It may come as a surprise, but there are actually 30 unique credit score levels. It can be confusing to sift through all of the information available on Google when trying to figure out what exactly constitutes a "good" credit score. Unfortunately, some of this information can be misleading and steer you in the wrong direction. As a seasoned expert in financial literacy and credit repair, I'm here to provide straightforward advice on a variety of topics. Today, we will be discussing credit scores. Over the last 15 years, I have had the pleasure of helping over 20,000 individuals transform their credit scores, and I'm confident that I can provide you with enough information to do the same. So, let's dive right in!
Contents:
Types of Credit Scores: FICO vs. Vantage
Understanding Credit Scores: What You Need to Know
What's the Ideal Credit Score for Homebuyers?
Determining Credit Score Range for Buying a Car
Strategies to Improve Credit Scores
Joe's Insights on Credit Improvement
Types of Credit Scores: FICO vs. Vantage
Credit scores are the cornerstone of the lending industry. It is, therefore, important to understand how they are calculated and how lenders evaluate the different credit scores. There are two main credit scoring models, FICO and Vantage.
1. Understanding FICO Credit Score
The FICO credit scoring model is the most popular and widely used scoring model in the industry. However, the model has evolved over the years with eight different FICO models from FICO 2 to FICO 10. Each of these models is intended for use in different lending situations. For instance, when you apply for a mortgage, the lender will most likely pull your FICO 5 report. In contrast, for a credit card, your FICO 8 credit report will be pulled. This means you may have different scores depending on the lender and the type of loan you are applying for.
2. Factors Affecting FICO Scores
The weight of each factor that determines your FICO score differs across the different models. For example, your mortgage payment history weighs more heavily on FICO 5 reports than on other FICO models. Similarly, your credit card history impacts your FICO 8 report score the most. Importantly, each lender will use the particular FICO scoring model that best matches its lending criteria when considering a loan application.
3. Understanding Vantage Credit Score
Vantage is a new scoring model and a direct competitor to FICO. Developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, Vantage Score offers an alternative to FICO. While the Vantage model is less widely used for lending purposes currently, it is gaining popularity, particularly for auto and personal loans.
4. Vantage vs. FICO: Accuracy and Reliability
The accuracy of your credit score depends on its context. Since most lenders still use FICO, Vantage may not be an accurate measure of your lending score. Nevertheless, it can provide a general idea of your scores. Also, the Vantage model may offer a better representation of your overall credit scores than FICO. As more lenders use Vantage for lending decisions, its accuracy and reliability will improve.
In conclusion, monitoring your credit scores is an essential part of managing your finances. You can sign up at www.myfico.com to view your different FICO scores. Similarly, various credit monitoring platforms provide free Vantage scores. Understanding the different types of credit scores can equip you with valuable knowledge when applying for a loan.
Understanding Credit Scores: What You Need to Know
A credit score provides insight into your financial stability, and knowing where you stand can be crucial when preparing for any financial goals. Both FICO and Vantage models score between 350 to 850, 350 being the lowest and 850 being the highest. This article will help you understand the different score ranges and how to work towards improving them.
Score Thresholds
620 or below:
Any score below this range is considered bad credit, indicating a weak credit history, high balances on credit cards or maybe no credit cards at all. Start by making timely payments and opening at least ten active revolving credit accounts like Credit Builder Card or OpenSky Credit Card. Once you hit the 620 credit score range, you'll qualify for an FHA home mortgage.
640-680:
This score range indicates a fair to good credit score, suggesting established credit but with some negative marks or high credit card balances that need paying off. Newly opened accounts can also temporarily lower your scores, but they’ll bounce back.
740+:
A credit score over 740 means you have “super-prime†credit and receive the best interest rates for most loans, making up only 20% of the US population. Keep paying your accounts on time and maintaining your revolving credit card accounts paid, and you will continue to do well. Congratulation on your excellent credit score!
What's the Ideal Credit Score for Homebuyers?
