It may come as a surprise to many that there are actually 30 different levels of credit scores. The vast amount of information available on Google can make it difficult to determine the best credit score. Sometimes, this information can be confusing and even lead you in the wrong direction. My name is Joe Mahlow, and I have been working in the field of financial literacy and credit repair for more than fifteen years. My aim is to offer you unprocessed advice on various topics of concern, such as credit scores. Having assisted over twenty thousand clients in boosting their credit scores, I believe I can provide you with enough knowledge to do just the same. So without further ado, let's dive in!
Contents:
Different Credit Scores: Understanding FICO and Vantage Models
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a House?
Determining the Ideal Credit Score for Buying a Car
Tips for Increasing Your Credit Score
Insights from Joe on Credit Scores
Different Credit Scores: Understanding FICO and Vantage Models
Understanding the different credit scoring models available is crucial. The most widely used credit scores are the FICO and Vantage models. While they share similarities, they differ in how they calculate credit scores.
FICO Credit Score
The FICO credit scoring model is the most popular. It offers eight models, with FICO 2 to FICO 10 providing different credit scores depending on your credit report. This is because lenders use different FICO reports for different types of credit, such as a FICO 5 report for a mortgage or FICO 8 for a credit card.
Why So Many FICO Scores?
Each credit report has a different “weight.†For instance, a FICO 5 mortgage report would weigh heavily on previous mortgage history. Credit card companies primarily use the FICO 8 report, so your credit card history impacts this score the most. Auto lenders typically pull Fico-2 reports that weigh heavily on your previous auto history.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies as competition for FICO. This new model is gaining popularity in sectors like personal loans and auto lending, although it is not widely used for lending purposes.
Is the Vantage Score Accurate?
The Vantage Score is accurate in general but not always for lending purposes. FICO is the most recognized scoring model, making it more reliable for actual lending scores. However, the Vantage Score can provide a good general idea of your FICO score.
While the FICO scoring model is widely used, the Vantage score is becoming more relevant. Credit reporting agencies collect significant data, making them a reliable source for scoring models. Regardless, it's essential to check both your FICO and Vantage scores for the best representation of your credit scores.
Understanding Good Credit Scores
Both FICO and Vantage models use a scoring range of 350 to 850, with 850 as the highest score and 350 as the lowest. Achieving the highest possible scores requires frequent monitoring to ensure that you reach key thresholds throughout your credit-building journey. Here are some vital score benchmarks:
1. 620 or below
Having a score within this range is considered bad credit, indicating a history of adverse credit events, high outstanding balances, or no credit cards. Boost your scores by making timely payments and keeping ten active revolving credit accounts open. Two recommended options for building credit are the Credit Builder Card and OpenSky Credit Card. With a 620 score, you may qualify for an FHA home mortgage.
2. 640-680
A score within this range is considered fair for good credit. This means that you have established credit, but may have derogatory marks, high balances, or newly opened accounts, which can temporarily lower your score. To improve your score, pay down debts and manage your accounts wisely.
3. 740+
Scores over 740 fall within the category of "super-prime" and receive the best interest rates on most loans. Achieving this score puts you in rare company, as only 20% of the US population has a score in this range. Maintain your score by consistently paying your accounts on time and managing your revolving credit card accounts responsibly. Congratulations on your achievement!
What Credit Score Do You Need to Buy a House?
The credit score you need to buy a house will vary depending on the type of mortgage loan you are applying for. The requirements and guidelines for conventional loans, FHA loans, and VA loans can be similar or different due to federal regulation and government backing. Here is an overview of the credit score and other requirements for each loan type:
1. Conventional Loans
Conventional loans are the most popular type of mortgage loans and usually offer the best "savings" option outside of VA loans. They have lower downpayment requirements and better interest rates than other loans, and you do not need to maintain private mortgage insurance (PMI) which can increase your down payment or monthly payment. However, conventional loans usually require a credit score of at least 640, and your debt-to-debt ratio should be no higher than 43%.
