It's a little-known fact that there are actually 30 different levels of credit scores. Unfortunately, when most individuals try to research the best credit scores, they often receive a myriad of conflicting information from search engines like Google. This misinformation can not only be perplexing, but it can also lead people down dangerous financial paths. For over a decade, my name is Joe Mahlow and I've worked in the financial literacy and credit repair sector, assisting thousands of clients to enhance their credit scores. My aim is to provide genuine advice on various subjects, and today, we'll be talking about credit scores. My hope is that by the end of this article, you will have enough pertinent information to improve your credit score, just like the tens of thousands of people I've previously helped. Let's delve into it!
Contents:
Understanding the Different Types of Credit Scores
Determining a Good Credit Score
Determining the Ideal Credit Score to Buy a House
Determining the Appropriate Credit Score to Buy a Car
Tips to Increase Your Credit Score
Insightful Advice from Joe on Improving Your Credit
Understanding the Different Types of Credit Scores
Credit scoring models are an essential factor when it comes to assessing your creditworthiness. There are mainly two credit scoring models you should be familiar with: the FICO model and the Vantage model. Both are critical to understanding how lenders calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most common and widely used model with eight different FICO models varying from FICO 2 to FICO 10. Each model yields a different credit score depending on the credit report used. The FICO model works by assigning weights to factors that matter most to particular lenders. For example, FICO 5 mortgage report gives more weight to your mortgage payment history, while FICO 8 credit report accounts for your previous credit card history.
Vantage Credit Score
Vantage Score is a newer credit scoring model developed by the three major credit reporting agencies- Equifax, Experian, and TransUnion. The Vantage model competes with the established FICO model and is used by several credit monitoring websites to offer a free credit report. This model is gaining popularity in some sectors like personal loans and auto lending. Although the Vantage Score is accurate, its overall knowledge is less widespread and, therefore, less accurate in predicting your lending score than FICO.
Why multiple FICO Scores?
Credit scores might vary between different lenders, and there is a different FICO score for each credit report that a lender will pull depending on the loan type. For instance, a mortgage lender usually pulls the FICO 5 credit report, while an auto lender pulls FICO 2. The different FICO scores are a result of assigning much importance to specific factors that matter most to lenders, making credit history weigh more for mortgage lenders score-wise, while for credit cards companies, previous credit card history weighs more.
Final Words
As a consumer, it is wise to understand the various credit scoring models used by different lenders. While Vantage is an excellent model for a general idea of your credit score, FICO is more accurate and widely recognized by lenders. As per a prediction, Vantage might become more widespread in lending in the next 5-10 years. Keep in mind that credit reporting agencies are the most significant data collectors, and their scoring data is based on data, which is why they remain the best sources for lending and credit score data.
Determining a Good Credit Score
Credit scores for FICO and Vantage models rank from 350 to 850, highlighting 850 as the highest and 350 as the lowest score possible. If you plan on improving your credit score, it’s essential to understand where you stand throughout the process. Here are significant score thresholds to aim for:
1. 620 or below
Scores below this range are considered as bad credit. Having derogatory marks or high-balance accounts can lower your credit score. The best way to improve is to keep on-time payments and have ten active revolving credit accounts. Applying for a secured credit card such as Credit Builder Card or OpenSky Credit Card can also help. You can begin qualifying for an FHA home mortgage when you reach the 620 credit score threshold.
2. 640-680
Scores in this range reflect fair or good credit. However, derogatory marks or newly opened accounts can cause temporary low scores. To sustain a good credit score, it is best to pay down credit card balances and manage any newly opened accounts properly.
3. 740+
Credit scores exceeding 740 fall under the "super-prime" category, offering borrowers the most competitive interest rates for loans. Congratulations if your credit score falls on this range because you belong to the top 20% of the US population. Ensure to pay accounts on time and maintain an excellent credit utilization ratio, as this will keep your score in tip-top shape.
