Are you aware that your credit score has 30 different levels? Many people are unaware of this fact, and when they try to search for the best credit score, they usually come across a variety of answers from Google. Unfortunately, most of the information available online can be both confusing and misleading, leading people down a complicated and uncertain path. My name is Joe Mahlow, and I have spent over fifteen years working in the financial literacy and credit repair industry. My mission is to provide authentic and unbiased advice on various subjects, such as credit scores. In my time, I have been able to assist over twenty thousand clients in improving their credit scores, and I hope to offer you the same valuable insights. So, let's dive into the topic at hand.
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Credit Scores
A Suitable Credit Score to Secure a Mortgage Loan
Determining the Qualifying Factors for a Car Loan
Ways to Increase Your Credit Score
Joe's Advice on Credit Improvement
Different Types of Credit Scores: FICO and Vantage
Credit scores are a crucial aspect of your financial life. They are used by lenders to assess your creditworthiness and determine your eligibility for loans, credit cards, and other financial products. Two major credit scoring models - the FICO model and the Vantage model - are widely used in the financial industry to calculate credit scores. Understanding these models is essential, especially when it comes to the differences in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most commonly used in the United States. There are eight different FICO models, ranging from FICO 2 to FICO 10, each calculating your creditworthiness differently. Your credit score may vary depending on which FICO model the lender uses to pull your credit report. For instance, a mortgage lender will most likely use the FICO 5 credit report to evaluate your creditworthiness, while a credit card company is likely to use your FICO 8 credit score.
Why So Many FICO Scores?
Each FICO score is tailored to a specific lending sector. Factors critical to the lender have a more significant impact on the credit score than less important factors. For example, if you have a great payment history on a previous mortgage, it will weigh more heavily in your favor when it comes to the FICO 5 mortgage score. Credit card companies typically use FICO 8 scores, and your previous credit card history will impact this score the most. Auto lenders usually pull FICO-2 scores, and your previous auto history will carry more weight in this score.
To get a better representation of your different FICO scores, visit www.myfico.com and sign up for a free account.
Vantage Credit Score
The Vantage score was developed by the three major credit reporting agencies - Equifax, Experian, and TransUnion - as an alternative to the FICO score. While FICO has been used since the 1970s, Vantage is a newer scoring model gaining popularity in some sectors, such as personal loans and auto lending. It is frequently used by credit monitoring websites to provide users with a free copy of their credit report.
Is the Vantage Score Accurate?
While the Vantage score can provide a broad idea of your creditworthiness, it may not be accurate when it comes to actual lending scores. Since FICO is the most recognized scoring model among lenders, Vantage's accuracy can vary. However, the Vantage score can give you a general idea of your overall scores. I advise using your Vantage score to assess your creditworthiness until you can obtain your FICO score.
It's possible that lenders may widely use the Vantage scoring model in the future, given its ability to provide the best scoring models based on today's standards. In contrast, the FICO scoring model may be viewed as outdated and not as complete an indicator of creditworthiness. Remember, credit reporting agencies play a significant role in collecting data and providing accurate scoring data, similar to social media companies. Therefore, they may continue to be the best source of information on credit scores in the future.
Understanding Credit Scores
Credit scores are crucial when it comes to qualifying for loans or mortgages. The two main models, FICO and Vantage, have scores ranging from 350 to 850. A higher score is always better, and it's essential to know where you stand in your score to improve it. Here are some vital score thresholds you should be aware of:
620 or Below:
A score below 620 is considered bad credit. You may have some adverse credit history or high-balance credit card accounts, which is why it's best to have ten active revolving credit accounts open. You can improve your score by making timely payments and using secured credit cards such as Credit Builder Card or OpenSky Credit Card. Once you reach the 620 score range, you can start qualifying for an FHA home mortgage.
640-680:
Scores in this range are considered fair for good credit. It typically means you have established credit but may have derogatory marks, high balances on your credit cards that you need to pay down, or newly opened accounts, which can temporarily affect your scores.
740+:
Credit scores above 740 are considered "super-prime" and give you the best interest rates. Congratulations if you have a 740+ credit score as you are part of the 20% of the US population with this score. To maintain this score, pay your accounts on time and keep your revolving credit card accounts paid. Keep up the great work!
A Suitable Credit Score to Secure a Mortgage Loan
The ideal credit score for obtaining mortgage loans varies based on the loan type and the lender's regulations. Most loan requirements, while not identical, remain similar in terms of criteria because of government backing and federal regulation. The most frequently used mortgage loans are conventional, VA, and FHA loans.
