfortunately, many consumers with poor credit get stuck in a cycle that seems impossible to break. But developing a great credit score requires hard work, dedication, and a focus on spending habits. To start the process, create a budget and work towards eliminating bad spending habits. This will have a direct and positive impact on your credit score. If you need guidance or help with credit repair, don't hesitate to reach out to my office at www.asapcreditrepairusa.com.