Were you aware that credit scores can be divided into 30 different levels? Many individuals are not aware of this fact and may end up with conflicting information when searching for the best credit score online. It is important to be mindful as some of the data available can be confusing and possibly deceitful, resulting in an unpleasant experience. My name is Joe Mahlow, and I have spent over fifteen years in the financial literacy and credit restoration industry. As a result of my extensive experience, my aim is to provide you with unfiltered guidance on various topics related to credit scores, just like this one. In my time in the industry, I have been able to help more than twenty thousand clients increase their credit scores, and I am excited to offer you enough information to do the same. Let's delve into it together.
Contents:
Different Credit Scoring Models Explained
Guidelines for a Good Credit Score
The Ideal Credit Score for Buying a Home
Determining Creditworthiness for Auto Loans
Tips on Improving Your Credit Score
Advice from Joe on Improving Your Credit
Different Credit Scoring Models Explained
Understanding credit scoring models is essential when it comes to managing your creditworthiness. The two most widely used models are the FICO and Vantage scoring models. This article will provide a breakdown of both models and why they are important to understand.
FICO Credit Score
The FICO model is the most commonly used credit scoring model and comes in eight different models. Each model calculates your credit score differently, depending on the lender who pulls your credit report. For example, if you are applying for a mortgage, the lender will most likely use the Fico 5 credit report, whereas if you applied for a credit card, they would most likely use the Fico 8 credit report. This is because each type of lender prioritizes specific factors when calculating your credit score.
Why so many FICO scores?
Every credit report has a different “weight,†meaning the critical factors for each lender will have a more significant impact on your credit score than less important ones. For instance, if you have a great payment history on a previous mortgage when applying for another mortgage, it will weigh more in your favor score-wise than no history or negative history. The same goes for all the other FICO scores. For credit card companies, the FICO 8 report is primarily used, and your previous credit card history will impact this score the most. Similarly, auto lenders pull the FICO 2 reports, where your scores reflect your previous auto history.
If you want to keep track of your different FICO scores, you can create an account on myfico.com.
Vantage Credit Score
The three major credit reporting agencies (Equifax, Experian, and TransUnion) created the Vantage Score model to compete with the FICO model. It has become popular in some sectors, such as personal loans and auto lending, while not widely used for lending purposes. Vantage provides a free credit report through various credit monitoring websites around the United States.
Is the Vantage Score accurate?
The Vantage Score provides a good “general idea†of your FICO score, but it's not widely used for lending purposes. Creditors usually prefer FICO scores since it's the most recognized scoring model. Therefore, the accuracy of the Vantage score may vary depending on many factors like lenders and types of loans. It's hard to know your FICO score without paying for it or having a lender pull your credit report. Therefore, Vantage scores could give you a general idea of roughly where your overall scores stand.
Vantage credit scoring model is gaining popularity as it can provide the best scoring model based on today's standards. The FICO scoring model is somewhat outdated and doesn’t give users a clear representation of their credit scores. Credit reporting agencies have an advantage as the most significant data collection agencies outside social media companies. They have the data and the upper hand in providing the best scoring data.
Guidelines for a Good Credit Score:
Credit scores, whether FICO or Vantage models, range from 350 to 850. A score of 350 is the least favorable, while 850 is the best score possible. It's integral to comprehend your credit score and set realistic goals to boost it. Here are some essential thresholds to bear in mind:
1. 620 or below:
This score range is deemed as a bad credit score. You might have adverse credit history, high-balance credit cards, or no credit cards at all. To better your score, make timely payments, and have ten active revolving credit accounts open. Using secured credit cards such as the Credit Builder Card or the OpenSky Credit Card can significantly help you build your credit. Once you reach a score of 620, you'll be eligible for an FHA home mortgage.
2. 640-680:
Credit scores within this range are considered fair and good enough. Having a score within this range may imply that you've established credit, but you might have derogatory marks or accounts on your credit and a few high balances on your credit cards. Temporary score drops might also occur due to newly opened accounts, but you have nothing to worry about. Scores will revert to their normal range within no time.
3. 740+:
A credit score above 740 is super-prime, and most lenders will undoubtedly give you the best interest rates. You're considered part of the 20% of the US population with this score, so congratulations! Keep paying your accounts on time, and make sure your revolving credit card accounts are correctly paid. Keep up the good work, and you'll be fine!
