It's astounding to know that there are not just one or two, but thirty diverse levels of credit scores. These days, when you ask for the most favorable credit score, Google generates a plethora of dissimilar answers. Unfortunately, some of the available information can be misleading, if not confounding, and lead you towards deception. My name is Joe Mahlow, and for more than 15 years, I have been active in providing financial education and credit restoration services. My primary objective is to offer reliable, factual advice on various topics, and today, I am going to cover credit scores. Over the years, I've helped more than 20,000 clients restore their credit scores, and in this piece, I'll try to provide you with enough information to help you do the same. So, let's dive in and explore the topic in detail.
Contents:
Different Types of Credit Scores Understanding FICO and Vantage Models
What's Considered a Good Credit Score?
What is the Appropriate Credit Score to Purchase a House?
Determining a Good Credit Score for Buying a Car
Tips for Improving Your Credit Score
Joe's Advice on Improving Your Credit Score
Different Types of Credit Scores: Understanding FICO and Vantage Models
Credit scores are used to measure a person's creditworthiness. There are two primary models of credit scoring that are employed, namely the FICO model and the Vantage model. It is essential to understand the differences between these models and how they calculate your credit scores.
FICO Credit Score
The FICO model is the most commonly used credit scoring model, with eight different versions, ranging from FICO 2 to FICO 10. These versions yield different credit scores depending on the data on the credit report. Different lenders use different versions of the FICO score when determining the creditworthiness of an individual. For example, a mortgage lender will most likely use your FICO 5 credit report, while a credit card issuer will most likely pull your FICO 8 credit report.
Why so many FICO scores, you may wonder? This is because each credit report has a different "weight." This implies that the elements that are considered crucial by the lender about a credit report will have a more significant impact on a credit score than less important factors. So, for instance, FICO 5 mortgage report scores weigh heavily on previous mortgage history, while FICO 8 report scores factor in the credit card history the most. Likewise, auto lenders prefer to pull FICO-2 reports, and the scores heavily factor in previous auto history.
You can check your different FICO scores by signing up for an account on www.myfico.com.
Vantage Credit Score
The Vantage scoring model is a new entrant in the credit scoring industry and was developed by the three major credit reporting agencies, namely Equifax, Experian, and TransUnion. Vantage Score is designed to compete with the FICO scoring model. While FICO has been around since the seventies, Vantage is a relatively new scoring model. Credit monitoring websites frequently use Vantage Scores to provide customers with a free copy of their credit reports. Certain sectors use Vantage Score like personal loans and auto lending, and it is gaining popularity.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but it depends on the context of the question. While the Vantage Score provides a good general idea of one's credit score, it is not widely used for lending purposes; hence, it may not be accurate in determining your actual lending score. The FICO model dominates the lending sector, and the accuracy of the Vantage score may vary. However, with its ability to provide the best scoring models based on the current standards, the Vantage scoring model will likely gain widespread usage in the next 5–10 years.
The bottom line is that credit reporting agencies have significant data collection undertakings, and they have the upper hand in providing the best scoring data available. While the FICO scoring model is currently the industry standard, it may be deemed outdated, and the Vantage scoring model may become more widely adopted in the future.
What's Considered a Good Credit Score?
Credit scores for FICO and Vantage models range from 350 to 850, with 850 being the best score. Achieving high scores warrants crucial consideration when setting credit goals. Here are some important score thresholds to guide you through the process of building your scores.
1. 620 or below
Having a score of 620 and below is considered bad credit. This score may result from either an adverse credit history, high-balance credit card accounts, or having no credit card at all. The most effective way to improve your credit score is by making timely payments while maintaining ten active revolving credit accounts. Secured credit cards such as the Credit Builder Card or OpenSky Credit Card can help you build your credit. Once you reach the 620 credit score, you can start qualifying for FHA home mortgage.
2. 640-680
Scores at this range are considered fair for good credit. A score in this range means that you have established credit but may have derogatory marks or accounts, and high balances on your credit cards that require payment. Newly opened accounts may temporarily drop your scores. However, there is no need to panic, as your scores will return.
3. 740+
A score of 740 and above is considered "super-prime," and offers the best interest rates for most loans, making you part of the 20% of the US population with this score. Congratulations on the great work! Always ensure to pay your accounts on time, and consistently keep your revolving credit card accounts paid to stay in great credit shape.
What is the Appropriate Credit Score to Purchase a House?
