It might surprise you to learn that there are actually thirty distinct levels of credit scores. Despite this, many people remain unaware and turn to Google in search of the "best" score - only to receive a confusing array of results. Unfortunately, some of this information can actually be misleading and steer them in the wrong direction. My name is Joe Mahlow and I have been working in financial literacy and credit repair for fifteen years. In this series, I aim to provide you with honest and straightforward guidance on a variety of topics. Today, I'd like to discuss credit scores. Over the course of my career, I have helped more than twenty thousand clients improve their scores - and I hope to give you the information you need to do the same. So, let's dive in!
Contents:
Different Types of Credit Scores
Understanding Credit Score Ranges
What Credit Score is Required to Buy a House?
Determining Your Credit Score for Buying a Car
Tips to Increase Your Credit Score
Reflections from Joe: Improving Your Credit
Different Types of Credit Scores
There are two types of credit scoring models, namely the FICO model and the Vantage model. It is crucial to understand the difference between the two models and how they calculate your credit score.
FICO Credit Score
The FICO scoring model is the most popular and widely used. There are eight different FICO models, ranging from FICO 2 to FICO 10. Each model provides a different credit score, depending on your credit report. FICO reports vary, depending on the type of lender you use. For instance, if you apply for a mortgage, the lender will pull your FICO 5 credit report. If you apply for a credit card, they will most probably use your FICO 8 credit report.
There are multiple FICO scoring models because each credit report carries a different weight. This means that the critical factors for the lender carry more weight than the less important ones, affecting your credit score. For example, a FICO 5 mortgage report weighs heavily on your previous mortgage history. If you have a positive payment history on a previous mortgage, it will weigh more on your score than if you have no history or negative history. Similarly, FICO 8 reports, primarily used by credit card companies, depend heavily on your credit card history. Auto lenders typically pull FICO-2 reports, where previous auto history heavily influences your score.
You can access your different FICO scores by signing up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. It's a new scoring model compared to the FICO model, which has been used since the seventies. Vantage is gaining popularity in certain sectors, such as personal loans and auto lending, although FICO dominates the lending sector.
The Vantage Score is accurate, but its accuracy depends on the context. Since Vantage is not widely used for lending purposes, it will not be accurate when it comes to your actual lending score. Instead, view the Vantage Score as a good “general idea†of your FICO score. It's challenging to know your FICO score without paying for it or having a lender pull your credit report, so using your Vantage score gives you an idea of where you stand.
With time, it's possible that lenders will widely use the Vantage scoring model because it provides the best scoring models based on current standards. The FICO scoring model is outdated and doesn't clearly represent your credit scores. Credit reporting agencies, as the most significant data collection agencies outside social media companies, have data that gives them the upper hand in providing the best credit scoring data.
Understanding Credit Score Ranges
When it comes to credit scores, both the FICO and Vantage models use a range of 350 to 850. A score of 350 is the worst, while a score of 850 is the best possible score. To help you achieve your goal of attaining the highest credit score possible, it's important to know where you stand along the way. Here are some crucial score thresholds to keep in mind:
1. 620 or below:
Anything below 620 is considered poor credit. If you find yourself in this range, you may have negative credit history, high balance credit accounts, or no credit cards in your name. Improving your credit warrants timely payments and actively maintaining ten revolving credit accounts. Try using secured credit cards like Credit Builder or OpenSky credit cards to aid in building your credit. Once you reach a score of 620, this qualifies you for an FHA home mortgage.
2. 640-680:
If your score falls between 640-680, you've achieved fair to good credit. While scores in this range indicate you have established credit, you may have some derogatory marks or accounts on your credit report. Additionally, any high credit card balances may need attention. Opening new accounts can temporarily decrease these scores; however, this is nothing to worry about.
3. 740 and above:
Scores above 740 are considered "super-prime" and put you in the top 20% of all credit scores in the US. With a score of 740+, you qualify for the best interest rates for most loans. Congrats on your achievement and keep up the great work! Paying your bills on time and maintaining low balances on your credit cards will keep you in excellent financial standing.
What Credit Score is Required to Buy a House?
The standard for credit score requirements varies depending on the type of mortgage loan you are considering. Federal regulations and backing from the government ensure similar guidelines for most mortgage loans, but there are several options available, including conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most favored loan options and offer the best savings besides VA loans. To qualify for a conventional loan, you do not need to maintain private mortgage insurance (PMI), which can save you added costs on your monthly payment or down payment. Typically, conventional loan credit score requirements are 640, with no debt-to-debt ratio higher than 43%.
