It may come as a surprise but there are actually thirty different levels of credit scores. When people search for the best credit score, they are often bombarded with numerous opinions and suggestions from Google. Unfortunately, much of this information can be confusing or even misleading, sending you down a dark rabbit hole. As someone who has worked in the financial literacy and credit repair industry for over fifteen years, I understand the importance of demystifying topics like credit scores. My name is Joe Mahlow, and I'm here to provide you with unbiased advice on credit scores. Throughout my career, I've helped over twenty thousand clients transform their credit scores, and now I am here to help you do the same. Let's dive into this important topic.
Contents:
Different Credit Scoring Models: A Comprehensive Guide
What Qualifies as a Good Credit Score
Qualifying Credit Scores for Different Mortgage Loans
Determining the Credit Score Range for Buying a Car
Tips for Boosting Your Credit Score
Insights from Joe: How to Improve Your Credit Score
Different Credit Scoring Models: A Comprehensive Guide
Understanding credit scores is crucial to maintaining financial health, as they directly impact one's ability to access credit and loans in the future. Two of the most commonly used credit scoring models are the FICO and Vantage models, which differ in how they calculate credit scores.
FICO Credit Score
The FICO model is by far the most popular credit scoring model and has eight different FICO models ranging from FICO 2 to FICO 10. Depending on the type of lender used, a different FICO report will be pulled. For example, mortgage lenders usually pull the FICO 5 credit report, while credit card companies use FICO 8. The various FICO models weigh different factors according to what's critical to the lender, resulting in different scores for each report. For instance, FICO 5 heavily weighs previous mortgage history, while FICO 8 considers previous credit card history.
Vantage Credit Score
The Vantage model is a recent competitor to the FICO model and is gaining popularity in some sectors like personal loans and auto lending. Developed jointly by the three major credit reporting agencies - Equifax, Experian, and TransUnion - this model is usually used for obtaining a free copy of credit reports. As it is still not widely used for lending purposes, Vantage scores may not be accurate for lending scores. Instead, they provide a good "general idea" of the FICO score, which remains the most recognized scoring model.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, its accuracy depends on the context. With FICO currently dominating the lending sector, Vantage scores might not provide an accurate representation of one's lending score. However, with the Vantage model's ability to provide the best scoring models based on contemporary standards, it's becoming more relevant every day. Credit reporting agencies have the most significant data collection outside social media companies, and they have access to the best scoring data, making Vantage scores useful in helping track credit scores.
Conclusion
Monitoring your credit score is key to maintaining overall financial health. Familiarizing yourself with the various credit scoring models available will give you a better understanding of how your credit score is calculated. Sign up for an account on myfico.com to view your different FICO scores and use Vantage scores as a general idea of your overall credit score.
What Qualifies as a Good Credit Score
Credit scores for both the FICO and Vantage rating models range from 350 to 850. The lowest possible credit score to have is a 350, while 850 is the highest score possible. It's crucial to understand where you stand concerning credit score thresholds while building your credit scores. Here are a few essential score thresholds to keep in mind:
1. 620 or below
- This is considered a poor credit score
- If you're below this threshold, it's likely that you have negative credit history, high-balance credit card accounts, or no credit cards at all.
- To improve your credit score, endeavor to make timely payments, and open ten active revolving credit accounts.
- The Credit Builder Card and OpenSky Credit Card are secured credit cards that can aid you in building your credit.
- With a credit score in the 620 range, you may start qualifying for an FHA home mortgage.
2. 640-680
- This is considered "fair to good" credit.
- Scores in this range indicate that you've established credit, but you may still have some derogatory marks or accounts in your credit history.
- You may also have high credit card balances that you'll need to pay down.
- Recently opened accounts can result in a temporary drop in your score.
- If your score is in this range; however, don't panic, it's only a temporary drop, your scores should recover.
3. 740+
- Any credit score over 740 is considered "super-prime."
- You'll be eligible for the best interest rates on most loans.
- If you have a credit score over 740, congratulations, you are part of the 20% of the US population that has accomplished this feat.
- Keep up the good work; always ensure that you pay your account balances on time and keep your revolving credit card accounts paid; you'll be in excellent condition!
