It may come as a surprise, but did you know that credit scores have 30 different level variations? In the quest to search for the best credit score, most people rely heavily on Google and are often overwhelmed with the amount of information returned. Unfortunately, some of this information can be misleading, causing confusion, and leading individuals down a dark, complex path. As an experienced financial literacy and credit repair expert, with over fifteen years in the field, I'm here to provide you with accurate and straightforward advice on a range of topics, including credit scores. Over the years, I've been privileged to help transform over twenty thousand clients' credit scores, and I'm eager to share my knowledge to guide you on the same path of success. So, without further ado, let's dive into the details.
Contents:
Understanding Credit Scores: FICO and Vantage Models
What is a Good Credit Score?
Credit Score Needed to Qualify for Different Mortgage Loans
Ideal Credit Score to Buy a Car
Ways to Improve Your Credit Score
Joe's Advice on Improving Your Credit
Understanding Credit Scores: FICO and Vantage Models
Credit scores are vital in determining your creditworthiness, and two models you will often come across are the FICO and Vantage models. These models differ in how they calculate your scores.
FICO Credit Score
FICO is the most widely used credit scoring model, with eight different models available. Each model provides a different credit score depending on the credit report the lender pulls. For instance, mortgage lenders use FICO 5, while credit card companies use FICO 8. This is because factors critical to the lender, such as previous mortgage or credit card history, will weigh more heavily in the scoring.
Vantage Credit Score
Developed by the three major credit reporting agencies, Vantage Score is a newer model than FICO and used frequently by credit monitoring websites in the US. Although not widely used for lending, Vantage Score is gaining popularity in some sectors like personal loans and auto lending.
Is Vantage Score Accurate?
Vantage Score accuracy can vary since it's not widely used for lending. It's a good "general idea" of your FICO score. Nonetheless, as credit reporting agencies hold the most extensive data collection, Vantage Score might become widely used in the future, providing the best scoring data for today's standards, unlike FICO, which is considered outdated.
If you want a better visual representation of your different FICO scores, visit www.myfico.com and sign up for an account.
What is a Good Credit Score?
Credit scores vary between 350 and 850 for both FICO and Vantage, with scores above 850 being the best and scores of 350 being the worst. To help you understand where you stand as you build your credit, here are some vital score thresholds:
620 or below:
This is a bad credit score, and having a score of 620 or below signifies derogatory credit history, high-balance credit card accounts, or no credit cards at all. You can improve your score by timely payments and having at least ten active revolving credit accounts open. You can use the Credit Builder Card or OpenSky Credit Card to help you build your credit. When the score reaches the 620 range, you will qualify for an FHA home mortgage.
640-680:
This credit score range is fair for good credit. Having a score in this range implies established credit but with derogatory marks or accounts on your credit and high credit card balances that you need to pay down. Newly opened accounts can temporarily decrease your score. If you recently opened a new account and fall in this range, don't be anxious as it is just a temporary score drop.
740 or higher:
A credit score above 740 is considered "super-prime" and will give you the best interest rates for most loans. Congratulations if you have a score over 740, as it puts you in the top 20% of the US population with this score. Always make payments timely and keep revolving credit card accounts paid to maintain a great score.
Credit Score Needed to Qualify for Different Mortgage Loans
The credit score needed to qualify for a mortgage loan varies depending on the type of loan you are looking for. The following are the three most common types of mortgage loans and their requirements:
Conventional Loans
Conventional loans are the most popular and typically offer the best savings option outside of VA loans. To qualify, you need a credit score of 640 or higher and a debt-to-debt ratio no higher than 43%. Downpayment requirements are usually lower than other loans, and you don't need to pay PMI, which can increase your monthly payment.
FHA Loan
The FHA loan is for those with lower credit scores, usually between 580 and 619. With this loan, PMI is required for at least 11 years, and you can have a debt-to-income limit of up to 50%. Downpayment requirements are as low as 3.5%, but interest rates are often higher.
VA Loan
To qualify for a VA loan, you must have served in the United States military for at least 181 days or meet other specific criteria. The VA loan often has the best interest rates and typically does not require a down payment. There is no specific credit score requirement, but previous defaulted loans and past-due government debts are considered during pre-qualification.
