It may come as a surprise to many that there are actually 30 different levels of credit scores. Searching for the best credit score can often result in conflicting information from various sources. This can not only be overwhelming, but misleading as well, leading one down a confusing path. My name is Joe Mahlow, and I have spent over fifteen years in the financial literacy and credit repair industry. My aim is to provide you with accurate advice on various financial topics, starting with credit scores. With my expertise, I have successfully assisted over 20,000 clients in improving their credit scores, and today I hope to equip you with enough knowledge to do the same. Let's jump right in.
Contents:
Different Types of Credit Scores: A Comparison of FICO and Vantage Scoring Models
Understanding Good Credit Scores
What Credit Score is Needed for Buying a House?
Tips for Buying a Car on Credit
Ways to Improve Your Credit Score
Insights from Joe
Different Types of Credit Scores: A Comparison of FICO and Vantage Scoring Models
To better understand credit scores, it’s essential to know the two most common credit scoring models used – FICO and Vantage. One key difference between them is how they calculate credit scores.
FICO Credit Score
The FICO is the most frequently used credit scoring model, and it has eight different models from FICO 2 to FICO 10. Each model yields varying credit scores based on your credit report. Different lenders pull different FICO reports depending on the type of credit you are applying for. For instance, mortgage lenders usually ask for FICO 5, while credit card companies primarily use FICO 8. Why so many FICO scores? Each report has a different weight, which means there are critical factors that weigh more in your score.
Vantage Credit Score
The Vantage scoring model was created by the three major credit reporting agencies as a competitor to FICO. It is a relatively new scoring system compared to FICO, which has been used since the seventies. Vantage is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending. Many credit monitoring websites offer free Vantage scores. However, the Vantage score may not be accurate when it comes to actual lending scores. It's best used as a general idea of your FICO score.
Comparing the Accuracy of FICO and Vantage Scores
The accuracy of credit scores depends on the context within the question. FICO dominates the lending sector, and many lenders use it to evaluate creditworthiness. On the other hand, Vantage provides the best scoring models based on today's standards. The Vantage scoring model is gaining recognition in some sectors, but not as widely accepted as FICO. As credit reporting agencies are significant data collection agencies, they have the upper hand in providing the best scoring data.
To understand your credit scores better, visit www.myfico.com to sign up for an account to see your different FICO scores.
Understanding Good Credit Scores
Good credit scores are essential to achieve your financial goals. Both the FICO and Vantage models range from 350 to 850, with 850 being the best credit score you can have and 350 being the worst. It is vital to evaluate your current credit status and set goals to improve your credit scores. Here are some essential score thresholds that you need to bear in mind:
620 or below
If you fall into this category, you have bad credit. You may have adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, make timely payments and have at least ten active revolving credit accounts open. Secured credit cards like Credit Builder Card or OpenSky Credit Card can help you build your credit. When your credit score reaches 620, you can qualify for an FHA home mortgage.
640-680
This range is considered fair for good credit. Scores in this category indicate that you have established credit, but you may have some derogatory marks or accounts on your credit. You may also have high balances on your credit cards that you need to pay down. Furthermore, if you have recently opened a new account, it can temporarily drop your credit scores. However, it will not last long.
740+
Any credit score over 740 is considered "super-prime, and you are among the 20% of the US population with this score. Congratulations! Having this credit score means you will get the best interest rates for most loans. Ensure you keep up the great work by paying your accounts on time and keeping your revolving credit card accounts paid.
What Credit Score is Needed for Buying a House?
The credit score required for buying a house varies depending on the type of mortgage loan you want to obtain. Federal regulations and government support govern most mortgage loans, which means the requirements and guidelines are relatively consistent, but some variations do exist. There are three primary mortgage loan types: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most prominent and popular type of mortgage loan option, often considered the best savings option outside of VA loans. Unlike other loans, conventional loans do not require you to hold private mortgage insurance (PMI), which can potentially increase your monthly payment or down payment. With lower down payment requirements, superior interest rates, and a credit score requirement of at least 640 and debt-to-debt ratio no more than 43%, conventional loans prove to be a preferred mortgage option.
FHA Loans
FHA loans cater to those with credit scores between 580 and 619, making them an excellent choice for lower credit scores. It should be noted that not all loan programs have uniform requirements. Therefore, always shop around for lenders to find a viable option for your situation. FHA loans usually compel you to hold PMI for roughly eleven years, which can add to your mortgage's overall cost. Additionally, this loan type has a higher debt-to-income limit of up to 50%, enabling you to purchase homes that aren't possible with conventional loans based on your income. Lastly, although the down payment requirement for FHA loans is low, as little as 3.5%, the interest rates charged on the loan are typically higher than those of conventional loans.
