It's surprising how many people don't know that there are actually 30 different levels of credit scores. When it comes to finding the best credit score, a quick Google search often generates a variety of different answers. This can not only be confusing, but it can also sometimes lead to misinformation that sends you down a path of unnecessary worry. As someone who has been working in financial literacy and credit repair for over fifteen years, my name is Joe Mahlow, and I'm here to offer some raw and honest advice on topics like credit scores. Through my years of experience, I've assisted over twenty thousand clients in improving their credit scores and I'm confident that I can provide you with the necessary information to achieve similar results. So, let's dive in!
Contents:
Various Credit Scoring Models
What Constitutes a Good Credit Score
Ideal Credit Score for Home Buying
Determining What Qualifies as a Good Credit Score for Car Loans
Tips for Improving Your Credit Score
Insights from Joe on Restoring Bad Credit
What are the various credit scoring models?
Two significant credit scoring models that are crucial to understand are the FICO model and the Vantage model. It’s essential to comprehend the differences in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the widely used and popular credit scoring model. There are eight different FICO models ranging from FICO 2 to FICO 10 that generate varying credit scores depending on your credit report. Each FICO report has a different “weight†determined by the factors that are critical to the lender. For example, if you apply for a mortgage, the lender will most likely pull your FICO 5 credit report, which considers your previous mortgage history more than anything else. Similarly, credit card companies typically use the FICO 8 report, which focuses primarily on the individual's previous credit card history.
Why so many FICO scores?
Each FICO score report varies based on the critical factors considered by the specific lender and is given a different "weight." For instance, auto lenders typically give more weight to your previous auto history and use FICO 2 reports to process auto loans.
To see all your different credit scores, sign up for an account at www.myfico.com.
Vantage Credit Score
Equifax, Experian, and TransUnion created the Vantage score to compete with the FICO scoring model. Though a relatively new scoring model compared to FICO, the Vantage model is gaining popularity in some sectors, including auto lending and personal loans. Vantage, unlike FICO, can be viewed for free through credit monitoring websites.
Is the Vantage Score accurate?
The Vantage score is accurate, but its accuracy depends on the intended context. Since it is not widely used for lending purposes, Vantage may not be accurate in determining your actual lending score. Therefore, it serves as a good “general idea†of your FICO score. In the next five to ten years, lenders may widely use the Vantage scoring model, which provides the best scoring models based on current standards. The FICO scoring model may be outdated and not provide an exact representation of credit scores. Remember, credit reporting agencies collect extensive data on credit scores, and their algorithms determine the best scoring data.
What Constitutes a Good Credit Score
Both the FICO and Vantage models assign scores ranging from 350 to 850. The highest score is 850, whereas the lowest score is 350. It is important to know where you stand on the range when you aim to achieve the highest score possible. Below are some significant score thresholds to give you a better understanding.
1. 620 or below
a. This indicates poor credit since you most probably have adverse credit history, a high-balance on your credit cards, or no credit card at all.
b. The Credit Builder Card or OpenSky Credit Card are excellent secured credit cards that could help establish your credit.
c. With a 620+ credit score, you become eligible for an FHA home mortgage.
2. 640-680
a. Scores in this range are fair to good credit.
b. You may have derogatory remarks or accounts on your credit report, high balances on your credit cards, or newly opened accounts.
c. Your scores will recover if there has been a temporary lowered score after opening a new account.
3. 740+
a. A credit score over 740 is "super-prime" and makes you eligible for the best interest rates.
b. Less than 20% of the US population have such scores, so maintaining your score is excellent work.
c. Ensure that you continue to keep your revolving credit card accounts paid, and make timely payments to achieve and maintain a fantastic credit score.
Ideal Credit Score for Home Buying
The ideal credit score for home buying depends on the type of mortgage loan that you are applying for as the requirements and guidelines are different. There are three standard mortgage loans that you can opt for, namely conventional loans, FHA loans, and VA loans. Each mortgage loan type has its own benefits and conditions.