Conventional Loans
Conventional loans are the most popular and affordable loans available, other than VA loans. Additionally, conventional loans do not require you to maintain private mortgage insurance (PMI). PMI is an added cost that could increase your down payment or monthly premiums. PMI exists to safeguard the lender in case you default on your loan. You can obtain a conventional loan with a credit score of at least 640 and a debt-to-income ratio of 43%. Conventional loans also have lower down payment requirements and interest rates than other loans.
FHA Loans
FHA mortgage loans are tailored for individuals with lower credit scores, typically ranging from 580 to 619. Consider checking out several lenders who offer different loans and financial options if you meet the credit score threshold. FHA loans mandate PMI payments for at least eleven years. Consequently, this added cost is something to factor in if you're on a tight budget. It typically has a greater debt-to-income limit, reaching up to 50%. As a result, you may be eligible to purchase more homes on a lower income than with a traditional loan. Finally, FHA loans call for much lower down payments at 3.5% of the purchase sum. However, the interest rate is generally higher than that of conventional loans.
VA Loans
The minimum credit score required for VA loans is not fixed, but they will assess if you defaulted on any loans or have outstanding government debts when pre-qualifying you. You must have served the United States Armed Forces for at least 181 days, been in service for 90 uninterrupted days during a time of war, or served in the National Guard for six years. Alternatively, suppose you served in the military and lost your spouse during active service. In that case, you may also be eligible for a VA loan. The VA loan provides the most favorable interest rates and typically does not require a down payment, making it an ideal choice for veterans.
Determining the Qualifying Factors for a Car Loan
When applying for a car loan, credit history is a crucial factor in determining eligibility, rather than just the credit score. While a higher credit score holds some importance, the interest rate for a loan depends on a range of criteria. Lenders evaluate your previous and present credit histories to determine the risk involved in extending credit. An individual who has had issues with previous auto loans, including late payments or repossession, may have difficulty getting approved, compared to someone with a clean history. Interestingly, even if you have a poor credit history, certain dealerships or specialized finance lenders will approve you for a loan. However, you will have to meet specific criteria, like a higher down payment or additional fees to the dealership, to lessen their risk of default. When purchasing a vehicle on credit, it is recommended to have equity or a down payment to have more leverage.
Credit Score Range for Car Loans
While there's no specific credit score that guarantees approval for a car loan, a score of over 680 is ideal. If your score falls below it, then you might be charged a higher interest rate. The credit score isn't the only determining factor, and several other factors come into play, as discussed earlier. The amount of interest you are charged also depends on the credit score, and data suggests that individuals with a higher credit score pay less interest. For example, someone with a credit score of 720 and above would pay around $5,500 in interest, while an individual with a credit score of 580 or above would pay up to $15,300 in interest. Therefore, a higher credit score can significantly impact the interest you pay in the long run.
Ways to Increase Your Credit Score
Improving your credit score can be a straightforward task with the right approach and mindset. Although it takes time to build a strong credit score, there are various measures you can undertake to boost your score. The key is to be patient and take proven steps to avoid irrational decisions that may make your situation worse.
Here are some things you can do to improve your credit score:
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Open up to three to five revolving credit accounts:
Revolving credit, such as credit cards, is an excellent way to help maximize your credit scores. Limited or damaged credit history may make it difficult to obtain a large loan. Therefore, revolving credit offers the best chance of approval. Secured credit cards like Open Sky or Credit Builder Card are great options since they focus more on your payment history and income than your credit score. This approach can increase your overall credit score by 30-35%, but be patient as it may take 2-4 months to see the effects. Make sure to pay your balance on time and limit your usage to small purchases like gas or groceries.
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Request a credit limit increase:
Restricting your credit card usage is vital to avoid high credit-utilization rates that may negatively impact your credit score. Requesting a credit limit increase can help lower this rate, but different companies have varying rules. Reach out to your credit card provider and ask to fill out an application for a credit limit increase that usually considers your excellent payment history.
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Keep your balance low and reduce your debts:
Maintaining a low balance on credit cards is critical because high balances impact credit scores negatively. If you are unable to pay off your credit card debts at once, make a plan to pay it off over time, and reduce your usage. Carry a minimal balance of between $1-5 to show payment history positively. This approach will help limit your credit card usage and avoid paying high-interest rates that may mainly go towards interest than the principal.
Joe's Advice on Credit Improvement
Undeniably, many of us have experienced having less than ideal credit. However, improving your credit situation requires dedication and perseverance. Instead of falling for the notion that good credit is impossible to attain, focus on developing positive spending habits which are crucial in enhancing your credit score. With time and effort, your credit score will significantly improve, redefining your financial standing. As a starting point, create and adhere to a realistic budget while working towards eliminating poor spending habits. For more insights on credit repair and guidance, do not hesitate to contact Joe's office at www.asapcreditrepairusa.com.