Fun fact: Did you know that there are 30 distinct levels of credit scores? It's a common misconception that the search for the best credit score yields a single answer. Unfortunately, the information available on this topic can be confusing and misleading, leading you down a dark rabbit hole. My name is Joe Mahlow, and as a financial literacy and credit repair expert with over 15 years of experience, I'm here to provide raw and informative advice, starting with credit scores. Over the years, I've been able to help over 20,000 clients improve their credit scores, and I am excited to provide you with enough information to do the same. Are you ready? Let's dive in.
Contents:
Understanding Different Credit Scores
Understanding Good Credit Scores
Required Credit Score for Buying a Home
Determining Your Eligibility for a Car Loan
Ways to Improve Your Credit Score
Tips from Joe on Improving Your Credit Score
Understanding Different Credit Scores
There are two types of credit scoring models that are common in the U.S., the FICO model, and the Vantage model. Knowing the differences in how credit scores are calculated using each model is essential.
FICO Credit Score
The FICO credit scoring model is the most widely used, with eight types of FICO models. Each FICO model calculates a different credit score based on your credit report. The type of FICO report pulled by the lender depends on the type of credit being applied for. For instance, a mortgage lender will typically pull a FICO 5 report, while applying for a credit card will result in a FICO 8 report.
Why so many FICO Scores?
Each credit report has a different "weight." This means that factors critical to the lender will have a more significant impact on a credit score. For example, a FICO 5 mortgage report weighs heavily on previous mortgage history. Credit card companies use the FICO 8 report, and previous credit card history impacts this score the most. For auto lenders, FICO-2 reports are primarily used, with the focus being on previous auto history.
For a better understanding of your FICO scores, create an account on www.myfico.com.
Vantage Credit Score
Vantage is a new credit scoring model developed by the three major credit reporting agencies in the United States (Equifax, Experian, and TransUnion) to compete with FICO. Although FICO dominates the lending sector, Vantage is gaining popularity in some sectors, including personal loans and auto lending. Vantage is frequently used by credit monitoring websites to give consumers a free copy of their credit reports.
Is the Vantage Score Accurate?
Vantage can give a general idea of where your credit scores are. However, since it is not widely used for lending purposes, it may not be accurate in determining your actual lending score. FICO is the most recognized scoring model and is still widely used by lenders. Nonetheless, Vantage is a good indicator of your credit score.
In the next 5–10 years, we may see lenders nationwide using the Vantage scoring model more frequently due to its ability to provide the best scoring models based on current standards. Despite this, credit reporting agencies remain the biggest data collection agencies, and they have the ability to provide the best scoring data, period.
Understanding Good Credit Scores
Credit scores are important because they can determine your financial future. FICO scores and Vantage scores are two of the most used models, and they both range from 350 to 850. When building your scores, it's important to know what ranges you should aim for. Here are some score thresholds to keep in mind:
1. 620 or below:
This is considered a bad credit score. If you're in this range, it's likely because of bad credit history, high balances on credit cards, or no credit cards at all. To improve your score, make timely payments and have at least ten active credit accounts open. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can help you with this. When your score reaches 620, you can start qualifying for an FHA home mortgage.
2. 640-680:
This range is considered fair or good credit. It means you have established credit, but you may have some derogatory marks or accounts on your credit, and you may have some high balances on your credit cards that you will need to pay down. Newly opened accounts can also temporarily drop your score. If your score is in this range and you've recently opened a new account, don't worry; your score will return.
3. 740+:
Any score over 740 is "super-prime" and will give you the best interest rates for most loans. Congratulations if you have this score, as you're part of the 20% of the US population with a score this high. Keep up the great work by paying your accounts on time and keeping up with revolving credit card accounts.
Required credit score for buying a home
The credit score required to buy a home depends on the type of mortgage loan that you are applying for. Federal regulation and government backing typically lead to similar or varying guidelines and requirements for most mortgage loans. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most prevalent loan option outside of the VA loan. These loans do not mandate you to carry private mortgage insurance (PMI), which is an additional expense that can raise your downpayment or monthly payment. PMI protects the lender if you default on the loan. Conventional loans usually require lower down payments and offer better interest rates than other mortgage loans. A common credit score requirement for conventional mortgage loans is 640, and a debt-to-debt ratio no higher than 43%.
