It’s fascinating to learn that there are 30 varying levels of credit scores. Most people are oblivious to this fact and are often perplexed when searching for the best credit score online. The internet is a vast and confusing place, and it’s easy to be misled by inaccurate information. My name is Joe Mahlow, and as someone who has worked in the financial literacy and credit repair industry for over 15 years, it’s my aim to give you unbiased advice on various topics, including credit scores. Over the years, I’ve helped more than 20,000 clients improve their credit scores, and my goal is to provide enough useful information to help you do the same. So let’s dive right in!
Contents:
Understanding the Different Types of Credit Scores
Determining a Good Credit Score
What Credit Score Do You Need to Buy a Home?
Determining Your Creditworthiness When Buying a Car
Tips for Improving Your Credit Score
Final Thoughts from Joe: Improving your Credit Score
Understanding the Different Types of Credit Scores
Credit scores play a critical role in determining your financial future. However, not everyone knows that there are different types of credit scores that lenders use. In this article, we will discuss the two most popular credit scoring models: FICO and Vantage.
FICO Credit Score
FICO is the most widely used credit scoring model worldwide. With eight FICO models (from FICO 2 to FICO 10), lenders can pull different credit reports depending on the type of credit you are applying for. For instance, mortgage lenders usually pull FICO 5, while FICO 8 is commonly used by credit card companies. Each FICO scoring model assigns a different weight to the critical factors for lending decisions. If you want to see all your different FICO scores, sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score is a newer credit scoring model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion). Vantage gives a free copy of your credit reports and is gaining popularity in some sectors, such as personal loans and auto lending. While Vantage is pretty accurate, FICO remains the most recognized scoring model in the lending sector. However, it is worth keeping an eye on the Vantage score, as it is a useful tool to give you a general idea of your FICO score.
In conclusion, credit reporting agencies have the most comprehensive collection of data about your credit history, and they have the upper hand in providing the best scoring data. Lenders nationwide may widely use the Vantage scoring model in the future, primarily because it provides the best-scoring models based on today's standards. The FICO scoring model may be outdated and doesn't provide a clear representation of your credit scores readily.
Determining a Good Credit Score
Credit scores for both FICO and Vantage models range from 350 to 850, with 350 being the lowest possible score, and 850 being the highest. When striving to achieve the best scores, it is critical to understand where you stand in the process of building credit. Here are some essential score thresholds to keep in mind:
1. 620 or below:
This is generally considered a poor credit score. If your credit falls below this mark, you likely have some adverse credit history or high-balance credit card accounts. You can improve your credit scores by having ten active revolving credit accounts open and making timely payments. Two great options for building credit include the Credit Builder Card or OpenSky Credit Card. Having a score of 620 or higher will allow you to qualify for an FHA home mortgage.
2. 640-680:
Scores within this range are considered fair to good. If your score falls here, you likely have established credit, but you may have some derogatory marks or accounts, as well as high balances on your credit cards. Newly opened accounts may also impact your scores. While temporary, don't panic if your score drops temporarily.
3. 740+:
A score of 740 or higher is considered "super-prime" and entitles you to the best interest rates for most loans. If your credit score is in this range, you're part of the 20% of the US population with this score! Keep up the great work, make timely payments, and continue to responsibly manage your revolving credit card accounts, and you'll be in excellent financial shape.
What Credit Score Do You Need to Buy a Home?
The credit score you need to buy a home varies depending on the type of mortgage loan you are applying for. There are three common types of mortgage loans: conventional, FHA, and VA loans. Each of these loans have different requirements and guidelines, which are regulated by the federal government.
Conventional Loans
Conventional loans are a popular option and usually offer better interest rates and lower down payment requirements compared to other mortgage loans. With a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%, conventional loans do not require private mortgage insurance, which can increase the cost of your downpayment or monthly payment.
FHA Loan
An FHA mortgage loan is designed for people with lower credit scores, typically between 580 and 619. However, loan programs differ, so it is best to shop around for different lenders to find the best financial option for you. While this loan allows for a lower down payment, as low as 3.5% of the purchase price, PMI is required for at least 11 years and interest rates may be higher.
