You might not be aware that there are 30 distinct levels of credit scores available to consumers. It can be especially confusing for individuals searching for the best credit score, as the information readily available through search engines can be conflicting or difficult to interpret. My name is Sarah Park, and I've been working in the field of financial literacy and credit repair for more than a decade. My mission is to provide honest advice on important topics like credit scores. Over the years, I've helped over 20,000 clients improve their credit scores. In this article, I'll share everything you need to know about credit scores and empower you to take control of your credit. Let's dive in!
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
Determining a Good Credit Score
What Credit Score is Needed to Buy a House?
Determining the Credit Score Range for Car Financing
Tips for Improving Your Credit Score
Joe's Insights on Credit Improvement
Different Types of Credit Scores: Understanding FICO and Vantage Models
There are primarily two credit scoring models that you should know about: the FICO model and the Vantage model. Both are significant, particularly regarding the differences in the way they calculate credit scores.
FICO Credit Score
The FICO scoring model is the most widely used and sought-after by lenders. There are eight different FICO models ranging from FICO 2 to FICO 10, and your credit score may vary depending on which model is used to assess your credit report. However, the differences are easily explained. When you apply for credit, different lenders will pull different FICO reports depending on their needs. For example, mortgage lenders usually choose the FICO 5 report, while credit card companies primarily use FICO 8.
So why does FICO have multiple scoring models? Each credit report has various factors that weigh differently and impact the score differently. For instance, the FICO 5 report weighs your previous mortgage history heavily. In contrast, FICO 8 focuses on credit card history.
If you're interested in seeing all your different FICO scores in one place, you can sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies - Equifax, Experian, and TransUnion - to compete with FICO. Vantage is a new scoring model, while FICO has been in use since the seventies. While FICO still dominates the lending sector, Vantage is gaining popularity in sectors such as personal loans and auto lending.
Is the Vantage Score accurate? It depends on the context. Since it isn't widely used for lending purposes, it might not be accurate when it comes to your lending score. However, it's accurate when you need a general idea of your credit scores. If you want a better idea of your FICO score, you can use the Vantage score to point you in the right direction.
While FICO is still the most recognized scoring model, I believe the Vantage model is innovative, driven by modern standards, and accurate. In the next 5-10 years, I anticipate that lenders will widely use the Vantage scoring model to provide the best scoring models based on today's standards. Credit reporting agencies are the most significant data collection agencies outside social media companies, and with that comes the power of providing the best scoring data.
Determining a Good Credit Score
Both the FICO and Vantage scoring models vary from 350 to 850, with 850 being the highest score and 350 being the lowest possible credit score. Understanding where you stand on the journey to obtain the highest possible rating is critical when establishing targets to achieve great results. Take a look at these important score benchmarks:
1. 620 or Below
This is regarded as poor credit, and if you fall below this threshold, you may have some negative credit background, including high balance credit cards, or no credit cards at all. Making timely payments and having ten revolving credit accounts available is the most effective way to improve your credit rating. I suggest applying for a Credit Builder Card or OpenSky Credit Card, as these cards are secured and can help enhance your credit. When your credit score reaches the 620 range, you can start qualifying for an FHA home mortgage.
2. 640-680
This range is regarded as reasonable for excellent credit. Scores in this range indicate that you have established credit, but you may have some derogatory credit history or accounts, and you might have high credit card balances that you need to pay off. It is often the case that for recent accounts, credit scores temporarily fall. Don't worry if you're in this category and recently opened a new account; your score will quickly rebound.
3. 740+
A score of over 740 is known as a "super-prime" score, and it is considered the ideal rating for most loans since it offers the absolute best interest rates. Congratulations if your score is over 740 since this puts you in the top 20% of the US population with this score. Continue to keep up good habits, such as paying off accounts on time, and keeping your revolving credit card accounts paid off. Keep up the great work, and you'll be in excellent standing!
What Credit Score is Needed to Buy a House?