FHA Loan
The FHA mortgage loan is suitable for individuals with lower credit scores ranging from 580 to 619. Every loan program is unique, and if you fall within the defined credit score limits, shop around for multiple lenders that will provide the best financial option for you. FHA loans require you to maintain PMI for at least 11 years, which can impact your mortgage cost and may not be feasible if you're on a budget. The loan generally has a higher debt-to-income limit (50%) compared to conventional loans, enabling you to purchase more homes with a low income. Lastly, the downpayment requirements on an FHA loan are as low as 3.5% of the purchase price. However, these loans typically have a higher interest rate.
VA Loan
If you have served in the US military, VA loans do not require a minimum credit score. However, they will assess your previous defaulted loans and government-owed past-due debts when pre-qualifying you. To be eligible for VA loans, you must meet specific criteria such as serving in the military for at least 181 days, 90 consecutive days during wartime, or six years with the National Guard. Additionally, if you are a spouse of military personnel who died during active duty, you are eligible for VA loans. This loan has the best interest rates, and a downpayment is generally not required. As a result, the VA loan is an excellent way to repay veterans for their service to the country.
Determining Your Eligibility for a Car Loan
While a good credit score is a significant factor in qualifying for a car loan, lenders pay more attention to your credit history. Your current and previous credit histories help determine the risk of extending credit to you. Late payments or repossession on your credit report can make it more challenging to get approved for a loan. Even with bad credit, some lenders may still qualify you for a loan, but they may impose additional criteria such as a higher down payment or more fees. In some cases, dealerships may select the vehicle you can receive financing for, as they have a higher markup on the car to cover the fee they must pay to lend to you.
When it comes to the ideal credit score range for getting a loan for a new vehicle, there isn't a specific number.
For optimal approval chances, a credit score over 680 is recommended. Anything below this score increases the interest rate charged to you. Based on the current examples, someone with a lower credit score can end up paying higher interest rates, resulting in a higher overall cost of the loan. Ultimately, having equity or a down payment can provide you with more leverage when buying a vehicle on credit.
Ways to Improve Your Credit Score
It is possible to improve your credit score with minimal effort by taking several essential steps. However, building a good credit score is a gradual process that requires patience. Rushing the process can lead to poor decision-making and worsen the problem. Here are some actions you can take immediately to improve your credit:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit offers an excellent way to maximize your credit scores, especially if you have limited credit or want to rebuild it. Obtaining a large loan to build credit can be challenging; therefore, revolving credit gives you the best chance of approval. To get started, we recommend opening a secured credit card that focuses on your ability to pay on time rather than your credit score. For instance, Open Sky or Credit Builder Card, which require no bankruptcy history in the last two years and a steady income. Revolving credit forms 30-35% of your overall credit score, making it the best way to build credit scores in no time. Be sure to pay your balances on time and keep them at $5-10.
2. Raise Your Limits!
One way to increase your overall credit limits and reduce your credit utilization percentage is by requesting a credit limit increase for your active revolving credit card accounts. Exceeding 30% of your overall limits on credit card balances can significantly hurt your credit score. To avoid this, request a credit limit increase by filling out the required information, including your current income. Each credit card company has a different process, so contact your card issuer. They will evaluate your request based on seven to fifteen months of excellent payment history.
3. Pay Down Your Balances!
Keep your balance low and close to zero by spending only on small necessary purchases. Remember, you are not obligated to use your credit cards every month. Keeping a balance of about $1-5 on your credit card when paying your bill helps. If you have a high balance with no financial flexibility, create a strategy to pay a percentage of your paycheck each month to pay it down gradually. Avoid using the card again after paying to reduce your balances. High credit card usage affects your credit score, and the interest rates charged are high, leading to most of your payment going towards interest, worsening the situation.
Tips from Joe on Improving Your Credit Score
We've all faced the challenge of dealing with a less-than-stellar credit profile at some point in our lives. However, if you are willing to take your credit score seriously and invest time and effort into improving it, you can see some pretty impressive results surprisingly fast. Many individuals with poor credit fall into a cycle of continuing to have credit problems, eventually feeling like having good credit again is a lost cause. Building a solid credit score requires significant effort, but those who prioritize their credit and focus on their spending behavior will undoubtedly reap the benefits. Start by establishing a budget and addressing any harmful patterns in your spending; these changes will have a direct impact on your credit score. For more information on credit, please refer to this article. If you require assistance or guidance with repairing your credit, do not hesitate to contact my office at www.asapcreditrepairusa.com.