It’s surprising, but true: there are actually thirty different levels of credit scores. Unfortunately, many people are unaware of this fact. When they search online for the best credit score, they’re oftentimes presented with a confusing array of information – sometimes even misleading or deceptive articles that can quickly lead one down a rabbit hole. My name is Joe Mahlow, and I’ve been working in financial literacy and credit repair for more than fifteen years. My primary goal is to provide straightforward advice on a variety of topics, including credit scores. Through my work, I’ve been able to help over 20,000 clients improve their credit scores. And I’m hopeful that I can do the same for you! So, without further ado, let’s dive into the world of credit scores.
Contents:
Understanding Credit Scores: FICO and Vantage Models
Guide to Credit Scores
What's the Required Credit Score to Obtain a Mortgage Loan
Credit Score Requirements for Auto Loans
Methods to Increase Your Credit Score
Joe's Tips on Improving Your Credit Score
Understanding Credit Scores: FICO and Vantage Models
Credit scores are critical when it comes to lending and buying a house, car, or applying for a credit card. There are two primary credit scoring models that you should be aware of: the FICO and Vantage scoring models. So, what are they, and why do you need to know about them?
FICO Credit Score
The FICO scoring model is the most widely used credit scoring model, consisting of eight different models from FICO 2 to FICO 10. Each model is used by different lenders, depending on the type of credit you're applying for. For instance, if you're applying for a home mortgage, the mortgage lender will most likely pull your FICO 5 credit report, whereas a credit card company would typically use FICO 8. The reason behind the various models is that each credit report has a different weight, meaning that the factors crucial to lenders will have a more significant impact on a credit score. For example, a FICO 5 mortgage report places a heavy emphasis on previous mortgage history, while a FICO 8 report weighs previous credit card history the most.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO scoring model. Although the Vantage model is newer than the FICO model and not widely used for lending purposes, it's gaining popularity in some sectors such as personal loans and auto lending. Unlike FICO, Vantage provides a free copy of your credit report, making it easily accessible for credit monitoring.
Is Vantage Score Accurate?
The Vantage score is accurate, but it depends on the context. Since it's not widely used for lending purposes, it won't provide an accurate lending score. However, it's still a good "general idea" of your FICO score, which is challenging to know without paying for it or having a lender pull your credit report. In the upcoming 5-10 years, Vantage may become more common since it provides the best scoring models based on today's standards. The FICO scoring model may be outdated and might not provide a clear representation of your credit scores. Remember, credit reporting agencies hold enormous data that they can use to provide the best scoring data.
Overall, understanding these two credit scoring models will provide you with an accurate general idea of where your credit score stands and help you take action to improve it. To get a better visual representation of your different FICO scores, visit www.myfico.com and sign in to your account.
Guide to Credit Scores
Credit scores, whether FICO or Vantage, range from 350 to 850, with 350 being the lowest possible score and 850 being the highest. To achieve the highest scores, it's crucial to know where you stand and that's why we provide you with critical score thresholds.
1. 620 or below
This indicates bad credit and implies having negative credit history, high credit card balances, or no credit cards. The best way to improve such scores is to make timely payments and have ten active revolving credit accounts. Secured credit cards like Credit Builder Card or OpenSky Credit Card can assist you in building your credit. Once you cross the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680
Scores in this range are fair for good credit, indicating an established credit history with a possibility of derogatory marks, high balances, or newly opened accounts that may cause temporary drops in scores.
3. 740+
A credit score over 740 is considered "super-prime," placing you among the 20% of the US population with this score and qualifying you for the most attractive interest rates on most loans. Always pay your accounts on time, keep your revolving credit card accounts paid, and congrats, you're in great shape!
What's the Required Credit Score to Obtain a Mortgage Loan
The answer to this question varies depending on the type of mortgage loan you are seeking to obtain. Because of federal regulations and government backing, you will notice that the requirements and criteria for most mortgage loans are either the same or distinct. Conventional loans, FHA loans, and VA loans are the three most popular mortgage types.
