It may come as a surprise to you, but there are actually 30 different levels of credit scores. The problem is that when people try to find the best credit score, they often receive conflicting information from different sources. This can be not only confusing, but also misleading enough to take you down a frustrating rabbit hole. My name is Joe Mahlow and for more than fifteen years I've been actively involved in the financial literacy and credit repair industry. My primary objective is to provide you with accurate and honest advice on a wide range of topics, such as credit scores. Having helped over twenty thousand clients achieve significant transformations in their credit scores, I'm committed to sharing valuable information that can help you improve your own credit score. So, let's dive into it together!
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Credit Scores
Guidelines for Credit Score to Qualify for Mortgage Loans
Determining the Suitable Credit Score and History to Buy a Car
Strategies for Boosting Your Credit Score
Tips from Joe on Improving Your Credit
Different Types of Credit Scores: FICO and Vantage
Credit scores play a crucial role in the lending process, making it essential to understand the different types of credit scores. There are two widely used and recognized credit scoring models: FICO and Vantage. Both have unique characteristics that impact how they calculate your credit score.
FICO Credit Score
FICO, developed in the seventies, is the most widely used credit scoring model. It has eight different FICO models, from FICO 2 to FICO 10, each with different weights assigned to critical factors in the credit report. For instance, mortgage lenders pull FICO 5, while credit card companies primarily use FICO 8. Auto lenders, on the other hand, use FICO-2. Each of the models has unique factors that affect the credit score, and understanding these models' intricacies is essential.
Vantage Credit Score
The Vantage Score model is a younger model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO in the personal loan and auto lending sectors. While it's gaining ground in these sectors, it's not widely used for lending and may not be accurate when it comes to obtaining a loan. However, Vantage Score is an excellent general idea of where your credit score falls. Many credit monitoring websites offer free Vantage score to help you estimate your credit score.
Which One is Better?
While FICO is the most recognized scoring model, Vantage Score is gaining advocates who believe it provides better, contemporary scoring data. As data collection experts, credit reporting agencies are in the best position to provide accurate scoring data. In the next 5-10 years, we may see an expansion in the use of the Vantage Score as it proves its worth in additional lending sectors. For now, a good understanding of both models can be an invaluable asset when planning your credit strategy. To get a clearer picture of your credit score, visit www.myfico.com to see all your FICO scores.
Understanding Credit Scores
Credit scores are graded by both FICO and Vantage models and range from 350 to 850, with 350 being the worst and 850 being the best score. Knowing where you stand in terms of score is critical to improving it. Here are some vital score thresholds:
620 or below:
This score is considered bad credit. Low scores usually indicate adverse credit history, high-balance credit card accounts, or no credit cards at all.
To improve scores, make timely payments and have ten active revolving credit accounts open.
Use Credit Builder Card or OpenSky Credit Card to build credit.
Once you hit 620 credit score range, you can qualify for an FHA home mortgage.
640-680:
This score is considered fair to good credit.
Scores in this range indicate established credit history but may have some derogatory marks or accounts, high balances on credit cards, or newly opened accounts that can temporarily drop your scores.
740 and above:
Any credit score over 740 is considered "super-prime" and provides the best interest rates for most loans.
This score puts you in the top 20% of the US population.
Keep up the excellent work by paying accounts on time and keeping revolving credit card accounts paid.
Guidelines for Credit Score to Qualify for Mortgage Loans
The credit score requirement to obtain a mortgage loan depends on the type of loan you are trying to qualify for. While most mortgage loans follow similar guidelines due to federal regulations and government support, their requirements and criteria vary. Typically, there are three types of mortgage loans: conventional, FHA, and VA loans.
