Are you aware that there are 30 distinct levels of credit scores? Many individuals are unaware of this fact, causing them to receive conflicting information when searching for the optimal credit score. Frequently, the information offered on this topic can be confusing, or even worse, deceptive, sending users spiraling into a confusing abyss. My name is Joe Mahlow, and I have worked in the financial literacy and credit repair arena for more than 15 years. My objective is to provide honest advice on a range of topics, such as credit scores. With my assistance, over 20,000 clients have raised their credit scores, and I am eager to share this knowledge with you. Let's begin.
Contents:
Types of Credit Scores: FICO and Vantage
Understanding Good Credit Scores
Choosing the Right Credit Score for Your Mortgage Requirements
The Importance of Credit History When Buying a Car
Assistance in Raising Your Credit Score
Tips from Joe to Improve Your Credit
Types of Credit Scores: FICO and Vantage
Credit scores are essential for people aiming to maintain good credit and get loans. There are two different types of credit scoring models, the FICO model and the Vantage model. It is vital to understand the differences as they calculate your credit score differently.
FICO Credit Score
The FICO scoring model is the most widely used credit scoring model, with eight different models (FICO 2 to FICO 10). You will usually get a different score depending on your credit report. The mortgage lender will most likely pull your FICO 5 credit report when you apply for a home, while your FICO 8 credit report is pulled for a credit card application.
Why so many FICO scores?
The reason for having many different FICO scores is that each credit report has a different 'weight.' Each score weighs the factors critical to the lender, and the most important ones count more. For example, the FICO 5 mortgage report puts greater emphasis on previous mortgage history while the FICO 8 report focuses heavily on credit card usage. Auto lenders use the FICO-2 reports, with scores based on previous auto history.
At www.myfico.com, users can sign up for an account for a better visual representation of their different FICO scores.
Vantage Credit Score
Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), the Vantage Score is a newer model compared to FICO. While FICO is more widely used in the lending sector, Vantage is gaining popularity in some markets. Vantage is also used by credit monitoring websites to give free credit reports.
Is the Vantage Score accurate?
The Vantage Score is accurate, although it is not widely used for lending purposes. The score is only as reliable as your ability to obtain a loan, and since FICO is the most recognized scoring model, Vantage's accuracy can vary. Nevertheless, Vantage can give a 'general idea' of your FICO score.
The Vantage scoring model is becoming more widespread and may eventually replace the FICO model given its ability to provide the best scoring models based on today's standards. Credit reporting agencies hold vast amounts of data, and they have the upper hand in providing the best scoring data.
Understanding Good Credit Scores
The FICO and Vantage models score scale is from 350 to 850. 350 marks the worst credit score, while 850 is the best credit score. To achieve the highest credit score possible, you must know the score thresholds that matter. Here is what you need to know:
1. Bad credit - Below 620
If your credit score is below 620, this signifies bad credit, indicating adverse credit history, high-balance credit card accounts, or no credit cards at all. Timely payments and actively sustaining ten revolving credit accounts are critical for improving your scores. Secure credit cards like the OpenSky Credit Card and Credit Builder Card can also help build your credit. Once your credit score reaches 620, you can qualify for an FHA home mortgage.
2. Fair credit - 640 to 680
A credit score within this range, often means that you have established credit, but some outstanding accounts or derogatory marks pull your credit down. You might also have high balances on your credit cards, which must be paid down. You might experience a temporary drop in your scores due to a new account opening, but your scores will return.
3. Super-prime credit - 740 and above
If your credit score is over 740, congratulations, you are in the top 20% of the US population with excellent credit. A score of 740 or more is "super-prime," and it will garner you the best interest rates on most loans. Consistently paying your accounts on time and maintaining paid revolving credit card accounts will keep you in excellent shape.
Choosing the Right Credit Score for Your Mortgage Requirements
When looking to qualify for a mortgage loan, the required credit score will depend on the type of loan you are aiming for. Mortgage loans are governed by federal regulations and guidelines, and while similar, their requirements can differ. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
The most widely used loans are conventional loans, which are usually the best option outside of the VA loan for those who are seeking to save. A significant feature of these loans is that they do not require you to have private mortgage insurance, an added cost that can increase your monthly payments or down payment. These loans offer lower down payment requirements and better interest rates than other loans. Most conventional loans require a credit score of 640 and a debt-to-debt ratio of no more than 43%.