VA Loan
If you've served in the United States Military for at least 181 days, or meet other eligibility criteria, you may qualify for a VA loan which typically provides the best interest rates available and does not require a down payment. While there isn't a specific credit score requirement, lenders look at your past financial history, including any defaulted loans or government-owed debts. The VA loan is a great option for those who have served our country.
Determining Your Creditworthiness When Buying a Car
When you're in the market for a car, your credit history is the cornerstone of the decision-making process rather than the score itself. While a high credit score is vital, it's only a small contributing factor to the interest rate you'll be offered.
To be more specific, when you seek a car loan with credit problems, lenders examine your past and present credit histories to measure the risks associated with lending you money. For instance, getting approval for a loan might be more manageable for a person who has never missed a payment and has a spotless credit history, while someone with a track record of late payments, repossession, or default might face a more significant challenge.
People with poor credit or other financial issues can still qualify for a car loan, but the qualification criteria become more stringent and come with added costs, such as higher down payments and fees that dealerships charge to get you approved. These dealerships may also ask you to choose a car with a higher markup, so they can recoup the fees they paid to approve you for the loan.
If you seek to purchase a vehicle on loan, it's essential to have equity in the form of a down payment. While there is no definitive credit score for approval, a credit score of over 680 is ideal, as lower scores raise the interest rate, and thus you pose a more significant risk to the lenders.
Consider these loan interest averages based on credit scores below to understand the impact:
1. Someone with a 720 credit score or above pays an average interest of $5,500 on a loan.
2. Someone with a 680 credit score or above pays an average interest of $6,600 on a loan.
3. Someone with a 650 credit score or above pays an average interest of $8,100 on a loan.
4. Someone with a 615 credit score or above pays an average interest of $10,200 on a loan.
5. Someone with a 580 credit score or above pays an average interest of $13,900 on a loan.
6. Someone with a credit score of 580 or above pays an average interest of $15,300 on a loan.
The above data indicates that the lower your credit score, the higher the interest rate, potentially worsening your credit history.
Tips for Improving Your Credit Score
Improving your credit score is a gradual process that requires patience and effort. Rushing the process may lead to bad decisions that can make the situation worse. Here are some essential steps you can take to boost your credit score:
1. Open 3-5 revolving credit accounts
Having revolving credit accounts, such as credit cards, is one of the best ways to maximize your credit scores. It's easier to get approval for a credit card than a large loan, which is ideal for someone with limited credit or looking to rebuild their credit. Aim for a secured credit card that focuses on your payment ability, such as Open Sky or Credit Builder Card. Revolving credit comprises 30-35% of your overall credit score and can help you build credit quickly. Use your credit card for small purchases and make sure to pay your balance on time while keeping it between $5-10 each time.
2. Raise your credit limits
Request a credit limit increase for your active revolving credit cards to boost your overall credit limits and lower your utilization percentage. If your credit card balances exceed 30% of your overall limits, it can have a negative impact on your credit score. You can apply for a credit limit increase online or by calling your credit card company. They will assess your income and payment history before considering your request, so ensure that you have 7-15 months of excellent payment history.
3. Pay down your balances
Keeping your credit card balances low and close to zero is crucial. You can use your credit card for small purchases, but avoid running the balance back up. Leave around $1-5 balance on your credit cards when paying monthly bills. If you have high balances, make a plan to pay them down gradually. However, do not use the credit card while paying down the balance, or all your payments will go towards the interest, not principal. Remember to limit your credit card usage, as it plays a significant role in your overall credit score.
Final Thoughts from Joe: Improving your Credit Score
We've all experienced the challenges of having a less-than-perfect credit score. However, if you're willing to commit to working on your financial habits and credit score, you'll begin to see significant improvements in no time. Far too many individuals with bad credit give up and assume that building good credit is impossible. The truth is, it takes dedication and effort to achieve a healthy credit score, but it's completely attainable. Prioritizing your credit and carefully monitoring your spending habits is the key to success. Establish a budget and focus on improving any bad habits that may be holding you back. By doing so, you'll quickly notice improvements in your credit score. For additional guidance on credit repair, do not hesitate to contact my office today at www.asapcreditrepairusa.com.