It may come as a surprise, but did you know that there are actually 30 different levels of credit scores out there? When searching for the ideal credit score, Google tends to throw out a multitude of answers, which can be overwhelming and even misleading at times. As someone who has been immersed in the realm of financial literacy and credit repair for more than 15 years, my name is Joe Mahlow. My aim is to provide you with unfiltered advice on a variety of topics, including credit scores. Having assisted more than 20,000 clients in elevating their credit scores, I’m hopeful that the information I share can help you achieve the same. Let's dive into the details.
Contents:
Different Credit Scoring Models: FICO & Vantage
Understanding Your Credit Score
What Credit Score is Needed to Buy a House?
Determining What Credit Score is Needed to Purchase a Car
Guide to Boosting Your Credit Score
Final Thoughts from Joe on Achieving a Great Credit Score
Different Credit Scoring Models: FICO & Vantage
Understanding credit scores is essential for anyone who needs to apply for credit or a loan. The two most common credit scoring models are FICO and Vantage. It's important to know the differences between these models to understand how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used credit scoring model, with eight different FICO models from FICO 2 to FICO 10. However, depending on which type of lender you use, you will get a different credit score based on your credit report. For example, if you're applying for a mortgage, your lender will most likely pull your Fico 5 credit report, whereas if you're applying for a credit card, they will most likely pull your Fico 8 credit report. Each FICO scoring model takes into account different factors that may weigh differently for a specific type of lending.
Vantage Credit Score
The three major credit reporting agencies created the Vantage Score scoring model comparatively recently to compete with the FICO scoring model, which has been used since the seventies. Credit monitoring websites frequently use Vantage to give you a free copy of your credit reports. While FICO is the most popular and recognized scoring model for lending purposes, the Vantage Model is gaining popularity for personal loans and auto lending. However, the accuracy of Vantage's score depends on its usage and the context of the situation.
Accuracy of the Scoring Model
It is necessary to understand that a credit score is only as reliable as your ability to get a loan or credit. As FICO is widely used for lending purposes, it is the most commonly accepted credit score. However, that isn't to say that Vantage Score isn't accurate at all. It provides a general idea of your FICO score. To get your actual FICO score, you may need to pay or have a lender pull your credit report. Vantage Score can give you a rough idea of where you stand for overall credit score. However, it's fair to expect Vantage Score's increased usage as time passes given its high adaptability to the current standards and sufficient data. Lenders use credit reporting agencies for the proper scoring of the data provided, and both the models have their strengths and potentials to provide the best scoring data.
Understanding Your Credit Score
A good credit score is crucial if you want to secure loans and other financial benefits in the future. Both FICO and Vantage models measure scores on a scale of 350 to 850, with 850 being the highest attainable score. To help you set your score goals better, let's take a closer look at the vital score thresholds:
620 or below:
If you have a score of 620 or below, it is considered bad credit. You may have a history of adverse credit, no credit cards, or high-balance credit card accounts. The most effective way to improve your score is to make timely payments and maintain ten active revolving credit accounts. You may also consider getting a secured credit card such as Credit Builder Card or OpenSky Credit Card. Achieving a score within this range is the minimum requirement to qualify for an FHA home mortgage.
640-680:
Scores between 640-680 are considered fair for good credit. It typically indicates established credit, but you may still have derogatory marks, high balances, or newly opened accounts that could temporarily lower your score. However, these issues can be addressed by paying down your balances and refraining from opening multiple accounts.
740+:
Any credit score over 740 is considered "super-prime" and will secure the best interest rates for various loans. If you have a score above 740, congratulations! You are among the top 20% of the US population with this score. To maintain your score, always pay your accounts on time and keep your revolving credit card accounts paid. With this score, you’re in excellent financial shape.
What Credit Score is Needed to Buy a House?
The necessary credit score to buy a house depends on the type of mortgage loan you are looking to qualify for. Most mortgage loans have similar requirements and guidelines due to federal regulation and government support. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular loans and typically the best "savings" option outside of the VA loan. These loans do not require Private Mortgage Insurance (PMI), which can add to your downpayment or monthly payment. You usually have lower downpayment requirements and better interest rates than other mortgage loans. The credit score requirement for conventional mortgage loans is typically 640, and the debt-to-debt ratio should not be higher than 43%.
