It may come as a surprise, but did you know that credit scores come in 30 different levels? Most individuals searching for information on the "best" credit score may be bombarded with varied answers on search engines like Google. Unfortunately, some of the information found can be confusing or even misleading, leading one in circles. My name is Joe Mahlow, and I've been involved in the financial literacy and credit repair industry for over 15 years. As someone passionate about sharing valuable advice, I'm here to provide genuine insights on various topics - including credit scores. Over the course of my career, I've helped more than 20,000 clients improve their credit scores, and I aim to offer you the same quality information and advice. So, let's dive right in!
Contents:
What Are the Different Types of Credit Scores?
What Constitutes a Good Credit Score
Good Credit Scores for Different Types of Mortgage Loans
What is the Minimum Credit Score to Finance a Car?
How to Boost Your Credit Score
How to Improve Your Credit Score
What Are the Different Types of Credit Scores?
Credit scores are calculated using various models, but the two most popular are the FICO and the Vantage models. While FICO scores are extensively used, Vantage scores are gaining popularity, particularly for personal loans and auto lending. Here’s what you need to know about both models:
FICO Credit Score
- The FICO credit scoring model is the most common type of credit scoring model widely used.
- With eight different FICO models, each type of loan you apply for will have a different credit score depending on the version used.
- The scoring models have different weights assigned to different factors, meaning some aspects are weighed more heavily than others.
- For instance, mortgage lenders will pull FICO 5 credit reports, while credit card companies use the FICO 8 scoring model.
Vantage Credit Score
- The three major credit reporting agencies (Experian, Equifax, and TransUnion) developed the Vantage Score model to compete with the FICO model.
- Vantage is a relatively new scoring model, but its use is gradually gaining popularity in the personal loan and auto lending sectors.
- However, since it is not widely used for lending purposes, its accuracy for actual lending scores can vary.
- Instead, Vantage scoring models can be used to give you a general idea of your FICO score.
- Many credit monitoring websites in the US offer free copies of your credit report using Vantage scoring models.
Outdated or Not?
While the FICO credit scoring model has been around for several decades, the Vantage Score model is slowly gaining recognition. Although the Vantage Score model is accurate in representing your credit scores, the lenders' inability to access them makes them less useful. However, over the next five to ten years, the Vantage Score model's usage by lenders is expected to become more popular due to its ability to provide the best scoring models. Ultimately, credit reporting agencies hold a significant advantage in providing relevant scoring data based on the latest standards.
What Constitutes a Good Credit Score
Credit scores for both FICO and Vantage models fall within the 350 to 850 range, where 350 is the lowest possible score, and 850 is the highest. To achieve the highest scores, it's critical to be aware of where you stand when working toward building your scores. Here are some important score thresholds to keep in mind:
1. 620 or below:
This score is deemed bad credit, indicating possible adverse credit history, high-balance credit card accounts, or no credit cards at all. The best way to improve your credit score is by making timely payments and opening ten active revolving credit accounts. We suggest Credit Builder Card or OpenSky Credit Card, as they are secured credit cards that can help you build your credit. Once you reach a credit score of 620, you can become eligible for an FHA home mortgage.
2. 640-680:
This range is considered reasonable for good credit. Scores in this category mean you have established credit, but you might have some derogatory marks or accounts on your credit, and large balances on your credit cards that need to be paid off. Newly opened accounts can cause temporary score drops. If you fall in this range and have recently opened a new account, don't panic. Your score will bounce back.
3. 740+:
Any credit score above 740 is classified as "super-prime" and results in the best interest rates for most loans. Congratulations if you have a credit score of 740 or above, as only 20% of the US population have this credit score. Keep up the great work by paying your accounts on time and paying off your revolving credit card accounts. You are on the road to great financial shape!
Good Credit Scores for Different Types of Mortgage Loans
When it comes to buying a house, determining a good credit score for qualification depends upon the type of mortgage loan you want. Different mortgage loans have their own specific requirements and guidelines, imposed due to federal regulation and government backing. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular loans and usually offer better interest rates than other lending options, except for VA loans. They do not require private mortgage insurance (PMI), which eliminates an added cost to your monthly mortgage payment or down payment. Conventional loans demand a typical credit score of 640 and a debt-to-debt ratio of no higher than 43%. Generally, conventional loans are an excellent savings option for the average buyer.
