Were you aware that there are 30 disparate categories of credit scores? Often people are uncertain about how to find the best credit score, as there is an array of conflicting information available with just a simple Google search. Unfortunately, many resources can be ambiguous and even erroneous, leading individuals down an uncertain path. I am Joe Mahlow, and I have devoted over 15 years of my professional career to financial literacy and credit repair. My purpose is to provide truthful, impartial guidance on a range of topics, including the subject of credit scores. Through my work, I have assisted over 20,000 clients in improving their credit scores and I aim to now share with you the necessary information to attain similar results. Without further ado, let's dive in.
Contents:
Types of Credit Scores: FICO vs Vantage
What Constitutes a Good Credit Score?
What Credit Score is Needed to Buy a House?
Determining the Credit Score Range needed to Buy a Car
Tips for Raising Your Credit Score
Insights by Joe on Building Good Credit Score
Types of Credit Scores: FICO vs Vantage
Credit scores play a vital role in the loans you can get and the interest rates you pay. There are two primary credit scoring models viz. FICO and Vantage that lenders use to determine your creditworthiness. Let's take a closer look at both models.
FICO Credit Score
FICO is the most commonly used credit scoring system, consisting of eight different models of which FICO 2 to FICO 10 are the most popular. Different lenders employ specific models to assess your credit report. For instance, a mortgage lender generally uses your FICO 5 credit report while a credit card issuer will prefer your FICO 8 credit report.
Why Multiple FICO Scores?
Each credit report carries a different weight depending on its relevance to the loan you are seeking. For example, your mortgage history will carry more weight on a FICO 5 mortgage report and your previous credit card account will reflect more on your FICO 8 credit report.
Vantage Credit Score
Vantage score, developed by Equifax, Experian, and TransUnion, competes with FICO as a credit scoring model. Vantage is a recent entrant in the market and is gaining popularity in some lending sectors such as personal loans and auto lending. However, FICO remains the go-to scoring model in the lending industry.
Is the Vantage Score Accurate?
While the Vantage score is accurate in portraying your creditworthiness, it may not be as useful since FICO remains the industry leader. The Vantage score is a good notion of your FICO score since gaining access to your FICO score requires application for loans or paying for it. Though I predict that Vantage will be widely accepted soon because they have the data to provide the most precise credit score report.
What Constitutes a Good Credit Score?
A credit score can be either good, bad, or fair, and it depends on the range of the FICO and Vantage models, which extends from 350 to 850. While a score of 350 is considered the worst credit score, a score of 850 is regarded as the best. If you aim to achieve the highest score possible, it's vital to know where you stand with regard to certain scores along your journey. Therefore, here are some essential credit score thresholds:
620 or less
This is considered a poor credit score, indicating you have a negative credit history, high-balance credit card accounts, or no credit cards at all. To improve this score, strive to pay your bills on time and keep ten active revolving credit accounts open. Consider getting secured credit cards like Credit Builder Card or OpenSky Credit Card as they can help you build your credit. Surpassing this range opens doors for qualifying an FHA home mortgage.
640-680
This credit score range is classified as fair for good credit. Scores within this range signify established credits with high balances on cards to pay off and derogatory marks or accounts on records. If your score falls within this range, and you have newly opened accounts, don't get anxious as your scores will return after a short while.
740+
A credit score of 740 or higher is considered "super-prime" and offers the best interest rates for most available loans. This is a remarkable milestone attained by only 20% of the US population. Keep up with the excellent work by making timely payments and paying your revolving credit card accounts.
What Credit Score is Needed to Buy a House?
Knowing the credit score one needs before buying a house depends on the type of mortgage loan required. There are three common loan types available in the market: conventional loans, FHA loans, and VA loans. While each category has different requirements, they will all have similar guidelines because of federal regulations and government support.
1. Conventional Loans
Conventional loans are the most popular loans and typically the best option for savings outside of the VA loan. You will not be required to maintain private mortgage insurance (PMI) when using a conventional loan, which can increase your downpayment or monthly payment. Conventional loans also have lower downpayment requirements and better interest rates than other loan types. A typical credit score requirement for conventional mortgage loans is 640 with a debt-to-debt ratio no higher than 43%.
