It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Despite this fact, many people are unaware and instead rely on a Google search to determine what constitutes a "good" score. Unfortunately, this often leads to confusion and even misinformation. As someone who has spent 15 years working in financial literacy and credit repair, I understand the importance of providing clear and accurate advice to those looking to improve their credit. Throughout my career, I've been able to guide over 20,000 clients towards transforming their credit scores, and my goal now is to do the same for you. So, let's dive into this topic and explore everything you need to know about credit scores.
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores: What Determines Good Credit?
Credit Score Requirements for Mortgage Loans
Determining the Credit Score Range to Purchase a Car
Tips for Improving Your Credit Score
Insights from Joe: Tips for Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage Models
There are two primary types of credit scoring models: FICO and Vantage. It's essential to understand both since they calculate your credit score differently.
FICO Credit Score Model
The FICO model is the most widely used and recognized. With eight FICO models—FICO 2 to FICO 10—it's not uncommon to get a different credit score based on your credit report. FICO scores vary depending on the type of lender and inquiry on your credit report. For example, if you apply for a mortgage, your mortgage lender will likely pull your FICO 5 report. However, if you apply for a credit card, they'll most likely request your FICO 8 report. This is because each credit report has a different weight, depending on factors that are critical to the lender.
Why So Many FICO Scores?
Each FICO scoring model weighs credit factors differently. For instance, if you have an excellent payment history on a previous mortgage, it will weigh more in your favor score-wise than if you had no previous mortgage history or negative history. Auto lenders typically pull FICO 2 reports, with previous auto history bearing more weight in the scores. Meanwhile, credit card companies use FICO 8 scores, primarily based on previous credit card history.
To view your different FICO scores, sign up for an account at www.myfico.com.
Vantage Credit Score Model
The Vantage model is a newly developed credit scoring model by the three major U.S. credit reporting agencies to compete with FICO. Although FICO dominates the lending sector, the Vantage scoring model is gaining popularity in sectors such as personal loans and auto lending. Credit monitoring websites in the U.S frequently use Vantage to provide you with a free copy of your credit report.
Is the Vantage Score Accurate?
Although the Vantage Score is accurate, it's not widely used for lending. Therefore, it won't give you an accurate lending score. To obtain an accurate idea of your credit score overalls, try the Vantage scoring model as an excellent "general idea." Remember, credit reporting agencies hold the most significant data collection power outside social media companies. As they have the data, they have the upper hand in providing the best scoring data.
I believe that the Vantage scoring model will become more widely used for lending purposes in the next 5-10 years, as it provides the best scoring data based on today's standards. The FICO scoring model is outdated and doesn't provide a clear representation of your credit score.
Understanding Credit Scores: What Determines Good Credit?
The FICO and Vantage models both rate credit scores on a scale from 350 to 850, where 850 is the highest and 350 is the lowest. Your score goal should be the highest possible, and it's crucial to understand the following score thresholds to stay on track:
1. 620 or below:
A score this low is considered bad credit and usually means a history of adverse credit, high-balance credit card accounts, or a lack of credit card accounts. Active revolving credit accounts and timely payments can help you improve your scores. Secured credit cards like Credit Builder Card or OpenSky Credit Card are excellent options to boost your credit. Once your score reaches 620, you could become eligible for an FHA home mortgage.
2. 640-680:
A score between 640 and 680 is considered fair for good credit. It indicates you have established credit but may have derogatory marks or high balances on your credit cards that need to be paid off. Newly opened accounts may also cause temporary drops in your scores, so don't panic if your scores have recently decreased.
3. 740+:
A score above 740 is considered "super-prime" and is indicative of the best interest rates for most loans. Congratulations if you have a score over 740! You are in the top 20% of the US population with this score. Continuously paying your accounts on time and keeping your revolving credit card accounts in good standing will help you maintain this excellent score.
Credit Score Requirements for Mortgage Loans
The answer to the question of what credit score is good enough to buy a house mostly depends on the type of mortgage loan you want to qualify for. The eligibility criteria and guidelines for mortgage loans vary according to the type of loan, such as conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular type of mortgage loans and generally the best when it comes to savings, outside of VA loans. These loans do not require Private Mortgage Insurance (PMI), which is an additional cost that could increase your monthly payments or down payment. The credit score requirements for conventional loans are usually a minimum of 640 and a maximum debt-to-income ratio of 43%.
