It's a little-known fact that there are actually 30 distinct levels of credit scores. When searching for the best credit score, many individuals turn to Google for answers, but the vast amount of information available can be overwhelming and even misleading. That's where I come in - my name is Joe Mahlow, and I've worked in the financial literacy and credit repair industry for more than 15 years. My goal is to provide straightforward advice on a range of topics, including credit scores. Through my work, I've helped over 20,000 clients improve their credit scores, and I'm here today to share some insights with you. Let's dive in and learn more!
Contents:
What are the Various Credit Scoring Models?
Understanding What Qualifies as a Good Credit Score
Credit Score Needed to Buy a Home: Understanding the Requirements for Different Mortgage Loan Types
What Determines Your Eligibility for a Car Loan
Tips for Improving Your Credit Score
Insights from Joe: A Look at Working on Improving Your Credit Score
What are the Various Credit Scoring Models?
Credit scores are calculated differently depending on the model used. There are two main credit scoring models to get acquainted with: the FICO model and the Vantage model. Understanding the differences between them is crucial.
FICO Credit Scores
The FICO model is the most commonly used and popular credit scoring model, with eight different models that range from FICO 2 to FICO 10. The credit score calculated can vary based on the credit report pull; different lenders call for different FICO models. For example, if you're applying for a home loan, the mortgage lender will most likely pull out your FICO 5 credit report. Conversely, for credit cards, the FICO 8 model is usually used. Different reports carry different weights, where the factors that are most critical to the lender will have a higher impact on the credit score. For instance, FICO 5 mortgage reports lean heavily on the borrower's previous mortgage history, whereas FICO 8 credit card reports heavily consider a borrower's past credit card history.
Vantage Credit Scores
Equifax, Experian, and TransUnion developed the Vantage Score model that competes with the FICO model. The Vantage Score is a new model compared to FICO, which has been around since the seventies. Although FICO dominates the lending sector, Vantage is gaining popularity as a scoring model in some sectors, including personal loans and auto lending.
Accuracy of the Vantage Score
While the Vantage Score is perfectly accurate, it would depend on the context within which the question was posed. As it is not widely used for lending purposes, it's not very accurate as an actual lending score. The best use of a Vantage score is to give you a general idea of your FICO score since it's hard to know your FICO score without paying for it or having a lender pull your credit report. The Vantage Score is perfect for a rough estimate of your credit scores. I believe that Vantage has the potential to be the most used scoring model by lenders nationwide in the next 5–10 years because it provides the best scoring models based on today's standards. Compared to FICO, which is an outdated scoring model that does not give users a clear representation of their credit scores, credit reporting agencies have the most relevant data collection outside social media companies. If they have the data, they have the upper hand in providing the best scoring data in the financial industry.
The Differences Between Credit Scoring Models
1. The FICO model is the most commonly used credit scoring model, whereas the Vantage model is gaining popularity in some sectors, such as personal loans and auto lending.
2. Different FICO models vary depending on the credit report that is pulled.
3. The Vantage score is a good 'general idea' of the FICO score since it's relatively unheard of in lending sectors.
Understanding What Qualifies as a Good Credit Score
Credit scores are measured by both FICO and Vantage credit scoring models, with scores ranging from 350 to 850. A score of 350 is considered the worst credit score, while a score of 850 is the best. As you aim for higher scores, it's crucial to be aware of key score thresholds throughout your credit-building journey. Read below to discover the important score ranges:
1. 620 or below:
Scores in this range are considered bad credit, which could include a history of adverse credit or no credit at all. To improve your scores, it would be best to pay your debts on time and have at least ten active revolving credit accounts open. Consider using a secured credit card, such as the Credit Builder Card or OpenSky Credit Card, to build your credit. Once you reach a credit score of 620, you can start qualifying for an FHA home mortgage.
2. 640-680:
Scores in this range are considered fair for good credit. It typically means that you have established credit, but you may still have derogatory marks or accounts on your credit. You may also have high balances on your credit cards that need paying off. Recently opened accounts may also have a temporary effect on your scores. If your scores fall in this range and you have recently opened a new account, don't worry; your scores will return.
3. 740+:
Any score over 740 is considered "super-prime" and will give you the best interest rates for most loans. You are part of the 20% of the US population with this score. Congratulations! Keep paying your accounts on time and maintaining your credit card accounts to stay in great shape.
Credit Score Needed to Buy a Home: Understanding the Requirements for Different Mortgage Loan Types
The credit score required to buy a house can vary, depending on the type of mortgage loan you plan to apply for. Different mortgage loan types are subject to various regulations and guidelines, but most have similarities due to government backing. Here’s a breakdown of the three most common mortgage loan types: conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are the most popular option, and they usually offer the best deal outside of a VA loan. With conventional loans, private mortgage insurance (PMI) is not mandatory, which can lead to lower monthly payments or a smaller down payment. Down payments are typically lower than other options, and interest rates are generally favorable. However, conventional loans require a credit score of 640 and a debt-to-income ratio of no more than 43%.