The Ideal Credit Score for Buying a Home
When determining a good credit score to purchase a home, you first need to understand the requirements and guidelines for the type of mortgage loan you're seeking. Federal regulation and government backing cause the requirements to be similar or different for most mortgage loan types. The three most popular types of mortgage loans include conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most favored loans and the best savings option next to VA loans. These loans don't need you to maintain Private Mortgage Insurance (PMI), which could increase your down payment or monthly payment. PMI is meant to protect the lender when you default on your loan. Conventional loans also have better interest rates and lower down payment requirements than other mortgages. The minimum credit score for a conventional mortgage loan is 640, and the maximum debt-to-debt ratio is 43%.
2. FHA Loan
The minimum credit score for an FHA loan is between 580 and 619, depending on the lender. These loans typically come with a higher PMI that you have to maintain for at least 11 years, making them costlier. There's increasing flexibility with higher debt-to-income ratios, making it possible to purchase many homes with lower income. Additionally, you need as little as a 3.5% down payment, but remember that the interest rates may be higher with an FHA loan.
3. VA Loan
There is no minimum credit score requirement for VA loans, but the lender usually checks your credit history for defaulted loans and government debt. The borrower must have served in the military in one of these capacities - 181 days of active service, 90 consecutive days during wartime, or six years with the National Guard. The loan type has the most desirable interest rates and does not ask for a down payment, so it's a good choice for veterans.
Determining Creditworthiness for Auto Loans
When it comes to buying a car, your credit history is more critical than your credit score. While having a higher credit score is beneficial, it's not the only factor that determines the interest rate on your loan. Lenders look at your previous and current credit histories to evaluate the risk of extending credit. This means that someone with a spotty credit history, including late payments or repossession, will face challenges in securing a loan. However, bad credit or special finance lenders may offer a higher chance of approval while still imposing strict criteria, such as a higher down payment or dealership fees. The latter can result in the dealership charging more for a vehicle to offset risk. Ultimately, to have the most negotiation power, equity or a down payment is necessary.
Credit Score Range for Auto Loans
While an exact credit score cannot guarantee approval for a vehicle loan, a score over 680 is ideal. A lower credit score increases your risk to lenders, which corresponds to a higher interest rate. For example, a person with a 720 credit score or above would typically pay around $5,500 in interest on an auto loan. In contrast, someone with a 580 credit score would typically pay $15,300 for the same loan. From this data, it's clear that a higher credit score translates to better interest rates, making it easier to maintain a good credit score.
Tips on Improving Your Credit Score
Raising your credit score requires time and effort on your part. It is a process that cannot be accomplished overnight and demands patience. With that said, there are several things you can do today to help boost your credit score, such as:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit can help maximize your credit scores, particularly for individuals with limited or damaged credit. It generally takes a lot of work to build credit by obtaining a large loan, so opening a secured credit card is often the best way to get started. Secured credit cards like Open Sky or Credit Builder Card focus more on your ability to pay your card on time than on your credit score. Revolving credit makes up 30 to 35 percent of your overall credit score, making it the best option for quickly building up your credit scores. Remember to keep your balance between $5 and $10 each month and pay it on time. It can take about 2 to 4 months before you see an increase in your credit score.
2. Raise Your Limits!
Requesting a credit limit increase for active revolving credit card accounts can increase your overall credit limits and lower your credit utilization percentage. Keeping your credit card balances below 30 percent of your overall limit is vital to boost your credit scores. You can request a credit limit increase by calling your credit card company or doing it online through your online portal. The credit card company will evaluate your credit history and decide whether to increase your credit limit.
3. Pay Down Your Balances!
Keeping your credit card balance low and close to zero is important. Avoid using your credit card excessively and only use it for small purchases. Make sure to leave a balance between $1 and $5 each month when paying your bills. If you have high balances and cannot pay them off immediately, make a plan to pay off a percentage of your credit card balance each month and stop using them. Limiting your credit card usage is critical as it plays a significant role in your overall credit score. Additionally, interest rates on credit cards are high, and most of your payments will go towards interest and not towards the principal amount.
Advice from Joe on Improving Your Credit
It's common for people to experience a dip in their credit score at some point, but it's important to take it seriously and work on improving it. Many individuals with poor credit get stuck in a cycle of credit issues that seems impossible to escape from. However, if you're willing to put in the effort to prioritize your credit and make changes to your spending habits, you can see significant improvements in a short amount of time. To start, create a budget and identify any areas where you tend to overspend. By doing this, you'll be able to tackle those habits and see a positive impact on your credit score. If you're needing guidance on how to improve your credit score or looking for credit repair services, you can contact my office today at www.asapcreditrepairusa.com. Consider this article as a resource for improving your understanding of credit.
Here are the main points to take away:
- Take your credit situation seriously and prioritize it.
- It takes work to develop good credit, but it's achievable.
- Start by creating a budget and fixing bad spending habits.
- Seek help from a professional if necessary.