Were you aware that there are 30 different levels of credit scores? The majority of people are unaware of this when they begin searching for the best credit score, and more often than not they receive various and often confusing information from Google. In fact, some of the data may even be misleading enough to lead you astray. My name is Joe Mahlow and I've been entrenched in the world of financial literacy and credit repair for well over fifteen years. My ultimate aim is to give you honest guidance on various topics, such as credit scores. Having already assisted more than twenty thousand clients in improving their credit scores, I'm hoping to be able to provide you with enough information to do the same. Let's dive in.
Contents:
Different Credit Scoring Models: FICO vs Vantage
Good Credit Score Ranges
What Credit Score is Needed to Buy a House?
Credit History Plays a Decisive Role in Determining Car Loan Eligibility
Ways to Improve Your Credit Score
Improving Your Credit Score: Insights from Joe
Different Credit Scoring Models: FICO vs Vantage
Credit scores are essential when it comes to lending decisions. Two different credit scoring models to understand are the FICO model and the Vantage model. While FICO is the most prevalent credit scoring model, there are eight different FICO models. So, depending on the lender you use, they will pull a different FICO report. For example, a mortgage lender typically pulls a FICO 5 credit report, while a credit card company mainly uses the FICO 8 report. The Vantage Score, on the other hand, was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. Although the Vantage Score is not widely used for lending purposes, it is gaining popularity in some sectors like personal loans and auto lending.
FICO Credit Score
The FICO model is the most popular and widely used model and consists of eight different FICO models. FICO 2 to FICO 10 have differences in how they calculate your credit score. Although this may be confusing, each report has a different "weight" depending on the factors a lender considers most important. For instance, FICO 5 mortgage report's critical factor is previous mortgage history. Therefore, if you have a great payment history on a previous mortgage, it will weigh more in your favor score-wise than if you had none or negative history. FICO 8, primarily used by credit card companies, weighs heavily on your previous credit card history, and for auto lenders, they typically pull Fico-2 reports, and similarly, your previous auto history will impact your score the most.
For a better visual representation of your different FICO scores, go to www.myfico.com and sign up for an account to view all of your different credit scores.
Vantage Credit Score
The Vantage model was developed to compete with the FICO model. It is a new model compared to the FICO model and is gaining popularity in some sectors like personal loans and auto lending. Credit monitoring websites throughout the United States frequently use Vantage to provide you with a free copy of your credit reports. Although it is not widely used for lending purposes, the Vantage Score is an accurate representation of your overall credit score compared to FICO.
While Vantage and FICO have differences in how they calculate your credit score, it is important to note that a credit score is only as accurate as your ability to obtain a loan, and since FICO is the most recognized scoring model, Vantage's accuracy can vary. However, the Vantage Score is still a good “general idea†of your FICO score. Thus you can use your Vantage score to give you a good idea of roughly where your overall score is.
Given that credit reporting agencies hold the most significant data collection outside social media companies, Vantage may become widely used in the next 5–10 years. The FICO scoring model is outdated and doesn’t give users a clear representation of their credit scores.
Good Credit Score Ranges
Credit scores are measured using both the FICO and Vantage models. Both models have a range of scores from 350 to 850. The best score is 850, and the worst is 350. It's crucial to identify where you stand when working on improving your score. Here are some score guidelines to help you along the way:
1. 620 or below
A score of 620 or below is considered bad credit. If this is your score range, you may have high-balance credit card accounts, no credit cards at all, or some adverse credit history. One of the best ways to improve your credit score is to have timely payments and ten active revolving credit accounts. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can help you build your credit. Once you reach a 620 credit score, you can qualify for an FHA home mortgage.
2. 640-680
A score between 640-680 is considered fair for good credit. Scores in this range suggest you have an established credit history, but you may also have derogatory marks on your accounts, high balances on your credit cards, or newly opened accounts that temporarily drop your scores.
3. 740+
A score over 740 is considered "super-prime" and will give you 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. Always make timely payments, and maintain balances on your revolving credit card accounts.
What Credit Score is Needed to Buy a House?
The minimum credit score required to qualify for a mortgage loan will vary depending on the type of loan you are seeking. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
This is the most popular type of mortgage loan. The credit score requirement for a conventional mortgage loan is typically 640, and the maximum debt-to-income ratio is 43%. One major advantage of a conventional loan is that it doesn't require private mortgage insurance (PMI), which can be an added expense. Additionally, conventional loans usually offer lower interest rates and downpayment requirements.
