It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Despite being a crucial factor in our financial lives, many people are unaware of this fact. When searching for information on the best credit scores, it's easy to fall down a confusing and potentially misleading rabbit hole. That's where I come in - my name is Joe Mahlow and I've spent over fifteen years in the financial literacy and credit repair space. My goal is to provide you with straightforward advice on various topics, such as credit scores. Having helped more than twenty thousand clients to improve their credit scores, I'm confident that I can provide you with the information you need to do the same! So, let's dive in.
Contents:
Different Types of Credit Scores and How They Are Calculated
Understanding Good Credit Scores
Credit Score Requirements for Different Mortgage Loan Types
Credit History vs Credit Score for Buying a Car
Ways to Increase Your Credit Score
Insights from Joe on Improving Your Credit Score
Different Types of Credit Scores and How They Are Calculated
There are two types of credit scoring models that are commonly used; the FICO and the Vantage. Both are important to be familiar with in order to comprehend the differences in how they calculate your credit score.
FICO Credit Scores
The FICO model is the most popular and widely used credit scoring model, with eight different models ranging from FICO 2 to FICO 10. Each model may result in a different credit score depending on your credit history, which can be confusing. However, the reason behind the existence of multiple FICO models is that lenders may pull different reports based on the type of credit applied for. For instance, home mortgage lenders are likely to pull your FICO 5 credit report while a credit card company may pull your FICO 8 credit report.
The Importance of Multiple FICO Scores:
Each credit report has a different weight which means factors that are critical to the lender have a greater impact on the credit score. For example, a FICO 5 mortgage report will put greater emphasis on your previous mortgage history. On the other hand, FICO 8 is primarily used by credit card companies, and your previous credit card history will have the most effect on this score. Similarly, auto lenders usually pull FICO-2 reports and your previous auto history will impact your score.
To have a better understanding of your FICO scores, visit myfico.com and sign up for an account to see all your different credit scores.
Vantage Credit Scores
The Vantage Score is a recent scoring model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO scoring model. Although FICO dominates the lending sector, the Vantage Model is gaining popularity in some other sectors such as personal loans and auto lending. Credit monitoring websites across the United States frequently use Vantage to provide free copies of credit reports.
Accuracy of Vantage Score:
The accuracy of the Vantage Score depends on the context within this question. Since it's not widely used for lending purposes, it may not accurately represent your actual lending score. FICO is the most widely recognized scoring model, and Vantage's accuracy can vary. However, the Vantage model can provide a general idea of your FICO score. It is advisable to use your Vantage score to get a rough idea of your overall scores if you are unable to know your FICO score without paying for it or having a lender pull your credit report.
The Future of Credit Scoring Models
The FICO scoring model has been used since the seventies, and the Vantage Score is a new scoring model. The Vantage scoring model is accurate and better than the FICO scoring model in providing the best-scoring data based on today's standards. Credit reporting agencies have significant data collection capabilities outside social media companies, meaning that they have the upper hand in providing the best-scoring data. It is likely that the Vantage scoring model will become more widely used for lending purposes in the future.
Understanding Good Credit Scores
Credit scores are essential for securing loans, credit card approvals, and even rental applications. Both FICO and Vantage models use a 350 to 850 score range, with 850 being perfect and 350 being the worst. As you focus on achieving the highest score possible, you should know where you stand. Below are crucial score thresholds for reference.
1. 620 or below
A credit score below 620 is considered bad credit, resulting from high-balance credit card accounts, no credit cards, or negative credit history. To improve this score, you must have ten active revolving credit accounts open, make timely payments, and use secured credit cards like the Credit Builder Card or OpenSky Credit Card to build your credit. With a credit score of 620, you are FHA home mortgage-eligible.
2. 640-680
Scores in this range are deemed fair for good credit. They imply established credit history, albeit with some derogatory marks or accounts, and high balances on credit cards. Newly opened accounts could also temporarily drop your score; thus, you should keep calm during such instances.
3. 740+
At this point, you have achieved a super-prime credit score and are part of the 20% of the U.S. population. Credit scores above 740 guarantee the best interest rates on loans. Always keep your revolving credit card accounts paid and maintain timely payments on your accounts to keep soaring higher.
Credit Score Requirements for Different Mortgage Loan Types
The credit score needed to buy a house is dependent on the type of mortgage loan you are pursuing. Mortgage loan requirements and guidelines are usually consistent within each type of loan but may vary significantly between loan types. The three most common mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most widely used and preferred mortgage loan option, apart from VA loans. Private mortgage insurance (PMI) is not required for conventional loans, which can inflate your mortgage payment or downpayment. PMI safeguards lenders if the borrower defaults on repayments. Typically, conventional loans demand a credit score of at least 640 and debt-to-income ratios of no more than 43%.
