You may not be aware of this, but did you know that there are actually 30 different levels of credit scores? You might have already searched for the best credit score, and you may have gotten multiple answers from Google. However, it's important to be aware that there's a lot of information out there, and some of it can be confusing or even misleading. As someone with over fifteen years of experience in financial literacy and credit repair, my name is Joe Mahlow, and one of my main goals is to provide you with straightforward advice on various topics, including credit scores. Through my work, I've been able to assist over twenty thousand clients in improving their credit scores, and I hope that with enough information and guidance, I can do the same for you! Let's dive in.
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding good credit scores
What is Considered a Good Credit Score for Buying a House?
Determining Credit Score for Buying a Car
Ways to Increase Your Credit Score
Advice from Joe
Different Types of Credit Scores: FICO and Vantage
Understanding credit scores is essential when it comes to taking control of your finances. There are two types of credit scoring models you need to know - the FICO model and the Vantage model. Explained below are the details of each scoring model for a better understanding of their differences in calculating credit scores.
FICO Credit Score
The FICO credit score is the most widely used and popular credit score model, which comprises eight different scoring models from FICO 2 to FICO 10. However, the credit score you receive will depend on the credit report used by the lender. A mortgage lender, for example, would pull a FICO 5 credit report, while a credit card issuer would use the FICO 8 credit report.
Why So Many FICO Scores?
Each credit report has a different "weight," which affects the credit score. Critical factors such as mortgage history will have a more significant impact on the credit score for a FICO 5 mortgage report than less relevant factors. The same is true for all the different FICO models. Credit card companies, using FICO 8, will consider a person's credit card history as the primary factor impacting their credit score. Conversely, auto lenders typically use FICO-2, and previous auto history will affect your scores.
To identify all your different FICO scores, sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score, developed by Equifax, Experian, and TransUnion, is a new scoring model designed to compete with the FICO score, which has been around since the 1970s. While FICO currently dominates the lending sector, Vantage is becoming more popular in some sectors, such as auto lending and personal loans. Vantage is frequently used to provide a free copy of your credit reports on credit monitoring websites across the United States.
Is the Vantage Score Accurate?
The Vantage Score is accurate but mainly when used as a general idea of your credit score. Since Vantage is not widely used for lending purposes, it will not provide an accurate lending score. The FICO model remains the most recognized, and its accuracy is a function of lenders' willingness to use it. Using your Vantage score can give you a good idea of your overall scores.
While FICO is the most widely recognized credit scoring model, Vantage is gaining traction as the best model based on current standards; it might soon become the widespread scoring model. When it comes to scoring and data accuracy, credit reporting agencies are among the most significant data collecting companies outside of social media entities. Thus, if they have the data, they have superiority in providing the best scoring data.
Understanding good credit scores
Credit scores are typically measured on a scale from 350 to 850 in both the FICO and Vantage models. At 350, you have the poorest credit score, and at 850, you have the best. As you strive to achieve the highest possible scores, it's vital to know where you stand during your credit-building journey. To that end, I’ll provide some score thresholds to keep in mind.
1. 620 or below
A score of 620 or below is considered bad credit. If you fall below this threshold, chances are you have a history of adverse credit, high-balance credit cards, or lack any credit cards. The best way to improve your credit scores is to keep making timely payments and maintain ten active revolving credit accounts. You can also consider applying for a secured credit card, such as the Credit Builder Card or the OpenSky Credit Card. Once your score reaches the 620 range, you can qualify for an FHA home mortgage.
2. 640-680
Scores in the 640-680 range are considered fair for good credit. Such a score usually indicates that you have established credit, but you may have some derogatory marks on your credit, high credit card balances, or newly opened accounts that can cause temporary drops in your scores. Simply paying down your balances will help improve your score in this range.
3. 740+
Credit scores of 740 or above are considered "super-prime" and grant the best interest rates for most loans. If your score is in this range, congratulations! You belong to the 20% of the US population with such a score. Keep paying accounts on time and maintaining active revolving credit card accounts. You will be in excellent shape!
What is Considered a Good Credit Score for Buying a House?