To determine the appropriate credit score to buy a house, it depends on the type of mortgage loan you are looking to qualify for. Federal regulations and government backing ensure that most mortgage loans have similar or different requirements and guidelines. The following are three common types of mortgage loans:
1. Conventional Loans
Conventional loans are the most popular and often the best option outside of VA loans. To qualify for conventional loans, you do not need to maintain private mortgage insurance, which increases your monthly payment or down payment. However, it can protect the lender in the event of non-payment. Conventional loans commonly have lower down payment requirements and better interest rates compared to other mortgage loans. The typical credit score requirement is approximately 640 with a debt-to-debt ratio of no higher than 43%.
2. FHA Loan
The FHA mortgage loan is suitable for those with lower credit scores, typically ranging from 580 to 619. Remember that different lenders have different loan programs, and it is best to compare their options based on your needs. FHA loans require maintaining PMI for at least 11 years, which may increase your mortgage's cost and impact your budget. You can typically purchase more homes through an FHA loan than a conventional loan if your income is lower, with a higher debt-to-income limit of up to 50%. In addition, there is a low down payment requirement of 3.5% for this loan, but it generally comes with a higher interest rate.
3. VA Loan
The VA Loan does not technically require a credit score, but it requires evaluation of past defaulted loans and government-owed past-due debts in pre-qualifying you. To qualify for this loan, you must have served in the US military for at least 181 days, 90 consecutive days during wartime, or six years with the National Guard, or if your spouse was in the military and lost their lives during active duty. The VA loan typically has the best interest rates available and does not typically require a down payment, making it an ideal option for veterans.
Determining a Good Credit Score for Buying a Car
When it comes to buying a car, having a good credit history is more important than a high credit score. Although having a high credit score is important, it is not the sole factor that determines your eligibility for a car loan, particularly the interest rate that you qualify for. A lender also considers your previous and current credit histories, which help assess the risk involved. If you have a history of late payments, repossessions, and other credit issues, you pose an increased risk to the lender, which makes it more challenging to qualify for a car loan. Even if you have poor credit, some lenders will qualify you for a loan, but they tend to have specific criteria, such as a higher down payment and additional fees, to reduce their risk. These lenders may also charge the dealership a fee for approving your loan, which may affect the vehicle you can choose and the overall cost of the loan. To have the most leverage, equity or a downpayment is essential.
Credit Score Range for a New Car
There is no exact credit score to guarantee loan approval since various factors influence it. However, an ideal credit score for a new car is over 680. Anything below this range is considered a higher risk by the lender, resulting in increased interest rates. The interest you pay on a car loan also depends on your credit score. For instance, a credit score of 720 or above will pay an average of $5,500 in interest, while someone with a 580 credit score or above will pay an average of $15,300 in interest. Hence, maintaining a higher credit score is essential to reduce the interest you pay, which ultimately improves your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time and effort. It is important to be patient and avoid making irrational decisions that could worsen your problems. Here are some things that you can do to improve your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Revolving credit is one of the easiest ways to maximize your credit score. To get started, consider opening a secured credit card like Open Sky or Credit Builder Card. Revolving credit makes up a significant portion (30-35%) of your credit score. It may take 2-4 months to see the increase in your credit score, so make sure to pay your balance on time and keep it low.
2. Request a credit limit increase
If you already have revolving credit card accounts, getting a credit limit increase can help increase your overall credit limit and lower your credit utilization percentage. To do this, contact your credit card company and request a “Credit Limit Increase.†You usually need 7-15 months of excellent payment history before the company agrees to increase your credit limit.
3. Pay down your balances
Keeping your balance low and close to zero is crucial. If you have high balances, make a plan to pay them down with a percentage of your paycheck each month. Do not run up your balances again after paying them down.
Improving your credit score takes time and patience, but taking these steps can help you get there.
Joe's Advice on Improving Your Credit Score
We've all experienced a not-so-great credit situation at some point. However, it's crucial to take your current credit status seriously and put in the time and effort to work on improving it. Many people with poor credit get stuck in a cycle of credit problems that seem impossible to break. Nonetheless, those who are willing to prioritize their credit and concentrate on their spending habits will succeed in developing an excellent credit score. To begin, establish a budget and work on correcting any unhealthy spending habits, as this will directly affect your credit score. This article aims to provide a better understanding of credit. If you require guidance and assistance with your credit score or credit repair, connect with my office today at www.asapcreditrepairusa.com.
Key Points:
Taking your credit status seriously is the first step towards improving your credit score.
Concentrating on your spending habits and establishing a budget can have a significant impact on your credit score.
Developing a great credit score requires dedication and effort.
Those who prioritize their credit will ultimately succeed in achieving good credit.