2. FHA Loans
FHA loans are designed to enable homeownership for persons with lower credit scores typically ranging from 580 to 619. Shop around and seek different lenders to find the right financial option for you, as loan programs differ. A homeowner must keep PMI for 11 years, which may mean a higher monthly mortgage payment and this might make the loan unfeasible while budgeting. The downpayment on the FHA loan is as low as 3.5% of the purchase, which makes it feasible to go into a mortgage with less than a conventional loan, but this may also have higher interest rates.
3. VA Loans
With VA loans, there are no credit score requirements, but pre-approval requires a history check for defaulted loans and past-due debts. This loan is accessible to veterans who have served in the military for at least 181 days, served for 90 consecutive days during wartime, served for six years with the National Guard, or to a spouse of military veterans who died while on active duty. VA loans usually have the lowest interest rate and typically need no down payment. VA loan is a great way to thank veterans for their service to the country.
Credit History vs Credit Score for Buying a Car
When trying to secure financing for a car, your credit history is more crucial to lenders than your credit score. While a good credit score is important, it's not the sole determining factor when it comes to the interest rate you'll receive. Lenders assess the risk of lending based on your credit history, both past and present. For instance, if you've been delinquent on your car payments before or have had your car repossessed, you'll likely have a tougher time getting approved for a loan compared to someone without these issues. Moreover, lenders specializing in bad credit or special financing will likely approve anyone for a car loan, with the caveat that they must meet specific criteria such as higher down payments and additional fees. Dealerships, in particular, may charge fees to cover their risk in offering you a loan if you have bad credit.
When it comes to credit scores, a score over 680 is ideal for qualifying for a lower interest rate. Anything below that score can increase your interest rate and pose risks for lenders. The following figures demonstrate how your credit score affects the interest you'll pay:
Interest rates based on credit score:
- A 720 credit score or above averages $5,500 in interest on a loan
- A 680 credit score or above averages $6,600 in interest on a loan
- A 650 credit score or above averages $8,100 in interest on a loan
- A 615 credit score or above averages $10,200 in interest on a loan
- A 580 credit score or above averages $13,900 in interest on a loan
- A credit score below 580 averages $15,300 in interest on a loan
Ultimately, lenders use your credit history and credit score to determine your credit risk level and adjust the interest rate accordingly. Therefore, having a good credit score and a solid credit history will provide you with more leverage in negotiating better terms when seeking a car loan.
Ways to Increase Your Credit Score
Improving your credit score is possible with a few essential steps that require minimal effort. Keep in mind that building a good credit score takes time and requires patience. Impulsive decisions can lead to bad choices with credit and make matters worse. Here are some things you can do to improve your credit score:
1. Open 3-5 revolving credit accounts:
One of the best ways to maximize your credit score is through revolving credit. If you have limited credit or are looking to rebuild it, obtaining a large loan is not an easy task. A secured credit card with a focus on timely payments and income verification like Open Sky or Credit Builder Card can help. Revolving credit is 30-35% of your overall credit score and will improve your credit score quickly. Make sure to limit the use of the card to expenses like gas or groceries and keep the balance low at $5-$10.
2. Request a credit limit increase:
Credit utilization percentages can hurt your credit scores greatly if they exceed 30% of the overall limit. You can increase your credit limits to address this. Request a credit limit increase from your credit card company. Ensure that you have an excellent payment history of 7-15 months and fill out the necessary information, including your current income.
3. Keep your balance low:
Maintaining a low balance is critical in keeping your credit score high. Use credit cards for small purchases only, and leave around $1-$5 unpaid each payment cycle. If you have high balances, make a plan to pay them down using a fraction of your paycheck each month. Do not use your credit cards anymore after clearing your balances to avoid getting them back up. Remember that your credit card spending habits significantly affect your credit score, and high credit card rates can cause most payments to go toward interest.
Insights from Joe on Improving Your Credit Score
We have all gone through a phase of poor credit scores at some point in our lives. However, by taking your credit situation seriously, and dedicating time and effort to improving it, you will witness remarkable changes in your credit score quickly. Most people with poor scores get trapped in an endless cycle of credit issues, where having good credit seems impossible. Achieving a good credit score demands hard work, but prioritizing your credit and keeping a tab on your spending habits brings great rewards. To begin with, create a budget and work towards eliminating bad spending habits that reflect directly on your credit score. This article provides you with valuable insights into understanding credit. For professional help with your credit score, or in need of credit repair services, our office, asapcreditrepairusa.com, is just a click away.