FHA Loans
Applicants with credit scores between 580 and 619 are eligible for the FHA mortgage loan. Each loan program has its requirements, and if you meet the credit score limit, it's best to shop around for the right lender that provides the optimal finances for you. FHA loans require you to have private mortgage insurance for a minimum of eleven years, which can increase the cost of your mortgage and should be well-considered if you're restricted financially. Generally, FHA loans allow for a higher debt-to-income ratio of up to 50%, and you can afford more homes if you have a lower income. FHA loans require as low as a 3.5% down payment, enabling you to get a mortgage with less money than a conventional loan, but keep in mind that your interest rates will be slightly higher.
VA Loans
For a VA loan, there is no technical minimum credit score requirement, but they examine previous defaulted loans and any government-owed past-due debts during your pre-qualification phase. A person who has served in the military for at least 181 days, 90 consecutive days during wartime, six years with the National Guard, or whose spouse has lost their life during active duty is eligible for a VA loan. The VA loan has the best interest rates with no down payment usually required, and it's an excellent way to honor and reward veterans for their services.
The Importance of Credit History When Buying a Car
When it comes to purchasing a car, your credit history plays a more significant role than your credit score in determining what you qualify for. While a higher credit score is advantageous, it is not the sole determinant of the interest rate you will receive. Lenders will look at both your previous and current credit histories when assessing the risk involved in extending credit. Those with a poor history, such as being late on payments or having had a repossession, will have a tougher time securing a loan. There are, however, lenders who are willing to qualify anyone for a car loan, but with stricter conditions, such as a higher down payment and additional fees for the dealership. The dealership also has a fee to pay to reduce the risk of you defaulting on the loan. It's helpful to have equity or a down payment to negotiate when buying a car on credit.
Credit Score Range for Buying a Car
While there is no fixed credit score that guarantees approval, a credit score of 680 or above is favorable. A score below 680 may result in a higher interest rate due to increased risk to the lender. According to recent data, the amount of interest paid on a loan increases with lower credit scores. For instance, someone with a score of 580 or above pays, on average, $15,300 in interest on a loan, while someone with a score of 720 or more pays $5,500. Therefore, it is clear that a higher credit score will result in less interest paid, positively affecting your credit score.
Assistance in Raising Your Credit Score
Improving your credit score is a process that takes time and requires effort. Quick solutions are not available, and being patient is crucial to making good financial decisions to build up your credit score. Here are some of the things that you should do to increase your credit score:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is an excellent option to maximize credit scores. If you have limited credit or are rebuilding your credit, then this option gives you the best chance of approval. Open a secured credit card that focuses more on your ability to pay on time, such as Open Sky or Credit Builder Card. Revolving credit makes up 30–35% of your overall credit score, and it can take 2-4 months to see the improvements show up on your credit score. It would be best if you limit the usage of the card to small purchases like gas or groceries and pay off the balance on time.
2. Raise your Limits!
Request a credit limit increase for your credit cards that can help to increase your overall credit limit and lower your credit utilization percentage. Most people use their credit cards a lot, but your credit score suffers if your credit card balances exceed 30% of your overall limits. Call your credit card company and request a "Credit Limit Increase." They will usually ask for your current income information.
3. Pay down your balances!
Keeping your balance low and close to zero is essential. You are not obligated to use your credit cards every month. Instead, use your cards for small purchases and leave a $1–5 balance on your credit cards when paying the bill each month. If you currently have high balances that you cannot realistically pay off, make a plan to pay them down monthly. It is essential to limit credit card usage since your credit card spending habits play a significant role in your overall credit score. Credit card interest rates are high, and most payments go towards paying interest and not principal.
Tips from Joe to Improve Your Credit
Credit problems are a common issue faced by many individuals. However, if you are serious about improving your credit score, you will need to put in time and effort to address your existing credit situation. Although it may seem challenging at first, focusing on your credit and spending habits can have a significant impact on your credit score. It is not uncommon for those with bad credit to feel like they will never have a good credit score again. But the truth is, developing and maintaining excellent credit requires hard work and dedication. To get started, consider creating a budget and identifying and correcting any bad spending habits you may have. By making positive changes to your financial habits, you will begin to see direct improvement in your credit score. This article provides useful insights on credit and how it works. If you require guidance or support with your credit score or credit repair, don't hesitate to contact my office at www.asapcreditrepairusa.com.