It's a little-known fact that credit scores have 30 different levels. When you search for the best credit score online, the results can be overwhelming and misleading. As someone who's been involved in financial literacy and credit repair for over 15 years, I know this all too well. Hi, my name is Joe Mahlow, and I am here to provide you with impartial advice on topics ranging from credit scores to personal finance. Over the years, I have assisted more than 20,000 clients in improving their credit scores, and I hope to offer insights that you can use as well. So, let's dive into it.
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
Understanding Good Credit Scores
Credit Score Requirements for Different Mortgage Loan Types
Credit History, Not Score, Vital When Buying a Car
Ways to Improve Your Credit Score
Joe's Insight
Different Types of Credit Scores: Understanding FICO and Vantage Models
When it comes to credit scores, there are two main models: the FICO model and the Vantage model. It's crucial to comprehend each one to understand how your credit score is calculated.
1. FICO Credit Score
The FICO scoring model is the most prevalent and widely used credit scoring model in the market. With eight different FICO models in use, it is possible to get a different credit score depending on which model is utilized. The reason for multiple models is that each credit report has a different "weight," meaning that factors essential to the lender will have a more significant impact on the credit score than the less important ones. For instance, if you want to apply for a home loan, the mortgage lender will most likely use FICO 5 credit report, whereas if you are looking for a credit card, the FICO 8 credit report will be used.
2. Vantage Credit Score
Developed by the three significant credit reporting agencies- Equifax, Experian, and TransUnion, the Vantage Score model is a newer model than the FICO model, which has been in use since the seventies. When compared to FICO, Vantage has a limited market share, but it is gaining popularity in markets like personal loans and auto lending and is frequently used by credit monitoring websites in the United States to provide free credit reports.
Accuracy of Vantage Score
Although the Vantage Score model is accurate, it depends on how you look at it. Since it is not widely used for lending purposes, it might not provide the most accurate lending score. However, it can offer a useful general idea about your FICO score. I recommend using your Vantage score to get an idea of your overall score.
Final thoughts
There are pros and cons to each credit scoring model. While FICO dominates the lending sector, the Vantage model is slowly increasing in popularity. As credit reporting agencies collect significant data, they can provide the best scoring data based on today's standards.
Understanding Good Credit Scores
Credit scores for both FICO and Vantage models range from 350 to 850, with 350 being the worst credit score you can have and 850 being the best score. It's vital to understand where you stand throughout your journey in building your scores, so here are some crucial score thresholds.
1. 620 or below
This is considered bad credit, indicating possible adverse credit history, high-balance credit card accounts, or no credit cards. Improve your credit scores by making timely payments and opening ten active revolving credit accounts. To build your credit, use Credit Builder Card or OpenSky Credit Card, the secured credit cards. By reaching the 620 credit score range, you can start qualifying for an FHA home mortgage.
2. 640-680
This is considered fair for good credit. Scores in this range usually indicate that you have established credit, but you may have some derogatory marks or accounts on your credit and high balances on your credit cards that require paying down. Newly opened accounts can temporarily drop your scores. If you're in this range and have recently opened a new account, your scores will return.
3. 740+
A credit score over 740 is considered "super-prime," giving you the best interest rates for most loans. You are part of the 20% of the US population with this score! Keep up the great work, pay your accounts on time, and keep your revolving credit card accounts paid. Congratulations!
Credit Score Requirements for Different Mortgage Loan Types
Getting approved for a mortgage loan depends on the type of loan you’re seeking. Mortgage loans are regulated by the government, and each one has its own set of guidelines. The three types of mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular type of loan and typically offer the best rates after the VA loan. These loans don't require private mortgage insurance (PMI), which can be an added cost that drives up your down-payment or monthly payments. The credit score requirement for a conventional mortgage loan is typically 640, and there is no restriction on the debt-to-income ratio, but it usually needs to be under 43%.
2. FHA Loans
FHA loans cater to those with lower credit scores, typically between 580 and 619. Depending on the lender and loan program, it's worth shopping around since loan requirements can differ slightly. Keep in mind that PMI is required for at least 11 years with this mortgage, adding to your overall costs. Similar to conventional loans, a high debt-to-income ratio isn't a deal-breaker but usually needs to be under 50%. The down-payment requirement for an FHA loan is as low as 3.5% of the purchase price.