FHA Loan
The lowest credit score you could have to be eligible for an FHA mortgage loan is around 580-619. The PMI is mandatory on this one, lasting at least 11 years, which can impact your monthly expenses. The FHA loan debt-to-income limit is higher than conventional loans, and down payments can be as low as 3.5%. A higher interest rate, however, usually comes with this option.
VA loan
If you are a veteran or serving military personnel, the VA loan is probably your best option as it does not have a specific credit score requirement. They are usually only looking at previous defaulted loans and government-owed past-due debts when pre-qualifying you. Also, you will not need a down payment but will need to fulfill specific criteria, such as serving in the US military or your spouse losing their life while serving. VA loans come with the best interest rates around.
What Determines Your Eligibility for a Car Loan
Your credit history is the most important factor in determining your eligibility for a car loan, more so than your credit score. While a high credit score is beneficial, the interest rate you qualify for is based on your credit history and not solely on your credit score.
When applying for a car loan
lenders examine your credit history, both past and current, to assess the risk associated with extending credit. Lenders are likely to reject those with a history of late payments, repossessions, or defaults on previous auto loans. Even lenders without strict credit requirements will add specific qualifications, such as a larger down payment or higher dealership fees, to mitigate the risk involved in lending to people with poor credit histories. Some dealerships, in particular, will select a car for you that has a higher markup to cover their costs of approving the loan.
To maximize your leverage when purchasing a car on credit
it’s essential to have equity or a down payment. While there is no minimum credit score requirement, a credit score over 680 is ideal. Anything below this score can increase the interest rate you're charged due to the increased risk to the lender.
The Impact of Credit Scores on Interest Rates for Car Loans
Credit scores have a significant impact on the interest rates charged for car loans. According to current data, someone with a credit score of 720 or above will pay, on average, $5,500 in interest on a loan. In contrast, someone with a credit score of 580 or above will pay an average of $15,300 in interest on a car loan.
As demonstrated by these figures, a higher credit score translates to lower interest rates, as a borrower poses less risk to the lender.
Tips for Improving Your Credit Score
Improving your credit score requires patience and effort. It is not something that can be achieved overnight. Nevertheless, there are some things you can do to help increase your credit score with little effort. Here are the three most crucial things:
1. Open 3-5 revolving credit accounts:
- Revolving credit is a good option to help you maximize your credit scores. Credit cards are a perfect example of revolving credit accounts that can aid you in building your credit. Opening a secured credit card like Open Sky or Credit Builder Card can help you focus on your ability to pay and improve your credit scores quickly.
- Revolving credit makes up 30-35% of your overall credit score. Ensure you pay your balance on time and keep it at $5-10 each time you pay it. Use the card only for small purchases like gas or groceries.
2. Raise your limits:
- Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. To avoid hurting your credit score, ensure your credit card balances are not above 30% of your overall limits. You can increase your credit limits by reaching out to your credit card company and requesting a credit limit increase either online or over the phone. The credit team will decide if a credit limit increase is something they will approve. Most credit card companies require you to have 7-15 months of excellent payment history on the account before they agree to increase your credit limit.
3. Pay down your balances:
- Keeping your balance low and close to zero is essential. The best advice is to use your credit card only for small purchases and pay your bill each month, leaving about a $1-5 balance on your credit cards. If you have high balances and cannot pay off your credit debts, you can create a game plan to pay off a percentage of your paycheck each month. This will help you to pay off your debt gradually and eventually stop using your credit cards. The worst thing to do is to run the balance back up after you have paid down your credit card. You must limit your credit card usage since it plays a massive role in your overall credit score. Not to mention, credit card rates are high, and most payments go towards interest and not principal.
Insights from Joe: A Look at Working on Improving Your Credit Score
We've all been in situations where our credit score leaves something to be desired. However, if you are serious about sorting out your credit score, and willing to put in the effort, you will quickly notice significant changes. Unfortunately, many consumers with bad credit feel trapped in a cycle of financial issues that seem difficult to resolve. Rebuilding a good credit score is a challenging task, but those who prioritize their credit and are mindful of their spending habits will eventually succeed. It's important to start the process by creating and sticking to a budget while focusing on improving any detrimental spending habits. By doing this, it will directly contribute to improving your credit score. This article offers helpful insights into understanding credit, and if you require guidance or assistance with credit repair, reach out to us today at www.asapcreditrepairusa.com. Here are a few tips to keep in mind:
- Be serious about working on your credit score
- Dedicate time and effort to the process
- Avoid getting trapped in the cycle of bad credit
- Prioritize credit management and spending habits
- Create and stick to a budget
- Seek assistance if needed