It's a little-known fact that there are actually 30 different levels of credit scores out there. However, many people are unaware of this and end up turning to Google for guidance on how to improve their credit score. Unfortunately, the abundance of conflicting and complex information available can often lead them down a confusing and frustrating path. But fear not, as I'm here to help. My name is Joe Mahlow and I'm a seasoned expert in the fields of financial literacy and credit repair, with over fifteen years of experience under my belt. My aim is to provide you with honest and straightforward advice on a range of topics, starting with credit scores. Having helped more than twenty thousand clients transform their credit scores, I'm confident that I can provide you with enough knowledge and guidance to achieve similar results. So, without further ado, let's dive right in!
Contents:
Types of Credit Scores: FICO and Vantage
Guide to Good Credit Scores
Determining the Right Credit Score for Homebuying
Determining Your Eligibility to Buy a Car Based on Your Credit History The Ideal Credit Score for Buying a New Car
Tips for Improving Your Credit Score
Insightful Perspective from Joe
Types of Credit Scores: FICO and Vantage
Credit scores are an important part of your financial life, and it’s essential to understand the different types of credit scores to stay on top of your credit game. There are currently two primary credit scoring models: FICO and Vantage. This article will break down both types of scores and offer some insights into what they are, how they work, and which one is right for you.
FICO Credit Score
The FICO credit scoring model is the most widely used among lenders in the United States today. The FICO scoring model consists of eight versions, ranging from FICO 2 to FICO 10. Depending on the type of lender, each version of the FICO model may be used, making it difficult to determine the exact credit score. For example, a mortgage lender will typically pull your FICO 5 credit report, while a credit card company will use the FICO 8 report.
The various FICO models exist because each lender prioritizes different factors when assessing your creditworthiness. For instance, the FICO 5 mortgage report places heavy emphasis on your previous mortgage history, while the FICO 8 report focuses more on your credit card history. Auto lenders primarily use the FICO 2 report, with scores reflecting your previous auto history.
Vantage Credit Score
The Vantage Score, developed by the three major credit reporting agencies, is a relatively new scoring model used to compete with the FICO model. However, Vantage is not widely used by lenders, with FICO dominating the lending sector. Vantage is frequently used by credit monitoring websites that provide free copies of your credit reports. The scoring model is gaining popularity in certain sectors, such as personal loans and auto lending.
Is the Vantage Score accurate?
While the Vantage Score is accurate, its accuracy depends on the context in which you use it. Given that the Vantage model is not widely used for lending purposes, it is not an accurate measurement of your actual lending score. It is best viewed as a general idea of your creditworthiness. As the Vantage scoring model is based on recent credit report data, it is a handy tool for estimating your FICO score.
Looking to the Future
With the Vantage Score's ability to provide the best scoring models based on today's credit standards, it is possible that it may become more widely used over the next 5-10 years. Some believe that the FICO scoring model is outdated and doesn't give users a clear representation of their credit scores. Ultimately, credit reporting agencies have significant power in providing the best scoring data available.
Guide to Good Credit Scores
Both FICO and Vantage score models have a range of 350 to 850. A 350 score is considered the worst while an 850 score is the best. To achieve high credit scores, it's crucial to determine where you stand and to track your progress. Here are essential score thresholds to guide you.
1. 620 or below
A score below 620 is considered bad credit, indicating adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve credit, timely payments and ten active revolving credit accounts are recommended. Secured credit cards such as Credit Builder Card or OpenSky Credit Card are perfect for building credit. With a score within the 620 range, you can qualify for an FHA home mortgage.
2. 640-680
This is considered fair for good credit. It implies established credit with some derogatory marks, high credit card balances, or newly opened accounts that could temporarily lower scores. Don't panic if your score falls within this range, as it's only a temporary setback.
3. 740+
Any credit score over 740 is considered "super-prime" and can get you the best interest rates for most loans. Less than 20% of the US population has this score, so congratulations if you do! Continue exercising good credit habits such as timely payments and maintaining revolving credit card accounts.