VA Loans
There is, strictly speaking, no minimum credit score required with a VA loan. Still, lenders look for defaulted loans and any outstanding government debts when pre-qualifying you. To qualify for a VA loan, you must have been part of the United States Military for 181 days or more, served 90 continuous days during wartime, service six years in the National guard, or have a spouse who was in the military and lost their life during active duty. VA loans typically offer the best interest rates available and, more often than not, require no down payment. VA loans offer great benefits to veterans, giving back to them for their services.
Tips for Buying a Car on Credit
Your credit history, not just your credit score, is the most crucial factor in determining your eligibility for a car loan. Although having a higher credit score is beneficial, it plays a lesser role in the interest rate you'll qualify for. That said, when you apply for a car loan, your credit history is going to be checked, and any problems in your credit history will impact the interest rate you qualify for. For instance, if you have a history of late payments or have had a repossession in the past, getting approved for a loan will be more difficult. Although bad credit or special finance lenders will approve a car loan even with previous repossessions or credit issues, the approval will always come with additional criteria, such as a higher down payment and dealer fees.
In contrast, a good credit score, which is over 680, increases your approval chances and reduces the interest rate charged. The higher your credit score, the lower the interest rates you will be charged, making it in your best interest to improve your credit rating. The table below shows how interest payments correlate with credit scores.
List of Interest Payments by Credit Score:
- Someone with a 720 credit score or above will pay, on average, $5,500 in interest on a loan.
- Someone with a 680 credit score or above will pay, on average, $6,600 in interest on a loan.
- Someone with a 650 credit score or above will pay, on average, $8,100 in interest on a loan.
- Someone with a 615 credit score or above will pay, on average, $10,200 in interest on a loan.
- Someone with a 580 credit score or above will pay, on average, $13,900 in interest on a loan.
- Someone with a credit score of 580 or above will pay, on average, $15,300 in interest on a loan.
To conclude, having equity or a down payment increases your likelihood of securing a car loan and pays lower interest rates as a result of reducing the payment period.
Ways to Improve Your Credit Score
Improving your credit score requires patience and consistent effort. There are several things you can do right now to help boost your credit score, that take little effort. Below are some of the tips that you can follow to improve your credit score:
Open 3-5 revolving credit accounts (credit cards):
Revolving credit cards are a great option to increase your credit scores as it provides a higher chance of approval. Start with a secured credit card such as Open Sky or the Credit Builder Card as they focus on your ability to pay the card on time. Revolving credit can quickly boost your credit score but be sure to pay your balance on time and use it only for small purchases.
Request a credit limit increase:
Requesting a credit limit increase can help lower your credit utilization percentage, which is one of the factors that can hurt your credit score the most. Contact your credit card company and request a "Credit Limit Increase." They will ask for your income and will only agree to it if you have excellent payment history on your credit card, usually between 7-15 months.
Pay down your balances:
Paying off your credit card balances or keeping them low and close to zero is crucial. Aim to use your credit card for small purchases and leave a small balance of $1-$5 on it when paying your bill. If you have high balances, make a plan to pay them off each month with a percentage of your paycheck. Avoid running the balance back up, as it can hinder your credit score.
- Open 3-5 revolving credit accounts (credit cards): Revolving credit cards are a great option to increase your credit scores as it provides a higher chance of approval. Start with a secured credit card such as Open Sky or the Credit Builder Card as they focus on your ability to pay the card on time. Revolving credit can quickly boost your credit score but be sure to pay your balance on time and use it only for small purchases.
- Request a credit limit increase: Requesting a credit limit increase can help lower your credit utilization percentage, which is one of the factors that can hurt your credit score the most. Contact your credit card company and request a "Credit Limit Increase." They will ask for your income and will only agree to it if you have excellent payment history on your credit card, usually between 7-15 months.
- Pay down your balances: Paying off your credit card balances or keeping them low and close to zero is crucial. Aim to use your credit card for small purchases and leave a small balance of $1-$5 on it when paying your bill. If you have high balances, make a plan to pay them off each month with a percentage of your paycheck. Avoid running the balance back up, as it can hinder your credit score.
Remember that building good credit takes time, so it's important to be patient and consistent with your efforts. By following these tips, you can build up your credit score and improve your financial situation.
Insights from Joe
It's common to struggle with bad credit, but taking it seriously and putting in the time and effort to improve your credit can lead to significant changes in your credit score. The cycle of bad credit can be difficult to break, but prioritizing your credit and focusing on your spending habits can lead to success. Start by creating a budget and working on any negative spending habits, as this can have a direct impact on your credit score. This article provides helpful information on credit. If you need guidance or assistance with credit repair, consider contacting our office at www.asapcreditrepairusa.com.