Were you aware that there are 30 different levels of credit scores? The majority of individuals are unaware that searching for the best credit score can lead to a plethora of varying answers from Google. Unfortunately, the provided information can often be perplexing and direct individuals towards inaccurate resources. As someone who has spent over fifteen years in the financial literacy and credit repair industry, my objective is to offer insightful advice to assist individuals in making informed decisions regarding credit scores. I have aided over twenty thousand clients in improving their credit scores and my aim is to provide you with enough information to do the same. So let's dive right in.
Contents:
Various Types of Credit Scores
Understanding Credit Scores
Determining the Ideal Credit Score for Homeownership
Determining Credit Requirements for Buying a Car
Tips for Improving Your Credit Score
Advice from Joe
Various Types of Credit Scores
There are two primary credit scoring models: the FICO model and the Vantage model. Both models are crucial to comprehend, particularly when it comes to understanding how they calculate credit scores.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used scoring model with eight distinct FICO models, from FICO 2 to FICO 10, resulting in different credit scores depending on your credit report. This may be confusing, but you will understand more after reading on.
Different FICO Scores
When you apply for credit, lenders may obtain a different FICO report based on the type of lender you use. For instance, if you want to apply for a mortgage, most mortgage lenders will pull your FICO 5 credit report. In contrast, credit card companies primarily use the FICO 8 report, and auto lenders usually pull FICO-2 reports. Other lenders may use different FICO models that are specific to their lending type.
Why Multiple FICO Scores?
Each credit report has a varying weight on the credit score, meaning that factors critical to the lender will have a more significant impact on the credit score than the less important ones. For instance, a FICO 5 mortgage report considers your payment history on previous mortgages. On the other hand, a FICO 8 report considers your credit card history. Generally, your previous history in each particular lending area will have a more significant impact on the relevant FICO scoring model.
Vantage Credit Score
The three major credit reporting agencies (Equifax, Experian, and TransUnion) developed the Vantage Score scoring model to compete with the FICO scoring model. Although the Vantage model is new compared to the FICO model, which has been in use since the '70s, credit monitoring websites all over the United States frequently use Vantage to provide a free copy of your credit reports. While FICO currently dominates the lending sector, the Vantage Model is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending.
Vantage Accuracy
The Vantage Score is accurate, but its accuracy depends on the context within this question. Since the Vantage score is not widely used for lending purposes, it will not be accurate when it comes to your actual lending score. However, the Vantage Score can provide a good "general idea" of your FICO score. Since it is hard to know your FICO score without paying for it or having a lender pull your credit report, the Vantage Score can give you an idea of roughly where your overall scores are.
The Future of Vantage Scoring Model
Lenders nationwide will widely use the Vantage scoring model in the next 5–10 years because of its current ability to provide the best scoring models based on today's standards. The FICO scoring model is outdated and does not give a clear representation of credit scores. Credit reporting agencies have the most significant data, and if they have data, they have the upper hand in providing the best scoring data, period.
Understanding Credit Scores
Credit scores are a crucial determinant of your financial health. Both the FICO and Vantage scoring models range from 350 to 850. The closer you are to the 850 score, the better. To help you understand where you stand, here are some critical score thresholds:
1. 620 or below
Scores in this range are considered bad credit. You may have some adverse credit history, high-balance credit card accounts, or no credit cards at all. The best way to improve your credit score is by making timely payments and having ten active revolving credit accounts open. Secured credit cards like Credit Builder and OpenSky Credit Card can also help you build your score. Once you reach the 620 credit score range, you can start qualifying for an FHA home mortgage.
2. 640-680
Scores in this range are considered fair for good credit. It typically indicates that you have established credit, but you may have some derogatory marks or accounts on your credit. Also, you may have high balances on your credit cards that you need to pay down. If you recently opened a new account and are in this range, do not worry. A temporary drop in scores is common, and your scores will return.
3. 740+
Any credit score above 740 is super-prime and will get you the best interest rates for most loans. You are part of the 20% of people with this score, so congratulations! Keep making timely payments, paying off your revolving credit accounts, and you will be in great shape.