The credit score required to buy a house depends on the type of mortgage loan you plan to apply for. In general, most mortgage loans have similar requirements and guidelines due to federal regulation and government backing. There are three main types of mortgage loans: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and provide a great savings option, aside from the VA loan. PMI is not required, which can save you money on your down payment or monthly payments. These loans usually have lower down payment requirements and better interest rates than other mortgage loans. A credit score of 640 is usually required for a conventional loan, along with a debt-to-debt ratio not exceeding 43%.
FHA Loan
FHA loans are available to those with lower credit scores, typically between 580 and 619. Each loan program varies, so it's important to shop around for lenders who provide the best financial option for you. PMI is required for at least 11 years, which can increase your mortgage cost, so consider your budget accordingly. FHA loans have a higher debt-to-income limit of up to 50% and a down payment requirement as low as 3.5%. However, this loan typically has a higher interest rate.
VA Loan
To be eligible for a VA loan, you must have served in the U.S. Military for at least 181 days, 90 consecutive days during wartime, or 6 years with the National Guard. Alternatively, your spouse's death during active duty is another way to be eligible. The VA loan has no specific credit score requirement, but lenders will look for previous defaulted loans and government-owed past-due debts. This loan usually offers the best interest rates and does not require a down payment, making it an ideal choice for veterans.
Determining the Credit Score Range for Car Financing
When applying for car financing, it's your credit history rather than your credit score that determines what you qualify for. Although a high credit score is important, it has less of an impact on the interest rate you qualify for. Even those with poor credit can qualify for a car loan, but they may face higher down payments, extra fees, and limited vehicle choices due to the risk they pose to lenders. To have the most leverage when buying a car through financing, it's best to have equity or a down payment.
While there is no specific credit score that guarantees approval for car financing, a credit score over 680 is seen as ideal. Anything below this number increases the interest rate you are charged due to the risk to the lender. For instance, a 720 credit score or above generally has an average interest of $5,500 on a loan, while someone with a score of 580 could be hit with $15,300 on the same loan. As these numbers indicate, a higher credit score can significantly reduce the interest rate and overall cost of credit.
Tips for Improving Your Credit Score
Improving your credit score is possible with the right strategies that require a little effort and patience. Building a good credit score takes time, and it's a gradual process that requires rational decisions, especially with your credit. Below are essential things you can do to improve your credit:
1. Open 3-5 revolving credit accounts
It's easier to build your credit score with revolving credit, especially for someone with limited credit or looking to rebuild their credit. Applying for a secured credit card such as Open Sky or Credit Builder Card can increase your chances of approval. Revolving credit constitutes 30-35% of your overall credit score, making it the best option to build credit scores quickly. However, it would be best if you were patient since it takes 2-4 months to reflect on your credit score. Ensure you pay your balance on time and keep it at $5-10 each time you make a payment.
2. Raise your limits!
Increasing your credit card limits can significantly help increase your overall credit limits and lower your credit utilization percentage. To avoid exceeding 30% of your overall limits, you can request a credit limit increase through your credit card company's online portal or customer service. Ensure you have at least 7-15 months of excellent payment history on a credit card before requesting a credit limit increase.
3. Pay down your balances!
Keeping your balance low and close to zero is essential in improving your credit score. Limit your credit card usage to small purchases and leave a $1-5 balance on your credit cards when paying your bills monthly. If you have high balances and can't pay your card's debt, create a repayment plan that takes a percentage of your paycheck each month to pay the credit card debt down. Your credit card usage and repayment habits play a vital role in determining your overall credit score, so ensure you limit your usage.
Joe's Insights on Credit Improvement
It's a common experience to have less-than-ideal credit. However, if you're serious about improving your credit, you can expect to see significant improvements in your credit score in a relatively short period of time. Many people with bad credit feel like it's impossible to have good credit, and as a result, they stay stuck in a cycle of credit issues throughout their lives. But it is possible to develop a great credit score with hard work and determination. By making changes to your spending habits and prioritizing your credit, you can take control of your financial future. Put together a budget, identify your bad spending habits, and work on addressing them to see a direct improvement in your credit score. This article provides helpful tips on understanding credit, but if you need more direct assistance or credit repair, feel free to contact our office today at www.asapcreditrepairusa.com.