FHA Loans
The FHA loan is designed for borrowers with lower credit scores. The minimum credit score required is typically between 580 and 619. However, many lenders offer different options, so it's important to shop around. Keep in mind that an FHA loan requires you to have PMI for at least 11 years and has a higher debt-to-income ratio of up to 50%. While the downpayment requirement for an FHA loan is low, at just 3.5%, the interest rate is generally higher.
VA Loans
VA loans don't have a minimum credit score requirement, but the lender will look at your credit history to check for previous defaulted loans and government-owed past-due debts. To qualify for a VA loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or be the spouse of a military member who lost their life during active duty. VA loans typically offer the best interest rates and do not require a down payment. This loan is a great benefit for our veterans.
Credit History Plays a Decisive Role in Determining Car Loan Eligibility
While your credit score is important when buying a vehicle, lenders look beyond that and consider your credit history, both past and present, to gauge your creditworthiness. Lenders are cautious to approve a loan if you have a record of late payments, repossession, or bankruptcy. People with a less-than-ideal credit score are more risk-prone, which results in them paying higher interest rates on car loans. However, bad credit or special finance lenders are open to qualifying almost anyone, including those with a history of repossession, albeit with some specific terms that must be met. They may ask for a higher down payment or additional fees to extend loans. On the other hand, having equity or a down payment can give you an edge when bargaining for a car loan.
The Credit Score Range for a New Car
While there isn't any magic credit score to guarantee approval, a score above 680 is considered ideal when buying a car. Anything lower than that increases the likelihood of getting a higher interest rate. Credit scores directly impact the interest rates, and it can be seen from the figures below. A higher credit score will result in a lower interest rate payable.
A credit score of 720 and above - Approximately $5,500 in interest on a loan.
A credit score of 680 and above - Approximately $6,600 in interest on a loan.
A credit score of 650 and above - Approximately $8,100 in interest on a loan.
A credit score of 615 and above - Approximately $10,200 in interest on a loan.
A credit score of 580 and above - Approximately $13,900 in interest on a loan.
A credit score of 580 or below - Approximately $15,300 in interest on a loan.
Therefore, it is evident that the higher your credit score, the better your chances of getting a good deal when you finance a car.
Ways to Improve Your Credit Score
It is essential to realize that building a good credit score is a gradual process that requires patience. Rushing it can lead to impulsive decisions that harm rather than help you. However, there are simple steps you can take now to improve your score gradually:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
This is an excellent way to boost your credit score, particularly if you have limited credit or are looking to rebuild your credit. While obtaining a large loan can be challenging, a secured credit card like Open Sky or Credit Builder Card offers a higher approval rate without focusing on your credit score. Revolving credit makes up 30–35% of your overall credit score, allowing you to build credit scores more quickly. However, ensure you pay your balance on time and keep it between $5–10 each time you make a payment.
2. Raise Your Limits
A credit limit increase can help lower your credit utilization percentage and increase your overall credit limits. To request a credit limit increase, call your credit card company or do it online through your portal. Most credit card companies require 7–15 months of excellent payment history before they agree to increase credit limits.
3. Pay Down Your Balances
Avoid high balances and keep your balance low by only using your credit cards for small purchases. Leave a $1–5 balance on your credit cards when paying off your bill. If you have high balances, make a plan to pay them off gradually by taking a fixed percentage of your paycheck monthly. Avoid running up balances again, as this will harm your credit score. Limit your usage and only use credit cards for necessary expenses.
Insights from Joe
We’ve all experienced times when our credit score wasn’t up to par. If you’re serious about improving your credit, and are willing to put in the time and effort, great improvements can be made in a short amount of time. Unfortunately, many people feel trapped and believe that they will never recover from bad credit. However, achieving a high credit score takes hard work and dedication. Those willing to make their credit a priority and tackle their spending habits head-on will ultimately succeed. Developing a budget and identifying problem areas in your spending habits is a great starting point for improving your credit score. This article aims to provide you with a better understanding of credit. If you require guidance or assistance with credit repair, reach out to our office without delay at www.asapcreditrepairusa.com.