2. FHA Loan
FHA loans are for lower credit scores, usually between 580 and 619. Shop around for different lenders that provide the best financial option for you. FHA loans will require you to keep PMI for at least 11 years, which increases your overall loan cost, especially if you're on a budget. FHA loans have a higher debt-to-income limit of 50%, enabling borrowers with lower incomes to purchase more homes than with a conventional loan. Additionally, the downpayment requirements for an FHA loan are as low as 3.5% of the purchase price. However, the interest rate will typically be higher.
3. VA Loan
VA loans do not have a credit score requirement, but the lender will check for previous defaulted loans and any government-owed past-due debts when pre-qualifying you. To be eligible, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was in the military and passed away during active duty. The VA loan typically offers the best interest rates, and usually, no down payment is required. It is a perfect option for our veterans.
Determining the Credit Score Range needed to Buy a Car
Credit history is a more important factor in determining the eligibility for a car loan than just the credit score. Although it is significant, the interest rate that one qualifies for is still primarily based on credit history. The previous and current credit performance is taken into account while verifying the credit health of the applicant for a car loan. For example, the credit score of someone who has been late on a previous or current auto loan or has had a repossession will impact the loan approval process negatively. Lower-tier lenders will extend credit to anyone, regardless of credit history, although specific approval criteria such as higher down payments and dealership fees will apply. The dealerships often select the vehicle the purchaser will pay for since they will receive a higher markup to cover the costs of approving the loan. Equity or downpayment significantly increases the leverage of buyers looking to purchase a car on credit.
Ideal Credit Score Range for a New Vehicle
There is no single credit score that guarantees loan approval, given the various factors discussed above. However, a credit score over 680 offers borrowers the best chance for a favorable loan term. Scores under 680 may present increased interest rates to compensate for the risk they carry for lenders. The interest rates charged vary greatly based on credit scores. For example, for a loan of average cost, individuals with a credit score of 720 or above need to pay $5,500 in interest, while individuals with a score of 615 or above may pay up to $10,200 in interest. Therefore, the credit score has a great impact on the loan terms and the total amount of interest charged.
Tips for Raising Your Credit Score
Improving your credit score is not a quick process, and it requires patience and smart decisions. There are several things you can do right away to help boost your credit score. Here are some tips on how to improve your credit score:
1. Open Revolving Credit Accounts:
Revolving credit, such as credit cards, can be beneficial for your credit score. If you have limited credit or need to rebuild your credit, obtaining a large loan can be challenging. Instead, try to open a secured credit card that does not focus on your credit score but rather on your ability to pay. Using revolving credit can help you build your credit score fast, up to 30-35% of your overall score. Make sure you pay your balances on time and limit your card usage to small purchases, like gas or groceries.
2. Raise Your Limits:
Requesting a credit limit increase on your credit cards can help you increase your overall credit limits and lower your credit utilization percentage. Most credit card companies allow customers to request credit limit increases online or through a phone call. You must have a history of excellent payment history on a credit card before requesting a credit limit increase.
3. Pay Down Your Balances:
Keeping your credit card balance low and close to zero is essential for building a good credit score. You're not obligated to use your credit cards, so it's recommended to use them only for small purchases. Try to pay your balance each month, leaving $1-5 on your credit card. If you accrue high balances and can't pay them off, create a plan to take a percentage of your paycheck each month to pay it down until you can stop using it.
Improving your credit score takes time, but with these tips, you can gradually increase your score by demonstrating responsible credit card usage and payment history.
Insights by Joe on Building Good Credit Score
We all have faced tough times with our credit score. However, if you are committed to improving your credit history and devote time and effort towards it, you can witness significant progress in your credit score in a short period. Often, individuals with poor credit ratings fall into the loop of never-ending credit problems, making it seem impossible to work on their credit score. Establishing an excellent credit score takes considerable effort, but if you prioritize your credit and spending habits, you can do it, too. Start by setting a budget and working on your expenses, and you will soon see the positive impact on your credit score. This article aims to enhance your credit knowledge. If you need professional help with your credit score or require credit repair, reach out to my office today at www.asapcreditrepairusa.com.