It may come as a surprise to many people that credit scores are not a one-size-fits-all concept. In fact, there are a total of 30 different levels of credit scores in existence. This fact can often leave people feeling confused and uncertain when it comes to finding the best credit score for their individual needs. With so much conflicting information available on the internet, it can be difficult to know where to turn for reliable advice. My name is Joe Mahlow, and I have spent more than fifteen years working in the fields of financial literacy and credit repair. My aim is to provide you with candid and practical advice on a range of topics, including credit scores. Throughout my career, I have assisted over twenty thousand clients in improving their credit scores, and I am eager to share my knowledge with you. So, without further ado, let's dive in.
Contents:
Different Types of Credit Scores
The Future of Credit Scores
Credit Score Requirements for Different Types of Mortgage Loans
Determining Credit Worthiness When Purchasing a Car
Tips for Improving Your Credit Score
Advice from Joe about Improving Your Credit
Different Types of Credit Scores
FICO Credit Score
The FICO credit scoring model is the most popular and widely used scoring model, with eight different FICO models, ranging from FICO 2 to FICO 10. Each model produces a different credit score based on your credit report. Different FICO scores exist due to the varying weights given to different factors according to the lender. Depending on the type of lender you use, they will pull a different FICO report. For instance, a mortgage lender will usually pull your FICO 5 credit report if you apply for a home loan. If you apply for a credit card, they will most likely pull your FICO 8 credit report.
Why Multiple FICO Scores?
Each credit report has a different weight, meaning that different factors will impact a credit score more heavily than others. For example, a previous mortgage history heavily impacts a FICO 5 mortgage report, whereas credit card history mostly affects the FICO 8 report. Auto lenders usually pull FICO 2 reports where previous auto history weighs heavily on your scores. You can see your different FICO scores on www.myfico.com.
Vantage Credit Score
Vantage Score is a new scoring model developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, designed to compete with the FICO scoring model. Although FICO dominates the lending sector, Vantage is gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites use Vantage to provide you with free credit reports.
Is the Vantage Score Accurate?
The accuracy of the Vantage Score depends on the context within the question. While Vantage is accurate, it is not widely used for lending purposes, so it may not be accurate when it comes to your actual lending score. Its accuracy can vary since FICO is the most recognized scoring model. Vantage is more of a general idea of your FICO score. However, since it's challenging to know your FICO score without paying for it or having a lender pull your credit report, you can use your Vantage score to determine where your overall scores might be.
The Future of Credit Scores
The Vantage scoring model may become widely used in the next 5–10 years due to its ability to provide the best scoring models based on today's standards. The FICO model is outdated and doesn't give users a clear representation of their credit scores. Credit reporting agencies are the biggest data collection agencies outside of social media companies and have the upper hand in providing the best scoring data.
What is considered a good credit score?
Credit scores are scored in a range of 350 to 850 for both FICO and Vantage models. A score of 350 is considered the worst, while 850 is the best score possible. To reach your highest score potential, it's crucial to know where you are on your credit score journey. Below are some vital score thresholds to help you figure out where you stand.
1. 620 or below:
If you are below this threshold, you have bad credit, and you might have a history of poor credit, high-balance credit card accounts, or no credit cards in general. To increase your credit scores, you can make timely payments and have ten active revolving credit accounts open. You can also try secured credit cards like the Credit Builder Card or OpenSky Credit Card, which will help in building credit. Once you reach the credit score range of 620, you can qualify for an FHA home mortgage.
2. 640-680:
Credit scores within this range are considered fair. You have established credit, but there might be some derogatory marks or accounts on your credit, and you may carry high credit card balances, which need to be paid down. If you opened a new account recently and your scores drop, don't worry; it's a temporary drop, and your scores will return.
3. 740+:
Any credit score above 740 is a "super-prime" score and earns the best interest rates for most loans. If you have a score above 740, congratulations, you are part of the 20% in the US population with this score. To continue having excellent credit, always pay your accounts on time, and keep your revolving credit card accounts paid. You will be in an overall excellent financial state.
Credit Score Requirements for Different Types of Mortgage Loans
The credit score needed to buy a house depends on the type of mortgage loan you want to apply for. To ensure compliance with federal regulations, you'll find that requirements and guidelines for most mortgage loans are similar. However, some differences can arise based on whether you opt for conventional loans, FHA loans, or VA loans.