The credit score you need to qualify for a mortgage loan depends on the type of loan you are looking for. Mortgage loans are categorized into conventional loans, FHA loans, and VA loans, and each has its own specific requirements and guidelines. Here is a breakdown of the credit score requirements for each type:
Conventional Loans
Conventional loans are the most popular loans and usually the best option after the VA loan. To qualify for a conventional loan, you must have a credit score of at least 640 and a debt-to-debt ratio no higher than 43%. Conventional loans may have lower down payment requirements and better interest rates compared to other mortgage loans.
FHA Loans
FHA loans are designed for borrowers with lower credit scores, usually between 580 and 619. If you're within this credit score range, shop around for lenders that provide the best financial option for you. You can have a debt-to-income ratio of up to 50% and a down payment as low as 3.5%.
VA Loans
VA loans don't technically have a credit score requirement, but they look for previous defaulted loans and past-due government debts during pre-qualification. To qualify for a VA loan, you need to have served in the United States Military for at least 181 days, among other requirements. The VA loan typically offers the best interest rates, and they usually don't require a down payment.
Overall, your credit score is an important factor when it comes to qualifying for a mortgage loan. Knowing the specific requirements for each loan type can help you prepare and increase your chances of being approved for a home loan.
Determining Credit Score for Buying a Car
When it comes to buying a car, having a good credit score is important but your credit history may play a more significant role in determining your eligibility for a loan. Your previous and current credit histories are evaluated to gauge the risk associated with extending credit. A higher credit score can translate into lower interest rates, but having a poor credit history, such as being late on payments or having a repossession, can make it harder to get approved for a loan. However, special finance lenders may still offer loans to individuals with poor credit, with specific criteria such as higher down payments and additional fees. These fees are added to cover the dealership's risks, which they will pass on to the borrower. When buying a car on credit, having equity or a downpayment will give you more leverage.
Ideal Credit Score Range for a New Vehicle
Although several factors determine if you qualify for a car loan, it is ideal to have a credit score of over 680. If your credit score is lower, you pose more risk to the lender, which can cause an increase in the interest rate you are charged. A comparison of credit scores vs. interest rates shows that those who have high credit scores pay less interest than those with lower credit scores. For instance, someone with a credit score of 720 or above will pay an average of $5,500 in interest on their loan, whereas someone with a credit score of 580 or above can expect to pay an average of $15,300 in interest on their loan. This data emphasizes that the higher your credit score, the lower the interest you’ll pay.
Ways to Increase Your Credit Score
Improving your credit score can be done with some practical steps that require time and patience. Patience is crucial because building good credit takes time, and you must avoid making irrational and bad decisions that only worsen the problem. Here are ways to boost your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, can help improve your credit score easily, especially if you have limited credit or want to rebuild it. Obtaining a large loan to build credit requires a lot of work, so a secured credit card that does not focus on your credit score can give you the best chance of approval. Focus on keeping your balance low and paying on time; use it only for gas and groceries.
2. Raise Your Limits
Requesting a credit limit increase for your active revolving credit cards can help boost your credit score by lowering your credit utilization percentage, which is a critical factor for most credit card companies. To raise your limits, call the credit card company and request a "Credit Limit Increase," and they will have you fill out some information, including your current income.
3. Pay Down Your Balances
Limit your credit card usage to small purchases and avoid high balances. Paying down your balances is essential, and you can create a game plan to take an "x" percentage of your paycheck each month to do so. Avoid running the balance back up after paying it down. The rates on your credit cards are high, and most of your payments will go to interest and not principal.
Advice from Joe
We've all experienced less-than-desirable credit at some point, but it's important to take your credit situation seriously if you want to see significant improvements in your score. Many people with poor credit feel like they're stuck in perpetual credit issues, but developing a strong credit score requires effort and can be achieved. Prioritizing your credit and spending habits is key to success. First, create a budget and work to correct any bad spending habits as these directly impact your score. This article aims to improve your understanding of credit. If you're seeking guidance or credit repair, don't hesitate to contact my office at www.asapcreditrepairusa.com.