It may come as a surprise to many that there are actually 30 varying levels of credit scores. Seeking the best possible credit score can be a daunting task as search results can often be confusing or even misleading; causing a sense of frustration and unknowing. As someone who has been actively involved in the financial literacy and credit repair industry for the past 15 years, I, Joe Mahlow, aim to provide helpful and insightful advice on various topics starting with credit scores. With a track record of assisting over 20 thousand clients in transforming their credit scores, I am confident that the information presented here will be of value to you. So, buckle up and let's get started!
Contents:
What are the Variations of Credit Scores?
Understanding the Components of a Good Credit Score
What is a Suitable Credit Score for Buying a House?
Determining Approval for a Car Loan Based on Credit History
Tips on Improving Your Credit Score
Tips from Joe on Improving Your Credit Score
What are the Variations of Credit Scores?
Two varieties of credit scoring models prevail, namely the FICO model and the Vantage model. It is crucial to comprehend these scoring models, and especially the dissimilarities in how they calculate credit scores.
FICO Credit Score
The FICO credit scoring model is the most widely used scoring model made up of eight distinct FICO models, ranging from FICO 2 to FICO 10, such that credit scores vary according to your credit report. The explanation for the different FICO models is contingent on the differing weight given to the various factors unique to every credit report. Therefore, when lenders pull your credit report based on the type of credit or purchase, different FICO models will be used. Mortgage lenders usually request FICO 5 credit reports, while credit card companies prefer the FICO 8 model. Meanwhile, auto lenders primarily use FICO-2 models.
Why Different FICO Scores?
The reason for different FICO scores is that every credit report has a specific "weight" assigned to different factors, where the most important ones to the lender have the most critical impact on the credit score. Essentially, each FICO score model focuses on specific credit history, such as mortgage, credit card, or auto loans, and may put varying weights on these histories, positively or negatively impacting the credit score.
Vantage Credit Score
The Vantage Score scoring model was developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, as a competitor to the FICO scoring model. Vantage is relatively new, only introduced recently, and is used by credit monitoring websites to offer free credit reports. Although FICO is currently the industry’s dominant scoring method, Vantage is gaining popularity in some sectors such as auto lending and personal loans.
Is Vantage Score Accurate?
To determine the Vantage score's accuracy, it depends on the context of the question. Credit lending depends on staying accurate to your actual credit score, which FICO does better since it is the most widely used scoring model in the industry. Vantage offers a good "general idea" of an individual's credit scores. Although not widely used for lending purposes, the accuracy of the Vantage score still holds valid in representing a borrower's credit. Since FICO is for the moment the recognized scoring model, using Vantage scoring can still provide an accurate general idea of your credit score.
Vantage vs. FICO
The likelihood of Vantage being widely used by lenders seems likely in the coming years because of its scoring algorithms, which provide the best scoring outcomes by today's standards. FICO's scoring model is outdated and ineffective in providing a clear representation of credit scores. Remember that credit reporting agencies are among the largest data collection organizations outside social media companies. If they have the data, they have the power to deliver the best scoring data, hands down. If you want a better visualization of your different FICO scores, you can sign up for an account on www.myfico.com to see all your different credit scores.
Understanding the Components of a Good Credit Score
Both FICO and Vantage scoring models measure credit scores in a range of 350 to 850, with 850 being the highest score and 350 the lowest. If you want to achieve the highest credit scores, it’s essential to evaluate where you stand to set realistic goals and thresholds. Below are some benchmarks to help you during your credit-building journey:
1. Scores of 620 or lower
Credit scores in this range are considered bad. You might have no credit cards, high-balance credit card accounts, or adverse credit history. To improve your credit scores, try to make prompt payments and open ten active revolving credit accounts. A secured credit card such as the Credit Builder Card or OpenSky Credit Card can help. Once your score reaches 620, you can qualify for an FHA home mortgage.
2. Scores between 640-680
If your score is in this range, your credit is considered "fair for good credit." You probably have some derogatory marks or high credit card balances that need payment. Additionally, newly opened accounts can temporarily lower your score. But don’t worry; your score will increase again over time.
3. Scores of 740+
If you have a credit score of 740 or up, congratulations! You are part of the 20% of the US population with a super-prime credit score. With this score, you can enjoy the best interest rates for loans. Keep up the effort by paying your accounts on time and paying the balances on your revolving credit card accounts.
What is a Suitable Credit Score for Buying a House?
The credit score required for buying a house depends on the type of mortgage loan you are interested in qualifying for. Federal regulations and government backing ensure that most mortgage loan guidelines and requirements are either similar or different. There are three common types of mortgage loans: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
- Conventional loans are the most prevalent loans and often the best "savings" loan choice aside from VA loans.