1. Conventional Loans
These are the most popular loans available and can be a great savings option, especially if you don't qualify for VA loans. Conventional loans don't require private mortgage insurance (PMI), which can increase your down payment or monthly payment. You can apply for this type of loan if you have a credit score of at least 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loans
FHA loans are available to individuals with lower credit scores, usually between 580 and 619. However, the credit score requirements may vary depending on the lender. If you're within the credit score limit, shop around for different lenders to find the best financial option for you. With this type of loan, you are required to maintain PMI for at least 11 years, which could increase your mortgage payments. The debt-to-income limit for this loan can be as high as 50%, allowing you to purchase more homes than with a conventional loan. You may only need a down payment of 3.5% of the purchase, making it a good option if you don't have much cash on hand. However, the interest rate is typically higher than a conventional loan.
3. VA Loans
There is technically no credit score requirement for a VA loan, but lenders may look into your previous defaulted loans and government-owed past-due debt before pre-qualifying you. To be eligible for a VA loan, you must have served in the United States Military for at least 181 days or 90 consecutive days during wartime, six years with the National Guard, or your spouse must have lost their life during active duty. This loan typically has the best interest rates available and doesn't require a down payment, making it a great option for veterans.
Determining the Suitable Credit Score and History to Buy a Car
When purchasing a car on credit, your credit history holds more weight than your credit score. Although having a good credit score is vital, it has a minor impact on the interest rate you qualify for. Creditors assess your credit histories to determine the risk involved in granting you a loan. If you have a history of late payments or repossession, it could be difficult to secure a loan. Car loan lenders specializing in bad credit may approve anyone but add specific criteria, such as higher down payments and extra charges, to lower the risk of a default. Dealerships may also charge extra fees to cover the risk of loan default. To have an advantageous position in getting a car loan, it is helpful to ensure you have equity or a down payment.
The Ideal Credit Score Range for Buying a New Car
It is challenging to determine a specific credit score you need to qualify for a new car loan, since many factors are involved, but a credit score over 680 is your best bet. A score below that level increases the interest rate charged, indicating a higher risk for the lender. As per the current data, the interest amount you pay is based on your credit score. Hence, the higher your credit score, the less interest you pay, which, in turn, affects your overall credit score. The estimated interest payable per credit score is as follows:
1. A 720 credit score or above - $5,500 on average
2. A credit score of 680 or above - $6,600 on average
3. A credit score of 650 or above - $8,100 on average
4. A credit score of 615 or above - $10,200 on average
5. A credit score of 580 or above - $13,900 on average
6. A credit score of 580 or above - $15,300 on average
Strategies for Boosting Your Credit Score
Building and improving a good credit score is a process that requires time and effort. To achieve success in this area, you need to have patience because making rash or bad decisions will only worsen your situation. Here are some practical steps you can take to improve your credit score:
Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit or credit cards can help you increase your credit score quickly, especially when you have limited credit or are looking to rebuild your credit. You can start by applying for a secured credit card like Open Sky or Credit Builder Card since they focus on your payment history rather than your credit score. Revolving credit makes up about 30-35% of your overall credit score, so make sure you pay your bills on time and limit your expenses to small purchases only.
Raise your Limits!
Requesting a credit limit increase from your credit card company can help boost your overall credit limit and reduce your credit utilization percentage. Most credit card companies allow you to do this online or through a call. Remember that you need to have an excellent payment history before requesting a credit increase.
Pay down your balances!
Keeping your balance low and close to zero is crucial to improving your credit score. You can achieve this by using your credit cards for small purchases only and leaving about a $1-$5 balance every billing cycle. If you have high balances and can't pay them off right away, you can create a payment plan to reduce your debt gradually.
Remember to be patient and consistent in following these strategies. In time, your credit score will improve, and you'll be able to access better financial opportunities.
Tips from Joe on Improving Your Credit
We’ve all experienced credit problems at some point in our lives. However, it is possible to turn things around and improve your credit score significantly in a short amount of time if you take your credit situation seriously and commit to improving it. Many people with bad credit feel trapped in a never-ending cycle, but this cycle can be broken by prioritizing your credit and making conscious changes in your spending habits. Creating and sticking to a budget is a great first step in this process. By doing so, you can gain insight into any bad spending habits you have and make necessary changes. Don't hesitate to reach out to my office at www.asapcreditrepairusa.com for help with your credit score or credit repair needs.