2. FHA Loans
FHA loans are specifically designed for lower credit scores, typically between 580 and 619. However, the credit score requirements for FHA loans can vary depending on the lender you choose. With an FHA loan, you are required to keep PMI for at least 11 years, and your debt-to-income limit can go up to 50%, allowing you to purchase more homes with a lower income. The downpayment requirements on this loan are as low as 3.5% of the purchase. Keep in mind that the interest rate will usually be higher compared to a conventional loan.
3. VA Loans
VA loans typically have the best interest rates available, and they do not usually require a down payment. In terms of credit score, there isn’t technically a specific requirement for the VA Loan, but previous defaulted loans and government-owed past-due debts are looked at when pre-qualifying you. To qualify for a VA loan, 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 spouse was in the military and lost their lives during active duty. VA loans are a great way to give back to our veterans.
Determining the Ideal Credit Score for Buying a Car
When it comes to purchasing a car, your credit history plays a more important role than your credit score. Although having a good credit score is valuable, the interest rate you receive largely depends on your credit history. In evaluating your creditworthiness when seeking a car loan, lenders look at both your past and current credit histories to determine any risks they may incur. This means that people who have delayed making payments or defaulted on a loan, including car loans, may find it harder to get approved for another loan. In such cases, the credit score is not the only determinant. Lenders have different criteria for approving loans. For instance, special finance lenders who deal with high-risk borrowers may require higher down payments and impose additional fees to lessen the risk of default. Dealerships also charge a risk fee as well as a higher markup on the car to cover costs. If you intend to buy a car on credit, it is crucial to have equity or make a down payment.
Although there is no definite credit score that guarantees approval, a score above 680 is ideal.
A score below this threshold can lead to higher interest rates, as the lender perceives borrowers with lower scores as posing a higher risk. A high credit score increases overall creditworthiness and reduces the interest paid. For instance, someone with a 720 credit score or above will pay, on average, $5,500 in interest on a loan. In comparison, an individual with a 580 credit score or above will pay, on average, $15,300 in interest on the same loan. Through this, it becomes clear that having a higher credit score carries immense benefits.
Tips for Increasing Your Credit Score
Improving your credit score requires patience and effort. While it won't happen overnight, there are several things you can do starting now to boost your score. These tips include:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, is a great option for maximizing your credit score. A secured credit card, such as Open Sky or Credit Builder Card, which focuses on your ability to pay on time rather than your credit score, can be the best starting point for those with limited credit. Revolving credit makes up a significant portion of your credit score (30-35%), and using it wisely can help increase your score faster. Keeping a low balance of $5-10 and paying your balance on time are key to showing increases in your score.
2. Raise Your Limits
Another way to increase your score is to request a credit limit increase for your current credit cards. Doing so can increase your overall credit limits and lower your credit utilization percentage, which is a significant factor in determining your score. Requesting a credit limit increase can vary by creditor, but most require a minimum of 7-15 months of excellent payment history on your account before considering the request.
3. Pay Down Your Balances
Keeping your credit card balance low and paying it off on time is essential to maintaining a healthy credit score. Using your credit card for smaller purchases and leaving a $1-5 balance when paying your bill each month is a recommended strategy. If you have high balances and can't pay them off, make a game plan to pay down your balance over time and stop using your credit cards. High-interest rates and taking too long to pay down your debt can negatively impact your credit score.
Insights from Joe on Credit Scores
At one point or another, almost everyone has had poor credit. However, if you're serious about improving your current credit situation, all it takes is putting in the time and effort to work on yourself and your credit, and you'll experience significant changes to your credit score in no time. Many individuals with bad credit fall into the trap of having credit problems throughout their lives, believing that achieving good credit again is an impossible task. The fact of the matter is that establishing an impressive credit score requires a lot of effort, and those who make their credit a priority and concentrate on their spending habits will ultimately come out on top. Begin by creating a budget and addressing any problematic spending behaviors you exhibit; this will directly impact your credit score. This article is intended to help you better understand credit. If you're searching for assistance or advice on your credit score, or if you require credit repair services, please don't hesitate to contact our office at www.asapcreditrepairusa.com.