- It is advantageous as private mortgage insurance (PMI) is not required, which could increase your down-payment or monthly payment.
- PMI shields the creditors if you cease making payments on your loan.
- Furthermore, conventional loans usually have lower down-payment requirements and interest rates compared to other mortgage loans.
- The credit score requirement for conventional mortgage loans is usually 640, and a debt-to-income ratio not higher than 43%.
2. FHA Loan
- The credit score for FHA mortgage loans is typically between 580 and 619.
- Be aware that loan programmes differ; therefore, shop around for different lenders that offer the best financial option for you.
- FHA loans require you to maintain PMI for a minimum of 11 years, which can raise your mortgage expense and is important to consider, especially if you are budgeting.
- Compared to a conventional loan, FHA loans have a higher debt-to-income limit of up to 50%, enabling you to purchase more homes if you have a lower income.
- Finally, the down-payment requirement for an FHA loan is as low as 3.5% of the purchase; this may enable you to obtain a valid mortgage with less money out of pocket than a conventional loan, but the interest rate is usually higher.
3. VA Loan
- There is no specific credit score requirement with VA Loans, however, they are looking for any previous defaulted loans and government-owed past-due debts when pre-qualifying you.
- 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 lost their lives during active duty.
- The VA loan often has the lowest interest rates available, and they generally do not require a down payment.
- The VA Loan is an incredible option for veterans, and it gives back to them perfectly.
Determining Approval for a Car Loan Based on Credit History
When it comes to buying a car, your credit history is the most crucial factor in determining your eligibility, rather than simply your credit score. While having a higher credit score is still important, it carries less weight in deciding the interest rate you qualify for. Lenders will take into account your previous and current credit histories to assess the risk involved with granting you a loan. This means that a person who has had late payments on an auto loan or a repossession will have a harder time being approved than someone who has a clean record. Special finance lenders may approve loans for individuals with bad credit or previous repossessions, but with additional requirements such as higher down payments and fees paid by the dealership to lessen the risk of non-payment. It is advisable to have equity or a downpayment to use when purchasing a car on credit.
Credit Score Range for Car Loans
An exact credit score for loan approval is not set in stone, as many factors are at play. However, a credit score of over 680 is ideal for purchasing a new vehicle, with anything below that score posing greater risk for the lender and leading to higher interest rates for the borrower. The data shows that interest rates increase as credit scores decrease: a person with a credit score of 720 or above on average pays $5500 in interest, while someone with a score of 580 or above pays $15,300 in interest on a loan. The higher the credit score, the less interest you will pay.
Tips on Improving Your Credit Score
Building a good credit score takes time and effort, so it's important to be patient. Rushing the process can lead to bad decisions that will only make matters worse. To improve your credit, consider taking the following steps:
1. Open 3-5 revolving credit accounts
Revolving credit is an excellent way to maximize your credit scores, especially for those with limited credit or looking to rebuild. Start with a secured credit card, such as OpenSky or Credit Builder Card, that doesn't focus on credit score but on your ability to pay on time.
2. Raise your limits
Requesting a credit limit increase is a quick way to lower your credit utilization percentage and increase your overall credit limit. Different credit card companies have different processes, but you can call and request a "Credit Limit Increase."
3. Pay down your balances
Keep your balance low and close to zero. If you have high balances, make a game plan to pay off the credit cards. Leave a small balance of $1-5 on your cards, but limit your card usage since it will play a role in your overall credit score. The rates on credit cards are high, and most payments will go towards interest and not principal.
Tips from Joe on Improving Your Credit Score
We’ve all experienced moments of economic hardship reflected in our credit scores. However, it is essential to take your credit situation seriously and invest time and effort in improving your financial status to see quick and significant changes in your credit score. Often, consumers with poor credit fall into a continuous pattern of credit problems, making them feel as though having good credit is impossible. Developing an exceptional credit score requires investing in your credit and focusing on responsible spending habits, which can be achieved by creating a budget and working to remedy any poor spending habits. This article is intended to help you gain a better understanding of credit. If you need assistance in improving your credit score or require credit repair services, don’t hesitate to reach out to my office today at www.asapcreditrepairusa.com.
Key Points:
- Take your credit situation seriously and put in time and effort to improve it
- Many believe that having good credit is impossible but it takes work to get there
- Prioritize your credit and focus on your spending habits
- Creating a budget and fixing any bad spending habits will directly reflect on your credit score
- Assistance for improving your credit score or credit repair services are available by contacting Joe's office at www.asapcreditrepairusa.com