Determining the Ideal Credit Score for Homeownership
The credit score necessary to purchase a home depends on the type of mortgage you want to qualify for. Because of federal regulation and government support, mortgage loan requirements and regulations are often similar—though at times, divergent. Here are the three most prevalent mortgage loan types:
1. Conventional Loans
Conventional loans are one of the most popular options available. It is also a great “cost-effective†alternative to the VA loan. In contrast to other mortgage loans, conventional loans do not necessitate private mortgage insurance (PMI), which can raise the down payment or monthly payment. PMI coverage protects the lender if you are unable to make payments on your loan. Conventional loans usually come with lower down-payment prerequisites and superior interest rates than other mortgage loans. A conventional mortgage loan necessitates at least a 640 credit score and a debt-to-debt ratio not exceeding 43%.
2. FHA Loan
The FHA mortgage loan is intended for lower credit scores (typically 580 to 619). Keep in mind that each loan program is distinctive, so if you satisfy the credit score requirements, it is critical to shop around for various lenders offering the best financial terms. FHA loans necessitate PMI payments for a minimum of 11 years, leading to higher mortgage costs and should be factored into the buyer's budget plan. This loan type has an increased debt-to-income limit (up to 50%), allowing you to purchase more properties than conventional loans with a lower income. Lastly, FHA loans only require a 3.5% down payment, making home financing a feasible possibility even with less cash. Nonetheless, be aware that FHA loans often come with a higher interest rate.
3. VA Loan
VA loans do not have a credit score requirement. However, they scour through your financial history for possible past-due bills and previously defaulted loans when pre-qualifying you. To be eligible for the VA loan, you must have either served in the US Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a deceased spouse who was in the military. VA loans are typically offered at the most competitive interest rates and do not typically require down payments. I am an advocate of VA loans since they perfectly fit our veterans' needs.
Determining Credit Requirements for Buying a Car
When it comes to purchasing a car, your credit history is more crucial than your credit score. A higher credit score does play a role in loan interest rates, but it is not the most important factor. Lenders assess your previous and current credit histories when you apply for a car loan to determine the risk involved in extending credit. For instance, if you had late payments on a previous or current auto loan or experienced repossession, securing a loan can be difficult. However, the worst credit or special finance lenders can approve just about anyone for a car loan. Still, they will require additional criteria such as a higher down payment and extra dealership charges to alleviate the risk of you defaulting on the loan and push your approval. Your credit score will also influence the interest rate you will pay, and having a score over 680 is ideal. For instance, if you have a credit score of 720 or above, you will pay an average of $5,500 in loan interest, while having a score of 580 or above will result in paying an average of $15,300 in interest. Therefore, the higher your credit score, the lower the interest rates you'll qualify for and vice versa. Lastly, having equity or a down payment can provide you with leverage when purchasing a car on credit.
Tips for Improving Your Credit Score
Improving your credit score is achievable with a bit of effort, but it takes time and patience. Rushing the process can result in poor decisions that make matters worse. Here are some tips to improve your score:
1. Open 3-5 revolving credit accounts.
Revolving credit is the best option to help increase your credit score, particularly if your credit history is limited. Secured credit cards like Open Sky or Credit Builder Card are excellent options to start with. Revolving credit makes up 30-35% of your credit score, and using it wisely can help you improve your score quickly. Make sure to pay your balance on time and keep it between $5-$10.
2. Request a credit limit increase.
If you have active revolving credit card accounts, increasing your credit limit can help lower your credit utilization percentage and improve your credit score. Contact your credit card company and request a “Credit Limit Increase.†Most credit card companies would want to see good payment history for at least seven months before approving a growth in credit limit.
3. Keep your balances low.
Limit your credit card usage to small purchases and only spend what you can afford to settle each month. Leave about $1-$5 balance on your credit cards when paying bills. Pay down high balances gradually by allocating a percentage of your paycheck each month.
Remember, limiting your credit card usage is the best way to manage your credit score.
Advice from Joe
We've all experienced less than ideal credit situations. If you take your current credit situation seriously and invest time and effort into both your personal growth and credit, you'll notice significant improvements to your credit score in no time. Those with bad credit often feel like they're stuck in a cycle of credit issues for life, thinking that restoring their credit is impossible. However, developing a great credit score requires much effort, and those who prioritize their credit and modify their spending habits are guaranteed to win. Begin by drafting a budget and actively working to fix any poor spending habits -- this will have a direct positive impact on your credit score. If you require assistance and guidance with your credit score or need credit repair, don't hesitate to contact my office today at www.asapcreditrepairusa.com.