3. VA Loans
VA loans don’t officially have a credit score requirement, but having defaulted loans or government-owed debts can impede your eligibility. To qualify, you must have served a minimum of 181 days in the United States military or served 90 consecutive days during wartime. If you were in the military for six years with the National Guard or your spouse lost their life during active service, you can also be eligible. VA loans have the best interest rates and typically don't require a down payment, making them an excellent option for military personnel.
Credit History, Not Score, Vital When Buying a Car
When it comes to financing a car, your credit history matters more than your credit score in determining whether your loan application will be approved. Even though a higher credit score is beneficial, its contribution to the eligibility for a better interest rate is relatively minimal.
Here are some additional details
While assessing your creditworthiness for a car loan with a history of credit problems, lenders scrutinize your past and present credit records. Consequently, a person who has defaulted on previous auto loans or has an ongoing loan repayment issue may find it more challenging to secure a loan than someone without any such blemishes. Nonetheless, subprime or bad credit lenders typically grant loans to anyone, including individuals who have gone through repossession before, but with some additional terms. They may demand a more substantial down payment or additional fees payable to the dealership to avoid delinquency and approve the loan. As surprising as this is, it is not uncommon for dealerships to charge fees to cover the risk of default on loans. If you have poor credit and have visited a dealership, you may have had to pick a car from the ones with higher profit margins to meet the fees. Ultimately, having equity or a downpayment gives a borrower an edge when seeking credit to finance a car.
The recommended credit score range for acquiring a new car
There is no definitive credit score for securing a car loan since several elements play a part, as mentioned earlier. However, a credit score of 680 and above is optimal. Anything lower may translate into a higher interest rate charged by lenders due to the risk factor involved.
Below is a comparison of how various credit scores impact the interest rates charged to borrowers:
720 credit score and above - average interest paid is $5,500.
680 credit score and above - average interest paid is $6,600.
650 credit score and above - average interest paid is $8,100.
615 credit score and above - average interest paid is $10,200.
580 credit score and above - average interest paid is $13,900.
580 and below credit scores - average interest paid is $15,300.
From the above statistics, it is clear that a higher credit score will result in lower interest rates and, consequently, a better credit score in the end.
Ways to Improve Your Credit Score
Improving your credit score may seem daunting, but there are several easy steps you can take to achieve a higher rating. It's important to remember that building your credit will take time and patience, so don't expect overnight results. Keep in mind that impatience often leads to poor financial choices that will only make your situation worse.
Here are some actions you can take today to boost your credit score:
1. Open 3-5 revolving credit accounts.
This type of credit is an optimal option for those seeking to build or rebuild their credit score. Obtaining a large loan may be difficult, so getting a secured credit card like Open Sky or Credit Builder Card - both of which don't focus on credit scores but rather your timely payments - is your best bet for approval. Revolving credit accounts comprise 30-35% of your overall credit score, and can help increase it quickly. Although it could take 2-4 months to see results, ensure that you pay off your balance on time and keep it between $5-10 per payment, and limit it to small purchases like gasoline and groceries.
2. Request a credit limit increase.
If you actively use a credit card account, you can ask your card company to increase your credit limit. Increasing your limits can decrease your credit utilization ratio and increase your overall credit limits. When your credit card balances exceed 30% of your overall limit, it can negatively impact your credit score. To avoid this, contact your credit card company and request a credit limit increase. Different companies have different processes. Some allow you to request it online through your online portal while others will require you to call in. They may ask for additional information, such as your income before they make a decision.
3. Pay down your balances.
Paying down your balance and keeping it at a minimum can make a significant impact on your credit score. Remember that you are not obligated to use your credit card each month. So use them only to make small purchases and when paying your monthly bills, leave about $1-5 as a balance. In case you have high balances and struggle to pay off your credit card, you should make a plan to pay it off with a percentage of your income each month and eventually stop using it. Keep in mind that credit card usage plays a significant role in determining your credit score, and you must limit it to maximize your score impact.
Joe's Insight
We've all experienced the challenges that come with poor credit. However, if you are serious about improving your credit, making the necessary changes can lead to significant improvements in your score. Many people feel like bad credit is a lifelong burden, but by prioritizing credit and adjusting spending habits, a great credit score is achievable with diligence and patience. To begin, creating a budget and eliminating negative spending habits is vital to your credit score. This article provides helpful information on understanding credit. Contact our office at www.asapcreditrepairusa.com to receive guidance and assistance with credit repair.