Conventional Loans
Conventional loans are the most popular loan choice and usually the best "savings" mortgage option beyond the VA loan. Private mortgage insurance (PMI) is not required for a conventional loan, and failure to make loan payments will result in it protecting the lender. Conventional loans typically need lower down payments and interest rates than other loans, and they typically require a credit score of 640 and a debt-to-debt ratio of no more than 43%.
FHA Loans
FHA loans are typically for individuals with lower credit scores, ranging from 580 to 619. Since all loan programs differ, if you are within the credit scoring requirements, look around for different lenders who can provide you with the best financial options. You will be required to maintain PMI for at least 11 years with an FHA loan, which can be a significant addition to your mortgage. With a higher debt-to-income limit of up to 50%, this loan allows you to buy more homes on a low-income than with a conventional loan. Finally, the down payment requirements for an FHA loan are as little as 3.5% of the purchase price, allowing you to get a mortgage with less money out of pocket than a conventional loan, but you will typically have a higher interest rate.
VA Loans
Although there is no specific credit score requirement for the VA Loan, when pre-qualifying, they search for former defaulted loans and any overdue debts owed to the government. You must have served in the United States Military for a minimum of 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your partner died while on active duty in the military. Among their benefits, the VA loan generally has the best interest rates and usually requires no down payment. The VA Loan is an excellent option for veterans, and it's a great way of showing appreciation for their service to the country.
Credit Score Requirements for Auto Loans
When it comes to buying a car, your credit history plays a more critical role in determining your eligibility than your credit score. Although a high credit score is still important, it has less impact on the interest rate you're eligible for. The lender will assess your credit history, including any late payments or repossessions, to measure the risk involved in extending credit. Lenders who specialize in bad credit financing may still approve loans for those with poor credit, but with additional criteria, such as higher down payments, fees to the dealership, and approval for specific vehicles.
To have the most leverage in purchasing a car on credit, it's best to have equity or a down payment. While there is no exact credit score required for approval, having a score over 680 is ideal. A score below that range can increase the interest rate, which varies based on the credit score:
Someone with a credit score of 720 or above will pay around $5,500 in interest on a loan.
Someone with a credit score of 680 or above will pay around $6,600 in interest on a loan.
Someone with a credit score of 650 or above will pay around $8,100 in interest on a loan.
Someone with a credit score of 615 or above will pay around $10,200 in interest on a loan.
Someone with a credit score of 580 or above will pay around $13,900 in interest on a loan.
Conclusively, the higher your credit score, the less interest you pay on the auto loan, making it essential to keep your credit in good standing.
Methods to Increase Your Credit Score
Developing a strong credit score requires effort and patience, as it cannot be achieved overnight. To begin improving your credit score, consider the following actions:
1. Set up 3-5 revolving credit accounts
Revolving credit accounts, such as credit cards, can significantly contribute to increasing your credit score by up to 30-35%. For those with limited credit or those seeking to rebuild their credit, applying for a secured credit card with minimal emphasis on credit score requirements is a good way to start. Remember to keep the balance at $5-$10 and pay it on time to achieve the best results.
2. Request a credit limit increase
A credit limit increase can lower your credit utilization percentage, positively impacting your credit score. Requesting an increase can typically be done online or through a phone call with your lender. A payment history of 7-15 months with the credit card is typically required before a credit limit increase is granted.
3. Reduce your balances
Aim to keep your credit card balance low and close to zero and avoid carrying high balances. If high balances exist, allocating a percentage of your paycheck each month to paying down the balance is recommended.
Remember, a strong credit score is built on responsible credit card behavior. Be mindful of your credit card usage and aim to borrow only what you can afford to pay.
Joe's Tips on Improving Your Credit Score
At some point in our lives, most of us have experienced less than ideal credit. However, turning your current credit situation around requires a serious commitment to personal development and credit repair efforts. While it's easy to feel trapped in a cycle of poor credit, those who prioritize their finances and commit to better spending habits are likely to experience significant improvements in their credit score over time. If you are struggling with credit issues, it's important to start by creating a budget and identifying any problematic spending behaviors. By doing so, you can begin to see a direct correlation with positive changes in your credit. This article has provided you with credit insights and advice. If you require additional guidance or credit repair services, please visit our website at www.asapcreditrepairusa.com.