1. Conventional Loans
Conventional loans are the most commonly used loans and offer the most savings outside of VA loans. They do not require private mortgage insurance (PMI), which can increase your downpayment or monthly payment. This insurance protects the lender if you default on your loan. Conventional loans typically have lower downpayment requirements and better interest rates than other mortgage loans. A credit score of 640 and a debt-to-debt ratio of no more than 43% is necessary for conventional loans.
2. FHA Loans
FHA loans are designed for lower credit scores, typically between 580 and 619. Credit score requirements vary between lenders, so be sure to shop around for the best financial option. With an FHA loan, you will need to keep PMI for at least the first 11 years of your loan. This additional cost is important to consider, particularly if you are on a tight budget. FHA loans have a higher debt-to-income limit of up to 50%, enabling you to purchase more homes than you can with a conventional mortgage loan if you have a lower income. You could get into a mortgage with less money out of pocket than a conventional loan but with a higher interest rate. The minimum downpayment requirement for an FHA loan is only 3.5% of the purchase price.
3. VA Loans
Unlike the other two mortgage loans, the VA loan doesn't have a minimum credit score requirement. However, when pre-qualifying you, they look closely at your history with defaulted loans and government-owed past-due debts. You must have served in the United States military for at least 181 days or 90 consecutive days during war, served 6 years with the National Guard, or have a spouse who lost their life during active duty. The VA loan usually has the most favorable interest rates and does not require a downpayment. It is an excellent loan option for veterans, and it serves as a way of giving back to those who served our country.
Determining Credit Worthiness When Purchasing a Car
While your credit score is a vital part of the financing process for your new car, it is not the most crucial factor. Lenders analyse your credit history to determine the propensity of extending credit. Having credit issues doesn't necessarily mean you will be disqualified from receiving finance, but the interest rates may be higher. Interest rates are determined by many factors, such as past credit history, current credit status, vehicle type, and so on.
If you have previous credit issues
Lenders will scrutinize your credit history and apply specific criteria to determine if you qualify for finance. Failing to meet this criterion will be a significant hurdle to being approved for a car loan. The most challenging aspect is that lenders who specialize in bad credit or "special finance" will have less stringent rules to qualify, but this comes with a high-interest rate and payment. They will also add fees to lessen their risk of losing money, although the dealership would be responsible for a portion of it. Dealerships may propose a vehicle with a higher markup on loans for customers with bad credit, consequently increasing the risk of default on the loan. Ultimately, you need equity by having a down payment to give you additional leverage when it comes to purchasing a vehicle.
Ideal Credit Score for a New Car
Although there is no precise range of credit scores to determine if you qualify for financing, generally, a credit score above 680 is favourable. Your potential financial risk also determines interest rates rather than focusing solely on the credit score. For example, a 720 credit score would exhibit financial safety to lenders since the interest rate would be lower for the loan. In contrast, someone with a 580 credit score would express more risk, and the interest rate would be substantially higher. It is necessary to look at all the factors, as interest rates play a significant role in the overall credit score.
Tips for Improving Your Credit Score
Improving your credit score requires time, patience, and effort. It's essential to avoid making hasty or irrational decisions that can increase your financial problems. Here are some practical steps you can take to improve your credit:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, can help you boost your credit score quickly. If you have limited credit or need to rebuild your credit, start with a secured credit card like Open Sky or Credit Builder Card. Focus on paying your balance on time, and limit your purchases to small amounts like gas or groceries.
2. Request a credit limit increase:
A higher credit limit can help lower your credit utilization percentage, which can improve your credit score. Contact your credit card company to request a "Credit Limit Increase" and provide information about your income and payment history. They usually require 7-15 months of excellent payment history before approving an increase.
3. Pay down your balances:
Keeping your debt low and close to zero is critical to improving your credit score. Limit your credit card usage and leave a minimal balance of $1-5 each month. If you have high balances, create a plan to pay them down gradually and stop using your cards.
Remember that building good credit takes time and persistence. By following these tips and being patient, you can improve your credit score and achieve your financial goals.
Advice from Joe about Improving Your Credit
We've all experienced a less-than-favorable credit situation at some point in our lives. However, if you are determined to improve your credit, and are willing to put in the necessary time and effort, you can quickly make significant changes to your credit score. Unfortunately, many people with poor credit find themselves stuck in a cycle of financial problems, unable to see how they could ever have great credit. Building good credit requires dedication, but those who prioritize their finances and focus on their spending habits will eventually succeed. Begin by creating a budget and addressing any problematic spending tendencies you may have, as these will directly impact your credit. You can learn more about credit with this informative article. If you need advice or assistance with credit repair, don't hesitate to contact my office at www.asapcreditrepairusa.com.