It may come as a surprise to some, but did you know that there are actually 30 different levels of credit scores? Searching for the best credit score can lead to various answers, which can be quite confusing and sometimes even misleading. As someone who has been working in the financial literacy and credit repair industry for 15 years, my aim is to provide you with accurate and unfiltered advice on a range of topics - including credit scores. Over the years, I've helped over twenty thousand clients improve their credit scores, and I hope to equip you with enough knowledge to do the same. So, let's dive in!
Contents:
Different Types of Credit Scores and Their Models
Understanding Good Credit Scores
What is the Ideal Credit Score for Purchasing a House?
Credit Score for Buying a Car
Assistance with improving your credit score
Advice from Joe on Credit Improvement
Different Types of Credit Scores and Their Models
When it comes to credit scores, there are two primary models: the FICO model and the Vantage model. It's essential to understand them to comprehend how they calculate your credit scores and their differences.
FICO Credit Score Model
The FICO model is the most prevalent scoring method, with eight different models (FICO 2 to FICO 10). Many FICO models may generate different credit scores depending on your credit report. When you apply for loans or credit, various lenders use different FICO reports depending on their preferences. For example, if you apply for a mortgage, you'll commonly receive the FICO 5 report, compared to the FICO 8 report used by credit card companies. The reason behind these different scoring models is that each credit report has a different "weight." The essential factors that impact your credit scores will have a more significant influence than others. For example, previous mortgage history carries more weight for a FICO 5 mortgage report than others. The FICO 8 report primarily considers previous credit card history. Moreover, auto lenders favor the FICO-2 report, which evaluates your previous auto history. You can visit www.myfico.com to create an account and view a visual representation of your FICO scores.
Vantage Credit Score Model
The Vantage model is a recent scoring model created by Equifax, Experian, and TransUnion, the three major credit reporting agencies. Vantage was developed as competition for the FICO scoring system, which has been used since the seventies. Although FICO still dominates the lending sector, the Vantage model is gaining popularity in some sectors, such as personal loans and auto lending. Though the Vantage score is accurate, its contextual accuracy depends on the question. It is not widely used for lending purposes. Therefore, it cannot accurately predict your real lending score. It can only give you a rough idea of your overall FICO score since FICO scores are challenging to obtain without paying or having a lender pull your credit report. In the next 5-10 years, the Vantage scoring model is expected to be widely used by lenders across the country due to its modern standards. Credit reporting agencies have the most significant data collection outside of social media companies; thus, they can provide the best scoring data available. The FICO scoring model is becoming more outdated and does not represent users' credit scores transparently.
Understanding Good Credit Scores
Both the FICO and Vantage models rate your credit score between 350 and 850, where 850 is the best credit score and 350 is the worst. It's essential to be mindful of where you stand in your credit-building journey while setting goals to achieve a high score. Take note of these score thresholds:
620 or below
If your score falls in this range, it's considered bad credit. You likely have some adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your score, make timely payments and keep ten active revolving credit accounts. Consider secured credit cards like Credit Builder Card or OpenSky Credit Card. Once you reach 620, you're good to qualify for an FHA home mortgage.
640-680
If your score falls in this range, it's classified as fair for good credit. It means you've established credit, but you may have derogatory marks or accounts on your record. You may also have high balances on your credit cards. A recent addition to your credit accounts could temporarily reduce your score. Keep in mind that this is temporary, and your score will bounce back.
740+
A score over 740 is considered "super-prime." It represents the top 20% of the US population with the highest credit scores. Having a score in this range will give you the best interest rates for most loans. If you fall in this group, congratulations! Keep up the excellent work by paying your accounts on time and ensuring you stay on top of your revolving credit card accounts. You'll be in excellent financial shape.
What is the Ideal Credit Score for Purchasing a House?
Before you can determine an ideal credit score to buy a house, you need to know the type of mortgage loan you're looking to qualify for. Most traditional mortgage loans have similar requirements and guidelines due to federal regulations and government backing, but not necessarily identical ones. Generally, there are three main types of mortgage loans: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and viable home loan options besides VA loans. Private mortgage insurance (PMI) is not compulsory for this type of loan, unlike other loans, which might result in extra costs that increase the downpayment or monthly payment. This insurance protects the lender from any financial loss if you stop paying your loan installment. Additionally, conventional loans offer low downpayment requirements and better interest rates than other loans. However, to qualify for a conventional mortgage loan, you need at least a credit score of 640 and a debt-to-debt ratio that does not exceed 43%.