Determining the Ideal Credit Score to Buy a House
Finding out the suitable credit score to qualify for a mortgage loan hinges on the type of loan in question. The guidelines and regulations for most mortgage loans are similar to some extent, but you will discover that some of them differ based on Federal regulations and government backing. Three of the most common mortgage loan types are VA loans, FHA loans, and conventional loans. Here are the credit score requirements for each type:
Conventional Loans
Conventional loans are the most sought-after loan option besides the VA loan. They usually yield excellent savings and do not require Private Mortgage Insurance (PMI), which can boost your monthly or down payment costs. PMI safeguards the lender in cases where you default on loan repayment. Conventional mortgages have a lower down payment requirement and better interest rates than other types of loans. A credit score of at least 640 is required for this type of loan, and the Debt-to-income ratio must be below 43%.
FHA Loan
This loan option caters to those with lower credit scores, ranging from 580 to 619. Note that every lender has different loan requirements, so it's important to shop around. FHA loans require you to make PMI payments for at least 11 years after which they can be discontinued. Consider this when factoring the loan's added cost, especially if you're on a budget. Compared to conventional loans, FHA loans offer a higher debt-to-income ratio of up to 50%, which allows individuals with lower incomes to purchase more homes. The required down payment on an FHA loan is 3.5% of the purchase price, which is lower than the conventional loan requirement. However, the interest rates are higher in most cases.
VA loan
The VA loans do not have a specified credit score requirement. However, previous defaulted loans and any past-due debts owed to the government may be considered during pre-qualification. To qualify for this type of loan, you must have served in the US military for at least 181 days, served 90 days consecutively during wartime, served six years with the National Guard or Reserves, or lost your spouse while on active military duty. The VA loan typically has the lowest interest rates available and may not require a down payment, which is why it's a perfect option for veterans.
Determining the Appropriate Credit Score to Buy a Car
When it comes to buying a car, your credit history is more important than your credit score. Having a good credit score is beneficial, but it doesn't necessarily have a significant impact on your interest rate. Your credit history is evaluated to determine the risks associated with extending credit, particularly if you have dealt with credit issues in the past. If you've been late on car payments or had a vehicle repossessed, getting approved for a car loan will be more difficult. However, low credit or special finance lenders may still approve you for a car loan with certain conditions, such as a higher down payment or additional dealership fees. Ideally, having equity or a good down payment can significantly improve your chances of getting approved for a car loan on credit.
Credit Score Range for a New Vehicle
Although different factors determine approval, having a credit score over 680 is best. A credit score under 680 can increase your interest rate and pose a risk to the lender, but there is no specific score that will guarantee approval. To understand the impact of your credit score on the interest you will pay, let us examine the following example.
A credit score of 720 or higher will average $5,500 in interest
A credit score of 680 or higher will average $6,600 in interest
A credit score of 650 or higher will average $8,100 in interest
A credit score of 615 or higher will average $10,200 in interest
A credit score of 580 or higher will average $13,900 in interest
A credit score of below 580 will average $15,300 in interest
In conclusion, having a high credit score affects the interest you pay on a loan, which, in turn, reflects positively on your credit history.
Tips to Increase Your Credit Score
Raising your credit score is a gradual process that requires patience and the adoption of positive habits. Rushing into it can lead to poor decisions and make your credit problems worse. Below are some simple but effective things you can do to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, can help maximize your credit scores. Starting with a secured credit card that assesses your ability to pay the card on time, and keeping the balance at $5-$10 per payment, can increase your overall credit scores quickly.
2. Raise your limits:
You can request a credit limit increase for your credit cards to help lower your credit utilization percentage, which may be impacted by high balances. Be sure to check with your credit card company and meet the requirements before doing so.
3. Pay down your balances:
Keep your credit card balances low and close to zero and pay your bills each month, leaving a small balance on your credit cards. If you currently have high balances, make a budget plan to pay your credit cards down and limit your usage. Most importantly, limit your credit card usage as much as possible to maintain a good credit score.
Insightful Advice from Joe on Improving Your Credit
It's no secret that many of us have experienced less-than-ideal credit at some point. However, taking the necessary steps to prioritize your credit and improve your spending habits can lead to significant and rapid improvements in your credit score. Sadly, numerous people with poor credit assume that it's an inescapable situation they'll have to bear for life. In reality, attaining a stellar credit score demands dedication and effort, but it's entirely possible. To begin, start by creating a budget and working on remedying any problematic spending patterns you may have; this will directly impact your credit score. This article aims to provide an in-depth understanding of credit. If you require assistance or guidance with enhancing your credit score or even require credit repair services, visit www.asapcreditrepairusa.com to contact my office today.