It may come as a surprise to many, but did you know that there are actually 30 distinct levels of credit scores? In fact, searching for the "best credit score" can yield a wide range of conflicting information - often leading to confusion and even misinformation. I’m excited to introduce myself, Joe Mahlow, a financial literacy and credit repair expert with over 15 years of experience. I'm here to provide you with honest advice on a variety of topics - particularly on credit scores. Having already helped over 20,000 clients improve their financial standing, I'm confident that I can provide you with enough knowledge to do the same. So, let’s dive right in!
Contents:
Different Kinds of Credit Scores: Explained
Understanding Good Credit Scores
Credit Score Needed to Buy a Home: Understanding the Different Loan Options
The Importance of Credit History When Buying a Car
How to Increase Your Credit Score
Advice from Joe
Different Kinds of Credit Scores: Explained
There are two well-known credit scoring models that you should be familiar with, namely the FICO model and the Vantage model. Both models are essential to understand as they differ in how they calculate your credit score.
FICO Credit Score
The FICO model is widely used and remains the most popular credit scoring model out there. With eight separate FICO scores available, from FICO 2 to FICO 10, your credit score may differ depending on the credit report. Although this may be perplexing, we'll break it down for you.
When you apply for credit at a lender, they will pull a different FICO report based on the kind of credit you're applying for. For example, if you're applying for a mortgage, the lender will most likely use your FICO 5 credit report, whilst an application for a credit card would probably require a FICO 8 credit report.
Why Are There So Many FICO Scores?
Each credit report has a different "weight" for different aspects of your credit history. Factors deemed more critical to lenders will have a more significant impact on your scores than the less important ones. Therefore, the FICO 5 mortgage report will heavily weight previous mortgage history, so if you've got an excellent payment history on a previous mortgage, it'll work in your favor score-wise, whereas negative or no previous history could adversely impact your score. As a result, credit card companies mainly rely on the FICO 8 report, and your prior credit card history will affect this score the most. Similarly, auto lenders prefer to use FICO-2 reports, and again, your score will depend on your previous auto history.
For a visual presentation of your different FICO scores, visit www.myfico.com and create an account to learn all your numerous credit scores.
Vantage Credit Score
Equifax, Experian, and TransUnion—three significant credit reporting agencies—developed the Vantage Score model as competition for the FICO scoring model. Vantage is a newer scoring model than the FICO model that has been in use since the seventies. Many credit monitoring websites in the United States use Vantage to give free copies of credit reports. Though FICO dominates the lending sector, Vantage is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending.
Is the Vantage Score Precise?
The Vantage Score can be accurate in its application, but it depends. As the Vantage score is not widely used for lending purposes, it may not serve as an accurate reference for your actual lending score. The accuracy of a credit score is only as good as your ability to obtain a loan, and since FICO is the most recognized and most widely used scoring model, Vantage's accuracy might falter. Instead, it is advisable to view the Vantage scoring model as an excellent "general idea" of the FICO score. As you cannot precisely determine your FICO score without paying for it or having a lender pull your credit report, you can use your Vantage score to get an overall indication of your score.
It is likely that lenders around the country will use the Vantage Score model more widely in the next 5–10 years due to its current ability to provide the best scoring models based on today's standards. We believe the FICO model is outdated and doesn't offer the user a good representation of their credit scores. Remember, credit reporting agencies are the most significant data collection agencies outside social media firms. If they have the data, they have the upper hand in providing the best scoring data—period.
Understanding Good Credit Scores
Credit scoring models, including FICO and Vantage, show scores between 350 and 850. The highest score being 850, and the lowest being 350. It is crucial to evaluate your current credit score and set specific goals to enhance your scores. To grasp what credit scores are considered good, we present the following score thresholds:
1. 620 or lower
If your credit score is below 620, it is considered bad credit. This can result from adverse credit history, high-balance credit card accounts, or no credit cards at all. However, timely payments and ten active revolving accounts can help you improve your scores. You can start qualifying for an FHA home mortgage when you achieve a 620 credit score range.
2. 640-680
Scores in this range are considered fair for good credit. You may have some derogatory marks, accounts, or high balances on your credit cards that require payment. Newly opened accounts will drop your scores temporarily. However, your scores will return over time.
3. 740+
Any score over 740 is considered "super-prime," and it can offer you the best interest rates for most loans. Only 20% of the US population holds this score. Always pay your accounts on time and keep your revolving credit card accounts paid to remain in great shape. Congratulations if you have over a 740 credit score!