2. FHA Loans
FHA loans are for those whose credit scores are typically between 580 and 619. Moreover, FHA loans require maintaining PMI for at least 11 years, which is an added expense to your monthly mortgage payment, but they come with lower down payment requirements. With a higher threshold of debt-to-income limit (up to 50%), FHA loans provide an opportunity to purchase more houses than conventional loans for those with lower incomes.
3. VA Loans
VA loans are great options for people who either served in the United States Military, their spouse died while on active duty or served 181 days, served 90 consecutive days in wartime, or served six years with the National Guard. Technically, there isn't any credit score requirement for VA loans; however, pre-qualification is determined by assessing past defaulted loans and government-owned past-due debts. VA loans usually have the lowest interest rates available and require no down payment. Overall, VA loans are the most ideal mortgage loans available and an excellent way to support our veterans.
What is the Minimum Credit Score to Finance a Car?
The credit history remains a crucial factor when financing a car, as compared to credit score. Nevertheless, a higher credit score also plays a vital role in determining the interest rate you qualify for. Credit lenders determine the risk involved in extending a loan by examining your previous and current credit histories when you apply for a car loan. Bad or previous credit history such as late payment or repossession can make approval for a loan difficult. Some special finance lenders can qualify nearly anyone for a car loan despite past credit issues, but a higher down payment and additional fees will be required. Thus, it's advisable to have equity or a downpayment when purchasing a car on credit.
While no exact score qualifies you for approval
A credit score over 680 is ideal. A low score increases the interest repayment rate due to the risk you impose on the lender. The interest rate repayment amount depends on the credit score, as statistics have shown. A person with 720 credit scores will pay an average interest of $5,500 on a loan, while payment will increase to $15,300 for someone with a credit score of 580 or above. Hence, a high credit score assures a lower interest rate, which can better your credit score.
How to Boost Your Credit Score?
Many people may wonder how to build their credit score quickly. However, achieving a good credit score requires time and patience. It is essential to have patience while building credit because anxiety can cause irrational and bad decisions with credit leading to further problems.
There are a few things that you can do right away to improve your credit score:
1. Open 3-5 Revolving Credit Accounts:
Obtaining revolving credit through credit cards can help maximize your credit score. Secured credit cards such as Open Sky or Credit Builder Card are excellent choices, as they focus on your ability to pay the card on time, your bankruptcy history, and your current income. Revolving credit makes up 30-35% of your overall credit score and can be the best option to build credit scores quickly. To increase your credit score, it is essential to make sure you pay your balance on time and keep it at $5-10 each time you make a payment.
2. Raise Your Limits:
You can even request a credit limit increase for your credit cards to lower your credit utilization percentage to improve your overall credit limits. To raise your limits, you can try doing it online, or some credit card companies require you to call them to make the request. Make sure you are prepared to fill out some information, including your current income. Your credit card company usually requires 7-15 months of excellent payment history before they agree to increase your credit card limit.
3. Pay Down Your Balances:
It is crucial to keep your balance low and close to zero. Using your credit cards for small purchases each month and leaving a $1-5 balance can help to keep your credit utilization rate low. However, if you are struggling with high balances, make a plan to pay an “x†percentage of your paycheck each month to reduce debt. Remember, credit card spending habits play a huge role in your overall credit score, and you must limit your credit card usage.
Building your credit score can take time and effort, but focusing on these vital tips can help boost your credit score over time.
Advice from Joe
We have all faced moments with inadequate credit. However, it is crucial to take your credit situation seriously and invest your time and effort in improving it. Significant and quick changes will occur in your credit score when you commit to enhancing it. Most people with poor credit get trapped in the cycle of credit challenges that continue to affect them throughout their lifetime. Such individuals often deem excellent credit unattainable. Nonetheless, a great credit score requires hard work, prioritization, and focus on your spending habits. You can begin by creating a budget and making strides towards correcting any unfavorable spending habits, ultimately reflecting in your credit score. This piece delivers better comprehension of credit and how to improve it. Do you seek guidance or credit repair? Reach out to us at www.asapcreditrepairusa.com.