2. FHA Loan
FHA loans are designed for lower credit scores, typically between 580 and 619, but these requirements can vary depending on the lender. FHA loans do require PMI, which lasts for a minimum of 11 years, so it's important to keep this in mind when considering your budget. Another notable feature of this loan is that the debt-to-income ratio limit can be as high as 50%, allowing you to purchase a more expensive home with a lower income. The down payment requirements for this loan are as low as 3.5% of the purchase price, but the interest rates are usually higher than for conventional loans.
3. VA loan
VA loans do not have a specific credit score requirement, but they do have some qualifying criteria based on your previous financial history. To qualify for these loans, you must have served in the military for a certain amount of time or be the spouse of someone who has. The VA loans typically have the best interest rates, and they usually do not require a down payment, making them a great option for veterans and their families.
Determining the Credit Score Range to Purchase a Car
When considering purchasing a car, your credit history plays a more significant role than your credit score. Having a higher credit score is important, but it influences the interest rate less than your credit history. Before approving a car loan, lenders first investigate a borrower's credit histories, such as their previous and current track record of repaying loans. Late payments, defaults, or repossession on an existing or past auto loan may make it more difficult to get approval for a loan, compared to individuals with a clean record. Even if previous repossessions occurred, bad credit or special finance lenders might still qualify anyone for a car loan but may require more payment up-front and additional dealership fees. Dealerships may select the car you get approved for to make a higher markup and help offset the lending risk. Lastly, having downpayment or equity raises a buyer's bargaining power for purchasing a vehicle on credit.
Credit Score Range for a New Car
There is no specific credit score required for approval; there are numerous factors to consider, as outlined above. However, having a credit score of over 680 is ideal for getting a lower interest rate. Purchasers with scores less than 680 encounter higher interest rates because they pose a higher risk to lenders. The data below shows how the interest charged on loans is affected by credit scores:
1. A credit score of 720 or above will accrue an average of $5,500 in interest payments.
2. A credit score of 680 or above will accrue an average of $6,600 in interest payments.
3. A credit score of 650 or above will accrue an average of $8,100 in interest payments.
4. A credit score of 615 or above will accrue an average of $10,200 in interest payments.
5. A credit score of 580 or above will accrue an average of $13,900 in interest payments.
6. A credit score of 580 or below will accrue an average of $15,300 in interest payments.
Thus, the high or low-interest rates charged on loans are based on credit scores, making good credit even more crucial.
Tips for Improving Your Credit Score
Improving your credit score doesn't have to be an overwhelming task. While it does take time to build a good credit score, taking a few simple steps can help you see improvement quickly. The most important things to keep in mind are patience and discipline. Here are some tips that you can implement right now to start improving your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit accounts, such as credit cards, are a great way to build your credit score. They're easy to obtain and use, even for those with limited credit. We recommend starting with a secured credit card that focuses on your ability to pay on time, rather than just your credit score. Revolving credit makes up 30-35% of your overall credit score, so it's an excellent way to start improving your scores quickly.
2. Raise your limits:
Increasing your credit limits can help lower your credit utilization percentage, which is a factor that can negatively affect your credit scores. Contact your credit card company to inquire about a credit limit increase. They may require some additional information, such as your current income, and want to see a history of excellent payment on your credit card before agreeing to increase your limit.
3. Pay down your balances:
Keeping your credit card balances low is essential. I recommend using your credit cards for small purchases only and paying them off each month. If you have high balances, make a plan to pay them down over time rather than all at once. Remember that your credit card usage habits have a significant impact on your overall credit score, so it's crucial to limit your credit card usage.
By following these tips, you can start improving your credit score today. Remember, building a good credit score takes time and discipline, so be patient and consistent in your efforts.
Insights from Joe: Tips for Improving Your Credit Score
We've all been in a situation where our credit score hasn't been the best. However, if you're serious about improving your credit score, it requires time and effort on your part. Sadly, many people believe that it's impossible to improve their credit score and continue down the spiral of bad credit. But by prioritizing your credit and focusing on your spending habits, you'll be on the way to a better credit score in no time. Creating a budget and identifying any bad spending habits are great places to start. These steps will directly impact your credit score. For more information on how to improve your credit score or credit repair, please contact my office at www.asapcreditrepairusa.com.