It might come as a surprise to learn that there are in fact 30 distinct credit score levels. Many individuals are unaware of this fact and often find themselves overwhelmed with conflicting information when searching for the best credit score online. The abundance of resources available can be confusing and misleading, ultimately leading to further frustration and uncertainty. As someone with over fifteen years of experience in financial literacy and credit repair, I am here to provide you with honest and straightforward advice on various topics, including credit scores. Throughout my career, I have successfully assisted more than twenty thousand clients in elevating their credit scores. I am confident that I can provide you with useful information that could facilitate the transformation of your credit score. So, let's dive in.
Contents:
Different Types of Credit Scores: FICO Model and Vantage Model
Understanding Credit Scores
What is the Minimum Credit Score needed to Buy a House?
Determining the Optimal Credit Score when Purchasing a Car
Tips for Improving Your Credit Score
Advice from Joe
Different Types of Credit Scores: FICO Model and Vantage Model
Credit scores play a critical role in determining creditworthiness and access to credit facilities, hence the need to understand various credit scoring models. Two common models that you should familiarize yourself with are the FICO model and the Vantage model, among others. Below is an overview of the FICO and Vantage credit scoring models.
FICO Credit Score
The FICO scoring model, with its eight different models, is the most popular and widely used. Each model calculates credit scores differently, depending on the type of lender and the purpose of the credit. For example, a home mortgage lender would pull a FICO 5 credit report, while a credit card company is likely to use a FICO 8 credit report.
Why so many FICO scores?
Each FICO report has a different weight that considers critical factors to lenders, such as credit card history, auto history, and mortgage history. As a result, your credit score will be different for each model, reflecting your credit history with a specific product.
Vantage Credit Score
The Vantage Score is a newer scoring model developed by the three major US credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO. Although the Vantage Score is gaining popularity in some sectors like personal loans and auto lending, it is not widely used for lending purposes.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but its accuracy may vary compared to FICO scores, which are widely used by lenders. Therefore, it's best to consider the Vantage Score as a general idea of your overall credit scores. Nonetheless, insights from the Vantage model and FICO models are both useful in understanding your credit standing.
If you want a detailed account of your credit scores, head over to www.myfico.com, where you can view various credit scores from different models. Although FICO dominates the lending sector today, the Vantage model may eventually become equally significant if it continues to provide better scoring results based on the latest standards. The credit reporting agencies have extensive data and insights, which put them in a position to offer the best scoring models possible.
Understanding Credit Scores
Credit scores are graded on both FICO and Vantage scales, ranging from 350 to 850. If you have the lowest score, 350, you have the worst credit score, whereas an 850 score is the best credit score. To attain the highest scores, it is essential to be aware of your current score and the score thresholds you need to meet along the way. Here are some vital score thresholds to bear in mind:
1. 620 or below
If your score is 620 or less, you have bad credit, which might be the result of a low credit history and high-balance credit card accounts or no credit cards at all. To enhance your credit scores, make sure you are making timely payments and have at least ten revolving credit accounts open. Credit Builder Card or OpenSky Credit Card are great options for secured credit cards that can also facilitate credit building. Once you reach this range, you can qualify for an FHA mortgage.
2. 640-680
Scores in this range are considered fair for good credit, suggesting that you have established credit. However, derogatory marks or accounts, high credit card balances, and newly opened accounts that may temporarily affect your score might still exist. If you are in this range and have recently opened an account, don’t panic; your scores will return to normal.
3. 740+
Credit scores over 740 are considered "super-prime" and can secure the best interest rates for most loans. Congratulations to the 20% of the US population with a score over 740. Keep up the excellent work: pay your accounts on time and maintain your credit card accounts paid as well. You are in great shape!
What is the Minimum Credit Score needed to Buy a House?
The minimum credit score required to qualify for a mortgage depends on the type of loan you are seeking. In general, the government backing and federal regulations ensure that most mortgage loan types have similar requirements, but some variations do exist. The three most popular mortgage loan types are Conventional Loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most common and a great option for those looking to save money. With this type of loan, private mortgage insurance (PMI) is usually not required, which can save you money on downpayment or monthly payments. Downpayment requirements and interest rates on conventional loans are typically lower than other mortgage loans. A minimum credit score of 640 is needed for conventional loans, and the debt-to-debt ratio should be no higher than 43%.