1. Conventional Loans
Conventional loans are the most common and cost-efficient option after the VA loan. Conventional loans require no private mortgage insurance and usually offer better interest rates and lower down payment requirements than other mortgage loans. A credit score of 640 and a debt-to-debt ratio of up to 43% is typically required.
2. FHA Loans
The Federal Housing Administration (FHA) loan is ideal for those with lower credit scores, typically between 580 and 619. If you fall within the credit score range, you may be eligible for this loan if you can afford the added mortgage insurance cost. FHA loans require PMI for at least 11 years, but they have higher debt-to-income limits of up to 50%. You can purchase a higher-priced home with a low down payment of only 3.5%, but it comes with a higher interest rate.
3. VA Loans
VA loans do not have a minimum credit score requirement, but they look for any previous defaulted loans and past-due government debts when pre-qualifying you. To be eligible, you must have served in the military for at least 181 days, 90 consecutive days during wartime, 6 years with the National Guard, or have a spouse who died during active duty. VA loans offer the best interest rates, and they usually require no down payment. It’s an excellent way to give back to our veterans.
Determining What Qualifies as a Good Credit Score for Car Loans
While having a higher credit score can play a role in getting a better interest rate for a car loan, your credit history is actually the most important factor in determining eligibility.
Credit History and Eligibility
When you apply for a car loan, lenders look at your credit history, including any past or current issues, to assess the risk. Those with a repossession or late auto loan payments will face more challenges in getting approved for a loan. Nonetheless, those with bad credit can still get approved by certain lenders, but with conditions such as higher down payments and supplementary fees to lessen the risk of default.
Benefits of Equity or a Down Payment
Having equity or a down payment can be beneficial when purchasing a car on credit.
Ideal Credit Score for Car Loans
Although there's no exact credit score to guarantee approval, a score above 680 is usually ideal. The interest rate you are charged may increase with a lower score, with someone with a 720 credit score or above paying on average $5,500 in interest, compared to someone with a credit score of 580 or above paying on average $15,300 in interest. So, it is best to maintain a good credit score.
Tips for Improving Your Credit Score
Improving your credit score can be achieved through several simple and essential steps that require some patience. A good credit score takes time to build, and one must avoid making bad decisions that can exacerbate the situation. Here are some things you can do right now to improve your credit score:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is the best option to help maximize your credit scores quickly, especially for those with limited credit or looking to rebuild their credit. It is essential to obtain a secured credit card that focuses more on your ability to pay on time, and revolve your balances at $5-10 to build your credit score quickly.
2. Request Credit Limit Increases
Requesting credit limit increases on your active revolving credit card accounts can help improve your credit scores. This will help increase your overall credit limit and lower your credit utilization percentage. Every credit card company has different processes, and they typically want to see excellent payment history on a credit card before agreeing to a credit limit increase.
3. Pay Down Your Balances
Keeping your balance low and close to zero is crucial for improving your credit score. One must limit their credit card usage and make a game plan on taking a certain percentage of their paycheck each month to pay down the credit card and ultimately stop using it. Remember, credit card spending habits play a massive role in your overall credit score, and most of your payments will go towards interest and not principal.
Insights from Joe on Restoring Bad Credit
We've all experienced a less than satisfactory credit score at one point in life. However, by taking the necessary actions to improve your credit situation, you'll quickly witness significant changes in your credit score. Many people with poor credit ratings believe that regaining good credit status is unachievable, and they resign to a life of credit issues. But, it takes effort to build a strong credit score, and individuals willing to prioritize their credit standing and spending habits will undoubtedly succeed. To begin, develop a budget, and focus on correcting any unfavorable spending habits to reflect positively on your credit score. This piece sheds more light on credit, and if you seek guidance and support to improve your credit score, consider reaching out to us today at www.asapcreditrepairusa.com.