2. FHA Loan
The FHA mortgage loan is for individuals with lower credit scores, typically between 580 and 619. FHA loans require you to maintain PMI for at least 11 years, which can increase your mortgage costs. This loan allows for a higher debt-to-income limit, which can enable you to purchase more homes with a lower income. The downpayment requirements on an FHA loan are as low as 3.5% of the purchase, but the interest rate is typically higher.
3. VA Loan
There is no specified credit score requirement for the VA Loan. However, they consider past defaulted loans and any past-due government debts when pre-qualifying you. To qualify, you need to have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or have a spouse who lost their life during active duty. VA loans usually offer the best interest rates available, and you do not need a down payment, making it an excellent option for veterans.
Determining What Credit Score is Needed to Purchase a Car
When purchasing a car, your eligibility is determined by your credit history rather than just your credit score. While having a higher credit score is important, the interest rate you qualify for is also based on various factors. The lender will look at your current and previous credit history to assess the level of risk for extending credit. Late payments or repossessions make loan approval challenging, whereas better credit histories make the process much simpler. However, special finance lenders provide car loans to almost anyone, regardless of their creditworthiness, but with specific conditions such as higher down payments and dealership fees. Dealerships will generally charge a fee to cover the risk of defaulting on the loan. A down payment with equity can provide leverage when buying a vehicle on credit.
Ideal Credit Score Range for Purchasing a New Car
A credit score above 680 is the ideal range for purchasing a new vehicle. However, it's based on several factors, as mentioned above, and there is no exact score for loan approval. A low credit score may increase your interest rate, causing more risk for the lender. The data indicates that the higher your credit score, the less interest you pay. Based on the current figure, someone with a credit score of 720 or above can pay $5,500 in interest on average. On the other hand, someone with a 580 credit score can pay $15,300 in interest on their loan, as it poses a higher risk for the lender.
Guide to Boosting Your Credit Score
Improving your credit score is possible with some effort and patience. Building a good credit score is not an overnight process and requires a consistent approach. Rushing into credit decisions can lead to mistakes and worsen your credit issues.
Here are some ways to improve your credit score quickly and efficiently:
Open 3-5 Revolving Credit Accounts
Revolving credit is an effective method to maximize your credit score. For those with limited credit or seeking to rebuild their credit, it can be challenging to get approved for a large loan. Opening a secured credit card that considers your payment ability, rather than your credit score can be a good start. Revolving credit accounts for 30-35% of your overall credit score and can help you build credit scores in a short time. Be sure to pay the balance on time and keep it between $5-$10 for each payment. Use it only for small purchases such as gas or groceries.
Request a Credit Limit Increase
Requesting a credit limit increase for your active revolving credit card accounts can increase your overall credit limits and lower your credit utilization percentage. Utilizing your credit cards up to 30% of your overall limits can significantly hit your credit score. To avoid this, consider raising your credit limits and reducing your utilization percentage. Each credit card company has different procedures for credit limit increases, which you can do online or by contacting their customer service.
Pay Your Balances
Keeping your balance low and closer to zero is vital to boosting your credit score. You can choose not to use your credit cards every month but pay them for small purchases. Always leave a $1-$5 balance on your credit cards when you pay your bill each month. If you have high balances and cannot pay them off quickly, make a game plan and set aside a percentage of your paycheck every month to clear the balance. You must limit your credit card usage, especially since the interest rates on credit cards are considerably high. Your credit card spending habits will have a substantial impact on your overall credit score.
Remember that building a good credit score requires time and effort. Don't rush into credit decisions. Instead, make a consistent approach and prioritize your payments. Be patient, and you will see the improvement soon.
Final Thoughts from Joe on Achieving a Great Credit Score
As many of us may have experienced, having poor credit is not uncommon. However, if you are serious about improving your credit score, dedicating time and effort to work on both yourself and your credit will lead to significant improvements. Unfortunately, many individuals with bad credit fall into a cycle of credit issues, resulting in them feeling hopeless about improving their credit. Developing a great credit score requires a significant amount of effort, but it is achievable for those who prioritize their credit and focus on their spending habits. Begin by creating a budget and working to address any negative spending habits, as this can directly impact your credit score. This article provides valuable insights into understanding credit. For guidance and support with your credit score or credit repair needs, reach out to our office at www.asapcreditrepairusa.com.