Conventional Loans - Conventional loans are the most popular and typically offer the best savings option outside of VA loans. To qualify, you need a credit score of 640 or higher and a debt-to-debt ratio no higher than 43%. Downpayment requirements are usually lower than other loans, and you don't need to pay PMI, which can increase your monthly payment.
FHA Loan - The FHA loan is for those with lower credit scores, usually between 580 and 619. With this loan, PMI is required for at least 11 years, and you can have a debt-to-income limit of up to 50%. Downpayment requirements are as low as 3.5%, but interest rates are often higher.
VA Loan - To qualify for a VA loan, you must have served in the United States military for at least 181 days or meet other specific criteria. The VA loan often has the best interest rates and typically does not require a down payment. There is no specific credit score requirement, but previous defaulted loans and past-due government debts are considered during pre-qualification.
Remember that all loan programs are different, so it's crucial to shop around and find the best financial option for your needs.
Ideal Credit Score to Buy a Car
Your credit history is the critical factor in determining auto loan approval, rather than just your credit score. While a higher credit score is important, it only slightly impacts the interest rate for which you qualify. Loan providers evaluate your credit history to assess the risk when extending credit, particularly if you have current or previous credit issues like late payments, repossession, or similar troubles.
Although bad credit and special finance lenders tend to qualify just about anyone for a car loan, they will impose specific approval criteria like a higher down payment and additional dealership fees. These dealerships charge such fees to reduce the lender's risk and approve the loan. To avoid such expenses and increase your chances of approval, consider putting down a down payment.
The Credit Score Requirement for a New Vehicle
There is no specific credit score that guarantees approval for a car loan, but a score of 680 or higher is an ideal benchmark. A lower score can lead to a higher interest rate, reflecting the risk you pose to your lender. The interest rate fluctuates based on your credit score. For example, someone with a 720 or above credit score pays an interest of $5,500 on average, while someone with a credit score below 580 would pay $15,300 on a loan.
This data shows that the higher your credit score, the lower your interest rate, affecting your overall credit score.
Ways to Improve Your Credit Score
If you want to improve your credit score, there are some essential things you can do right now with minimal effort. However, building a good credit score is a gradual process that requires patience. It's crucial to stay focused and avoid making irrational decisions that may worsen the situation.
Here are a few things you can do to improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, is an excellent option to maximize your credit scores. Opening a secured credit card that doesn’t focus on your credit score is a good way to begin building your credit history. Revolving credit contributes to 30%-35% of your overall credit score, so it is essential to use it wisely. Be sure to pay your balance on time and keep it between $5-$10.
2. Raise Your Limits
Requesting a higher credit limit on your credit cards can help increase your overall credit limits and lower your credit utilization percentage. To avoid hurting your credit scores, keep your credit card balances below 30% of your overall limits. To raise your limits, check with your credit card companies for their processes. You may need to fill out some information, including your current income, and wait for a response from their credit team.
3. Pay Down Your Balances
Having a high balance on your credit cards can hurt your credit score significantly, so it's crucial to keep your balance low. I recommend using your credit card for small purchases and leaving a $1-$5 balance to pay each month. Suppose you have high balances and cannot pay them off at once. In that case, it's essential to make a game plan and take a certain percentage of your paycheck each month to pay off the credit card balance gradually. This will avoid running the balance back up, which could negatively affect your credit score in the long run.
Joe's Advice on Improving Your Credit
Many of us have experienced the struggles of having poor credit. However, by acknowledging your current credit standing and committing to improving it, you can see significant improvements in your credit score relatively quickly. Unfortunately, many individuals with bad credit feel trapped in a never-ending cycle, assuming that regaining good credit is impossible. Contrary to this belief, achieving a great credit score requires dedication and focus on your spending habits. Start by creating a budget and addressing any harmful spending tendencies. Doing so will positively impact your credit score. This article aims to provide you with a better understanding of credit. If you need assistance or guidance on improving your credit, don't hesitate to visit www.asapcreditrepairusa.com.