2. FHA Loan
FHA loans are accessible for borrowers with lower credit scores ranging from 580 to 619. Every loan program has different criteria; hence applicants falling between the credit score limits should contact multiple lenders to compare the best options. Even though it is suitable for low-income property buyers, FHA loans require you to maintain PMI for about 11 years. They have a higher debt-to-income limit of around 50%, enabling you to purchase a house with a lower income and down payment of around 3.5% of the purchase price.
3. VA Loan
The VA loan requirements are different from conventional and FHA loans but serves our nation's military veterans. As a result, there isn't a particular credit score requirement to get approved, but the bank will check for past defaulted loans and government-owed debts. To qualify for the VA loan, you must have served for at least 181 days or ninety consecutive days during conflict periods or six years with the National Guard. Additionally, if you lost your spouse in the army, you are also qualified. VA loans often offer the best interest rates and generally do not require down payments.
Determining Your Credit Score for Buying a Car
When it comes to buying a car, your credit history has a more significant impact than just your credit score. While having a good credit score is important, the interest rate you are eligible for is primarily determined by your credit history and current credit situation.
Let's take a closer look
When you apply for a car loan, lenders will review your credit history to determine the risk involved in extending credit. Late payments on a previous or current auto loan, or a repossession, can make it challenging to qualify for a loan. However, some lenders may still approve anyone for a car loan, regardless of their credit history, by enforcing additional criteria such as a higher down payment and increased dealership fees. Ultimately, the dealership may have to pay a fee to help lower the risk of default. Concerning this, down payment or equity will increase your chances while making a purchase on credit.
The Credit Score Range for Purchasing a Vehicle
Like what we discussed above, there's no exact credit score that can guarantee an approval. The score required will depend on the factors being considered, but generally, a credit score of 680 or above is ideal. A lower credit score may result in a higher interest rate because borrowers pose as risky.
To further illustrate this, consider the following example, which shows how specific credit scores affect the interest charged on a loan:
Individuals with a credit score of 720 or above can expect to pay, on average, $5,500 of interest on a loan.
Individuals with a credit score of 680 or above can expect to pay, on average, $6,600 of interest on a loan.
Individuals with a credit score of 650 or above can expect to pay, on average, $8,100 of interest on a loan.
Individuals with a credit score of 615 or above can expect to pay, on average, $10,200 of interest on a loan.
Individuals with a credit score of 580 or above can expect to pay, on average, $13,900 of interest on a loan.
Individuals with a credit score of 579 or below can expect to pay, on average, $15,300 of interest on a loan.
As evidenced by these examples, a higher credit score means lower interest rates, ultimately affecting your credit score in the long run.
Tips to Increase Your Credit Score
Building a good credit score requires effort, patience, and time. To help improve your credit score, consider the following actions:
1. Open 3-5 revolving credit accounts (credit cards)
This option maximizes credit scores and increases approval chances, especially for those with limited credit. Start with a secured credit card like Open Sky or Credit Builder Card, as they focus on your ability to make timely payments rather than your credit score. Revolving credit accounts make up 30-35% of your credit score, making them the quickest option to build your credit score. Pay your balance on time and limit the usage to smaller purchases like gas and groceries.
2. Raise your limits
Request a credit limit increase online or through a call to your credit card company. Be prepared to fill out some information about your current income and offer a history of excellent payment on your credit card. A lower credit utilization percentage can increase your overall credit limits.
3. Pay down your balances
Leaving roughly $1-5 on your credit cards each month and keeping balances low is crucial in maintaining a good credit score. Make a game plan to pay an "x" percentage of your paycheck each month to pay high balances down if you cannot pay them off outright. Limit your credit card usage and remember most of your payments will go towards interest, not your principal.
Reflections from Joe: Improving Your Credit
It's not uncommon to have experienced a less than stellar credit rating. However, it's crucial to take this issue seriously and invest the necessary time and effort into improving your credit rating. The majority of individuals with poor credit tend to feel as if their credit rating is an unchangeable reality. But with enough hard work, you can improve your credit rating significantly, and in a relatively short amount of time. The key to achieving a good credit rating is by prioritizing your credit and focusing on your spending habits. Begin by creating a budget and addressing any bad spending habits you may have. That way, you'll see a direct reflection on your credit score. This article aims to informs you more about credit ratings. If you require guidance and assistance in credit repair, please contact my office today at www.asapcreditrepairusa.com.