Qualifying Credit Scores for Different Mortgage Loans
The minimum credit score you need to qualify for a mortgage loan depends on the type of loan you want. Federal regulation and government backing lead to similarities and differences in the requirements and guidelines for most loans. The three types of mortgage loans widely used today are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans, which do not require Private Mortgage Insurance (PMI), are the most common and cost-effective option after the VA loan. This loan attracts lower down payment requirements and better interest rates than other mortgage loans. The credit score requirement for conventional loans is generally 640, and there is a typical debt-to-income ratio limit of 43%.
2. FHA Loan
The FHA loan supports lower credit scores but usually between 580 and 619. The PMI is required for at least 11 years and may be an additional cost to your mortgage. The loan has a higher debt-to-income limit of up to 50%, which may allow you to buy more homes than the conventional loan if you have low income. The downpayment requirement on an FHA loan is as low as 3.5%, which is lower than the conventional loan. However, a higher interest rate is usually charged.
3. VA Loan
Technically, the VA loan does not presently require a minimum credit score qualification, but the lender pre-qualifies you by examining prior defaulted loans and any government-owned past-due debts. The VA loan offers the best interest rates and usually does not require a down payment. Qualification criteria require serving in the United States Military or a period of 181 or more days, serving 90 consecutive days during wartime, serving 6 years in the National Guard, or being a military spouse who lost his or her life during active duty. The VA loan is a fitting gesture that rightly gives back to our veterans.
Determining the Credit Score Range for Buying a Car
Your credit history, rather than your credit score, holds the most significance in determining your eligibility for a car loan. While a higher credit score is important, it has less impact on your interest rate qualifier. Creditors evaluate your previous and current credit histories to assess the risk involved in extending credit to you. A poor credit history, such as a repossession or recurring late payments on previous or current loans, may make getting a car loan approval more challenging. Special finance and bad credit lenders might approve almost anyone for a car loan, but thy add specific approval criteria, such as higher down payment and additional fees to the dealership, to reduce their risk. The dealership pays a fee to reduce the risk of the borrower defaulting on the loan and to approve the loan. Having equity or a down payment will give you an upper hand while buying a car on credit.
The Credit Score Range Preferred for Buying a New Car
A precise credit score cannot determine pre-approval since various factors influence the procedure. As mentioned, any credit score below 680 increases the interest rate charged since the borrower poses more risk to the lender. The credit score affects the amount of interest charged while taking loans. For instance, someone with a credit score of 720 and above will pay $5,500 in interest on average on a loan, while a person with a credit score of 580 or above will pay $15,300 on average. From this data, it is evident that the higher your credit score, the less interest you pay, affecting your overall credit score.
Tips for Boosting Your Credit Score
Improving your credit score takes time, but you can take some steps right now to help increase it. Patience is key because impulsive decisions will only make matters worse. Here are some things you can do to improve your credit score:
1. Open Revolving Credit Accounts
Revolving credit, such as credit cards, is a great way to improve your credit score. Start with a secured credit card that focuses on your ability to pay on time, like Open Sky or Credit Builder Card. Use these cards for small purchases, like gas or groceries. Keep your balance low, around $5-10, and pay on time. Revolving credit makes up 30-35% of your overall credit score.
2. Request a Credit Limit Increase
A high credit card balance can hurt your score. Increase your credit limits to lower your utilization percentage. You can do this online or by calling the credit card company. They will need information about your current income and payment history before approving a credit limit increase.
3. Pay Down Your Balances
Keep your balance low and close to zero, and make small purchases. If your balance is currently high, make a game plan to pay it down. Don't run up your balance again afterwards. Your spending habits play a significant role in your credit score, so limit your credit card usage. High credit card rates mean most of your payment goes towards interest.
Insights from Joe: How to Improve Your Credit Score
Many of us have faced the challenge of having poor credit. But if you're serious about improving your credit situation, dedicating sufficient time and effort towards your credit repair can produce enormous results in a short amount of time. Unfortunately, many people with bad credit fall into a chronic cycle of financial hardship, believing that it's impossible to restore their credit to good standing. However, attaining an excellent credit score requires significant effort and commitment, and those who take steps to prioritize their credit and improve their spending habits will be successful. A good starting point is to create a budget and address any harmful spending patterns - these changes will have a direct impact on your credit score. For more information to help you understand credit and guidance in improving your credit score or repairing your credit, reach out to my office today at www.asapcreditrepairusa.com.