2. FHA Loan
An FHA loan is the best option for those with lower credit scores, with the minimum typically ranging between 580 and 619. Different loan programs have different requirements, so shop around with different lenders to get the best option for you. PMI is required for at least 11 years for an FHA loan, which is something to consider if you're on a budget. The debt-to-income ratio limit for FHA loans is higher, up to 50%, allowing you to purchase a home with a lower income. Downpayment requirements start as low as 3.5%, which is ideal if you don't have much money for downpayment, but remember the interest rate is higher.
3. VA Loan
With the VA loan, there isn't technically a required credit score, but lenders will look into past defaulted loans and government-owed past-due debts when qualifying you. To be eligible for the VA loan, you must meet certain criteria, like serving in the military or being the spouse of a military member who lost their life during active duty. VA loans typically offer the best interest rates and don't require a down payment, making it the perfect option to give back to our veterans.
Determining the Optimal Credit Score when Purchasing a Car
When obtaining a car loan, lenders consider credit history, not only credit scores. Even though credit scores are crucial, they have less impact on the interest rate you are granted. If you have credit concerns, they will scrutinize your current and past financial activities to establish the credit risk associated with approving the loan. Lenders may be more hesitant to extend loans to those who have missed payments on previous loans or have had repossessions. Although the worst credit or special finance companies may grant loans to almost anyone, they will necessitate specific approval criteria met. For example, dealerships may ask for a higher down payment and impose additional fees on the loan, which they will utilize to offset the risk of default. You might have experienced this at a dealer if you've got bad credit. They may only authorize the vehicle where they make a higher markup to pay the charge. Ultimately, you should have equity or a down payment for the most bargaining power when buying a vehicle on credit.
New Car Credit Scores Range
While no precise credit score would ensure approval since several factors contribute to the decision, a credit score of 680 or above is generally regarded as ideal. Scores below this range can result in higher interest rates due to risk. The following are examples demonstrating how credit scores influence interest rates:
- Scores at or above 720: $5,500 in interest on average
- Scores at or above 680: $6,600 in interest on average
- Scores at or above 650: $8,100 in interest on average
- Scores at or above 615: $10,200 in interest on average
- Scores at or above 580: $13,900 in interest on average
The data demonstrates that interest rates increase as credit scores decrease, leading to a negative impact on your overall score.
Tips for Improving Your Credit Score
Achieving a good credit score requires patience and effort, but with a few straightforward steps, you can improve your credit score. Here are some tips to help you increase your credit score:
1. Open several revolving credit accounts:
Starting with 3-5 revolving credit accounts like credit cards can provide you with the best chance of approval. You can open a secured credit card like Open Sky or Credit Builder Card. Having several credit cards can quickly increase your overall credit score.
2. Raise your limits:
You can request a credit limit increase online or through phone calls. Having a higher credit limit will decrease your credit utilization percentage.
3. Pay down your balances:
Keeping your credit card balances low and close to zero is crucial to improving your credit score. You can use your credit cards for small purchases and pay the balance on time each month.
Improving your credit score is not an overnight process, but by taking these simple steps, you can get closer to your goal.
Advice from Joe
It's common to have poor credit at some point in our lives. However, taking your credit situation seriously and investing time and effort to improve your credit can lead to significant changes in your credit score. Too many individuals with bad credit feel trapped in a cycle of poor credit for life, believing that good credit is unattainable. Building a great credit score requires hard work and prioritizing credit management and spending habits. Create a budget and work on fixing unhealthy spending behaviors to see positive changes reflected in your credit score. This article serves as a guide to help you improve your credit. If you need expert guidance and assistance with credit repair, please feel free to contact my office today at www.asapcreditrepairusa.com.
Joe's Recommendations:
- Joe recommends taking your credit situation seriously and investing time and effort to work on yourself and your credit.
- Building a great credit score requires prioritizing credit management and good spending habits.
- Creating a budget and working towards fixing any bad spending habits can directly impact your credit score.