The credit score requirements for obtaining a mortgage loan vary based on the type of loan you are eligible for. Most mortgage loans have similar requirements and guidelines, but some loans may have different rules. The three most common mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular loans and the best option for savings, besides the VA loan. These loans do not require you to maintain PMI, which saves you money on your down payment and monthly payments. The credit score requirement for conventional loans is typically 640, and the debt-to-debt ratio should not exceed 43%. Conventional loans also have lower down payment requirements and better interest rates.
2. FHA Loan
FHA loans are designed for homebuyers with lower credit scores ranging between 580 to 619. Keep in mind that different lenders may have different financial options for you. With an FHA loan, you have to keep PMI for at least 11 years, which adds more cost to your mortgage. The FHA mortgage loan also has a higher debt-to-income limit of up to 50% and a lower down payment requirement of 3.5%.
3. VA Loan
There is no specified credit score requirement for VA loan pre-qualification, but if you have a history of defaulted loans or past-due debts to the government, it could affect your eligibility. To be eligible for VA loans, you must have served in the US military for a specified period, or your spouse must have died during active duty. These loans typically offer better interest rates, and you do not need a down payment. VA loans are an excellent way for the government to give back to our deserving veterans.
Determining Credit Score Range for Buying a Car
When it comes to buying a car, credit history plays a more critical role than your credit score in determining loan approval. Although a higher credit score is preferable, it does not entirely control the interest rate the borrower qualifies for. Creditors check previous and current credit histories to assess the risk involved in extending credit. For instance, individuals with past auto loan delinquencies or a history of repossession will struggle to get loan approval compared to others with an active and positive credit record.
While bad credit auto lenders approve almost anyone for a car loan, there are specific requirements that you must meet, such as a higher down payment and additional fees to the dealership. Assessing the risks involved in approving the loan, dealerships also pay a fee to extend car loans to high-risk borrowers. In some cases, the dealership selects the specific vehicle to approve the borrower because of its higher markup to cover the fee. Lastly, having equity or a down payment gives you an advantage when purchasing a vehicle through credit.
Although there is no specific credit score for approval, a score above 680 works best. Lower scores increase the interest rates charged due to higher risk to the lender. Based on the following examples, individuals with higher credit scores pay less interest when buying a car. A person with a credit score of 720 or above pays $5,500, while someone with a 580 credit score pays $15,300 in average interest on a loan. Overall, a higher credit score leads to lower interest rates.
Strategies to Improve Credit Scores
Improving your credit score takes time and effort. Patience is key because making irrational decisions with your credit can worsen your situation. The following steps can help improve your credit:
1. Open revolving credit accounts:
To increase your credit scores, it's recommended that you open 3-5 revolving credit accounts. A secured credit card like Open Sky or Credit Builder Card is a good option for individuals with limited credit history or those looking to rebuild their credit. Make sure you pay your balance on time and limit the usage of the card to small purchases like gas or groceries.
2. Request a credit limit increase:
You can improve your overall credit limits and decrease your credit utilization percentage by requesting a credit limit increase from your credit card company. Make sure to comply with their requirements and have a good payment history before making the request.
3. Pay down your balances:
Keeping your balance low and close to zero is important. Pay down your credit cards regularly and leave a balance of $1-5 each month.
Remember that credit card spending habits play a major role in your overall credit score, so limit your usage and avoid running up your balance again. By following these steps, you can build a strong credit score over time.
Joe's Insights on Credit Improvement
We have all experienced tough credit times which can severely impact our lives. Yet, if you earnestly dedicate your time and efforts to rebuild your credit, you will witness significant changes in your credit score in no time. Regrettably, a majority of people with bad credit remain trapped in a vicious cycle, believing that it's impossible to achieve a good credit score again. The truth of it is, it takes substantial effort and focus to develop a strong credit rating. Those who prioritize their credit and create manageable spending habits will ultimately succeed. To get started, consider creating a budget and identifying negative spending behaviors; this will positively impact your credit score. If you're searching for more ways to improve your credit rating or require credit repair services, feel free to contact my office at www.asapcreditrepairusa.com.