2. FHA Loan
FHA loan is considered for people with low credit scores. The credit score required for FHA loans is usually between 580 and 619 depending on the different loan programs available. To get the best financial option, choose a lender that suits your preference and budget. Unlike conventional loans, the FHA loan requires you to maintain PMI for at least 11 years, and this could result in more expenses to cover in your mortgage. The indebtedness limit for FHA loans is relatively high (up to 50%), enabling you to purchase more houses with a lower income. You can make down payments as low as 3.5% of the purchase, but you will pay higher interest rates.
3. VA Loan
VA loan doesn't technically require a credit score, but they will verify your defaults loans and any past-due debts to ensure you're a good candidate for pre-qualification. To qualify for a VA loan, you must have served in the United States Military for more than 181 days, served 90 consecutive days during wartime, or served six years in the National Guard. Spouses of military personnel who lost their lives on active duty may also qualify for the VA loan. These loans have the best interest rates available and typically no downpayment requirement. The VA loan is a great way to pay back our veterans for their sacrifice and service to the nation.
Credit Score for Buying a Car
When it comes to buying a car, your credit history is a more critical factor in determining what loan you qualify for, not your credit score. Although a higher credit score is advantageous, the interest rate you qualify for depends on your credit history. If you've had credit issues in the past, lenders evaluate your previous and current credit history to assess the risk involved in extending credit. For instance, if you have a record of late payments, repossession, or bankruptcy, getting approved for a loan will be more challenging compared to someone with a good credit history. Even if you have a poor credit score, lenders may qualify you for a car loan, with conditions such as a higher down payment, additional dealership fees, or higher interest rates. Moreover, having equity in your car or a down payment can improve your negotiating power when buying a car on credit.
Credit Score Range for a New Car
The credit score range for approval varies because lenders consider multiple factors during the approval process. Nevertheless, a credit score over 680 is ideal for securing a lower interest rate. Scores below 680 increase the interest rate you're charged due to the risks you pose to the lender. The data above shows how a credit score affects the interest you pay on a car loan. For instance, someone with a credit score of 720 or above may pay an average of $5500 in interest on a loan compared to someone with a score of 580 or below who may pay $15,300 in interest. The lower your credit score, the higher the interest rate you pay, ultimately affecting your credit score.
Assistance with improving your credit score
Improving your credit score is possible with some effort and patience. Building up a good credit score takes time, and impulsive decisions can only make it worse. However, there are a few things you can do to improve your credit score right away, such as:
Opening 3-5 revolving credit accounts (credit cards)
Revolving credit makes up around 30-35% of your overall credit score and can help build it quickly. A secured credit card like Open Sky or Credit Builder Card is recommended as they focus more on your ability to pay rather than your credit score. It's crucial to keep the balance at $5-10 and only use it for small purchases.
Increasing your credit limit
You can request a credit limit increase for your credit cards to lower your credit utilization percentage. The process for raising your credit limit varies depending on your credit card company, but usually requires some information like your income and excellent payment history.
Paying down your balances
To keep your credit score in good shape, it's crucial to keep your balance low and close to zero. Leaving about a $1-5 balance on your credit card when paying your bill is a good practice. If you have high balances, make a game plan to pay them down with a certain percentage of your paycheck each month and eventually stop relying on them.
Advice from Joe on Credit Improvement
Let’s face it, many of us have struggled with maintaining a good credit score. However, it is important to take your current credit situation seriously and dedicate the necessary time and effort towards improving your credit. Rather than falling into the trap of perpetual bad credit, dedicate yourself to developing a solid credit score – the effort is well worth it. The key to success in credit repair is to prioritize your credit and spending habits. Developing a realistic budget and taking steps to address any negative spending patterns will have a direct correlation to your credit score. This article serves as a helpful guide to understanding credit. Should you require further assistance with credit repair or improving your credit score, don’t hesitate to reach out to my office at www.asapcreditrepairusa.com.