Credit Score Needed to Buy a Home: Understanding the Different Loan Options
When it comes to buying a house, the credit score requirement will depend on the type of mortgage loan you are applying for. The different mortgage loans available in the market are conventional loans, FHA loans, and VA loans, each with its own set of requirements and guidelines.
Conventional Loans
Conventional loans are the most sought-after loan option, as they usually offer the best interest rates and don't require private mortgage insurance (PMI). With a credit score requirement of 640 and a debt-to-income ratio of no more than 43%, conventional loans are ideal for homebuyers who are looking to save money in the long run.
FHA Loan
For those with lower credit scores between 580 and 619, an FHA loan might be the best option. However, unlike conventional loans, you will be required to maintain PMI for at least 11 years. This type of loan typically has a higher debt-to-income limit of up to 50% and allows you to purchase a home with as little as 3.5% down payment. Keep in mind that the interest rate may be higher than with other mortgage loans.
VA Loan
If you or your spouse has served in the United States Military or National Guard, you may qualify for a VA loan. Although there is no minimum credit score requirement, lenders will examine your past debts and defaulted loans. The VA loan typically offers the best interest rates and does not require a down payment. As a way to give back to our veterans, the VA loan is a perfect option.
The Importance of Credit History When Buying a Car
Your credit history is the essential factor to determine the extent of your eligibility when buying a car. While a higher credit score is important, it plays less of a part in the interest rate that you qualify for. The lender will look at your previous and current credit histories to figure out the credit risk involved when you apply for a car loan. Someone who has credit issues, such as late payment on vehicle loans or repossession, finding approval for a loan will be challenging. Nevertheless, bad credit or special finance lenders can qualify anyone for a car loan, albeit with specific criteria attached, such as a higher down payment and additional fees for the dealership to lessen the borrower's risk. Your leverage when buying a car on credit comes from having an equity or a downpayment.
Credit Score Range for Buying New Cars
A credit score over 680 is ideal, but there is no exact credit score that can guarantee approval, as many factors are involved. Anything below 680 could increase the interest rate. In terms of interest amount, someone with a higher credit score will pay less than someone with a lower score. For instance, someone with a 720 credit score will pay, on average, $5,500 in interest, while someone with 580 scores and above will pay an average of $15,300 in interest on a loan. Therefore, a higher credit score means less interest paid, eventually affecting your overall credit score.
How to Increase Your Credit Score
There are several things you can do to improve your credit score, but it's important to keep in mind that building good credit takes time and patience. Rushing the process can lead to poor decisions that may negatively affect your credit score. Here are some important tips to follow:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is an excellent option to boost your credit score, especially if you have limited credit or are looking to rebuild. Secured credit cards such as Open Sky or Credit Builder Card are recommended as they focus on your ability to pay on time rather than your credit history. Revolving credit makes up 30-35% of your overall credit score, and paying your balance on time and keeping it at $5-10 each time you make a payment can help increase your score. Limit the use of the card to small purchases like gas or groceries.
2. Request a Credit Limit Increase
Active revolving credit card accounts can request a credit limit increase to lower your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase." Be prepared to fill out some information, including your current income, and credit companies usually require 7-15 months of excellent payment history before agreeing to a limit increase.
3. Keep your Balances Low
Leaving about a $1-5 balance on your credit cards can help keep your balance low. Avoid running up your balance back up after paying it off. With credit card interest rates being high, most payments will go toward interest, not the principal. Remember, credit card spending habits play a massive role in your overall credit score, so be sure to limit your usage.
Following these steps can help you boost your credit score over time.
Advice from Joe
It's common to have poor credit at some point in our lives. However, taking your credit situation seriously and dedicating time and effort to improving it can result in significant and speedy changes to your credit score. Many individuals with bad credit assume they will always have credit issues and feel hopeless about reclaiming good credit. Nevertheless, establishing and maintaining excellent credit requires diligence and the willingness to prioritize credit and spending habits. Start by budgeting and identifying and breaking bad spending habits; this will have a positive impact on your credit score. If you need help with credit repair or guidance on improving your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com. Here is an article that provides further insights on credit.
Key points:
- Poor credit is a common issue
- Improving credit requires effort and time
- Don't give up on improving credit
- Establishing and maintaining good credit requires prioritizing credit and spending habits
- Budgeting and breaking bad spending habits improve credit
- Visit www.asapcreditrepairusa.com for credit repair assistance and guidance on improving credit score