Determining the Right Credit Score for Homebuying
When it comes to purchasing a home, the answer to finding a good credit score may depend on the type of mortgage loan you want to qualify for. Most mortgage loan requirements are similar due to federal regulation and government backing, but some vary depending on the loan type. The three most common mortgages are conventional, FHA, and VA loans.
1. Conventional Loans
Conventional loans are a popular and cost-effective option outside of VA loans. They don't require private mortgage insurance, which can increase your monthly payments or down payment. These loans usually have better interest rates and lower down payment thresholds than other loans. To qualify for a conventional loan, you'll need a credit score of 640 or higher with a debt-to-income ratio no greater than 43%.
2. FHA Loans
FHA loans are for those with lower credit scores, typically between 580 and 619. The loan requires you to maintain PMI for at least 11 years and can have higher interest rates. However, it allows for down payments as low as 3.5% of the property value and a higher debt-to-income ratio of up to 50%.
3. VA Loans
VA loans are available to U.S. military members with over 181 days of service, 90 consecutive days during wartime, or six years with the National Guard. They typically have the best interest rates and don't require a down payment. There isn't a specific credit score limit for VA loans, but previous defaulted loans and any government-owed past-due debts are considered during pre-qualification. VA loans are one way our country shows appreciation for military members and their families.
Determining Your Eligibility to Buy a Car Based on Your Credit History
When looking to purchase a car, it's important to understand that your credit history plays a more significant role in determining your eligibility than just your credit score. While having a higher credit score is beneficial, lenders focus on assessing your credit history to determine the risks involved when extending credit. For individuals with credit issues, such as late payments or repossession, obtaining approval for a car loan may become more of a challenge. Special finance or bad credit lenders may be the option for those who have a low credit score but at a higher cost, including a higher down payment and additional fees. Additionally, dealerships may limit the vehicles you're eligible for due to the risk involved, which can result in higher interest rates. To increase your chances of a better deal, it's best to have equity or a down payment when purchasing the vehicle.
The Ideal Credit Score for Buying a New Car
While there isn't a specific credit score that guarantees auto loan approval, a score over 680 is generally preferred. A lower score can increase your interest rate and put you at a higher risk, ultimately impacting the amount of interest paid over time. For example, a credit score of 720 or above can result in $5,500 in interest on a loan, while someone with a score of 580 can expect to pay an average of $15,300 in interest. The data highlights that a higher credit score can pay off in the long run, resulting in a more manageable payment plan.
Tips for Improving Your Credit Score
Improving your credit score is possible with some easy measures that require little effort, but the process takes time. Patience is key to building a good credit score, as impulsive decisions often make the situation worse. Here are some tips to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
A secured credit card like Open Sky or Credit Builder Card can help someone with limited or poor credit to build credit scores fast. Revolving credit contributes 30-35% to the overall credit score. It is essential to maintain a balance of $5-$10 and pay it off every month on time.
2. Raise Your Limits
Requesting a credit limit increase can increase your overall credit limits, reducing the credit utilization percentage. A credit card company usually prefers to see 7-15 months of excellent payment history on a credit card before offering a credit limit increase.
3. Pay Down Your Balances
It is vital to keep your balance low, pay off credit card bills each month, and maintain a $1-$5 balance. If you have high balances and can't pay your credit cards off, create a plan to pay off your credit card balance with a percentage of your monthly paycheck.
Remember to limit your credit card usage and be cautious about impulsive purchases.
Insightful Perspective from Joe
Credit struggles are universal, and we have all faced them at some stage in life. The good news is that if you truly devote yourself to fixing your credit situation, you will soon witness a remarkable improvement in your credit score. People with poor credit histories often feel hopeless and assume that they will never have good credit again. However, by putting effort into developing healthy credit habits, anyone can achieve a superb credit score. Start by drafting a favorable budget and examine your spending habits regularly to reflect a positive impact on your credit score. This article serves as a guide to enhancing your credit score. Should you need advice or assistance regarding your credit score or credit repair, please visit www.asapcreditrepairusa.com to contact our office.