Hey, did you know that credit scores come in 30 different levels? It's not uncommon for people to search for the best credit score and receive varied responses from search engines. Unfortunately, much of the information online about credit scores can be confusing and misleading. But don't worry, I'm here to help. My name is Alice, and I've been working in credit repair and financial literacy for over 15 years. My goal is to provide you with honest and unbiased advice on various topics, including credit scores. Throughout my career, I've been able to assist over 20,000 clients in improving their credit scores, and I hope that the following information will empower you to do the same. So, let's dive in!
Contents:
Various Types of Credit Scores
What is a Good Credit Score?
What is a suitable credit score for purchasing a home?
Ideal Credit Score Range for Buying a Car
Tips for Boosting Your Credit Score
Insights from Joe on Credit Repair
Various Types of Credit Scores
There are two main credit scoring models that are commonly used in the credit industry. These models are the FICO model and the Vantage model, and understanding the differences between them is critical in understanding how your credit score is calculated.
FICO Credit Score
The FICO model is the most popular credit scoring model used today. With eight different FICO models, ranging from FICO 2 to FICO 10, your credit score may vary depending on the type of FICO report that is pulled by the lender. For instance, if you are applying for a home loan, your credit report is most likely going to be evaluated using the FICO 5 credit score, whereas a credit card company would use the FICO 8 report.
But why so many different FICO scores? The answer is simple: each credit report has a "weight," meaning that the factors that are most critical to the lender carry more value in calculating the credit score. For instance, if you have a great payment history with previous mortgage payments, your credit score weighs more in your favor on a FICO 5 mortgage report. This trend applies to all FICO scoring models. Credit card companies primarily use the FICO 8 report, evaluating your credit card history to determine your score, while auto lenders typically use the FICO 2 report, which places emphasis on your past auto history.
If you want to see your various FICO scores, visit www.myfico.com and sign up for an account.
Vantage Credit Score
The Vantage Score model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to challenge FICO's dominance in the credit scoring industry. Compared to the FICO model, which has been used since the seventies, Vantage is still relatively new. Credit monitoring websites in the United States frequently offer a free copy of your credit report when using Vantage, which has gained popularity in certain sectors, such as personal loans and auto lending.
While the Vantage Score is accurate, it is not widely used for lending purposes, meaning that it will not accurately reflect your actual lending score. However, the Vantage score is still a good indicator of your overall creditworthiness. Since FICO scores are challenging to obtain without paying for them or having a lender pull your report, using your Vantage score can provide you with a general idea of your FICO score.
It is predicted that lenders will widely use the Vantage model within the next 5-10 years due to its ability to provide accurate and current scoring models. The FICO scoring model is viewed as outdated, and credit reporting agencies have the upper hand in providing the best scoring data since they have the most data outside of social media companies.
What is a Good Credit Score?
When it comes to credit scores, both FICO and Vantage models range from 350 to 850; on this scale, 350 represents the lowest while 850 signifies the highest score. When aiming for a good credit score, it's essential to be aware of where you stand on the journey. Here are some vital score thresholds to consider:
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620 or below:
- This is considered bad credit
- Presence of adverse credit history, high-balance credit card accounts, or lack of credit cards
- To improve credit scores, keep ten active revolving credit accounts open and make timely payments
- The Credit Builder Card or OpenSky Credit Card is recommended for building credit
- A 620 credit score range qualifies you for an FHA home mortgage.
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640-680:
- This is considered fair for good credit
- It usually implies established credit history, but may have some derogatory marks or accounts on credit
- Possibility of high balances on credit cards that need to be paid down
- Newly opened accounts can temporarily lower scores but will return to normal.
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740+:
- Any credit score over 740 is considered "super-prime"
- You belong to the 20% of the US population with this score
- It secures the best interest rates for most loans
- Maintaining a score over 740 requires timely payment of accounts and payment of revolving credit card accounts. Congratulations on achieving this score!
What is a suitable credit score for purchasing a home?
The answer to this question varies depending on the type of mortgage loan you intend to qualify for. Due to the federal regulations and government support, most mortgage loans have similar requirements and guidelines, but some variances may exist between different lenders. The three most prevalent mortgage loan types include Conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most widespread type of mortgage loans, and they usually offer better interest rates, lower down payment requirements and no private mortgage insurance (PMI) than other mortgage loans except the VA loan. Conventional mortgage loans demand a typical credit score of 640 and a debt-to-debt ratio of no more than 43%.
FHA Loan
FHA loans require a lower credit score, typically between 580 and 619. Different lenders have varying credit score requirements, so it is essential to look around for the best lender to suit your financial needs. FHA loans also require you to keep PMI for at least 11 years, which adds to the monthly payments and puts some demands on your budget. However, these loans' higher debt-to-income limit of up to 50% allows you to buy more homes than you would with a conventional loan, especially if your income is limited. Furthermore, the downpayment requirement for FHA loans is only 3.5%, which may make it more favorable to those looking to spend less out of pocket, but you may have to pay a higher interest rate.
VA Loan
The VA loan does not have a specified credit score requirement, but it is useful to pre-qualify for potential defaulted loans and past-due debts in the government's hands. The VA loans are designed for people who served in the US military for at least 181 days or served 90 consecutive days during wartime or served six years with the National Guard. Alternatively, if your spouse was in the military and lost their lives during active duty, you are eligible for it too. The VA loan typically has the most favorable interest rates and usually does not require a down payment. VA loans are a great way to reward our veterans for their hard work and dedication to the country.
Ideal Credit Score Range for Buying a Car
When applying for a car loan, your credit history, not just your credit score, is the primary factor that lenders consider. While a higher credit score is important, the interest rate you get on the loan is also determined by your credit history. Lenders scrutinize your credit histories to assess the risks associated with extending credit. For instance, if you have a track record of late payments on your previous or current auto loan or have lost a car due to repossession, it will be difficult to get approval for a loan. Subprime lenders will qualify a borrower for auto loans despite poor credit histories but on strict conditions, such as a higher down payment and levying additional fees on the dealership to extend the loan. Such borrowers should hence be prepared for the dealer to choose a vehicle for them with higher margins to compensate for the lender's risk. Ultimately, having equity or a downpayment is crucial when buying a car on credit.
There isn't just one credit score that determines loan approval. However, a credit score of 680 and above is considered ideal. Anything lower can increase the interest rate you are charged and hurt your chances for loan approval. Depending on credit scores, an auto loan borrower can pay vastly different interests, with the higher the credit score, the less interest. For instance, someone with a 720 credit score can pay around $5,500 in interest, while someone with a 580 credit score or below may pay up to $15,300 in interest. Therefore, your credit score determines the amount of interest you will pay, which, in turn, impacts your overall credit score.
Tips for Boosting Your Credit Score
Improving your credit score might sound like an arduous process, but there are simple steps you can take to achieve your goals. Building a good credit score takes time, so staying patient is crucial. With that said, some of the things you can do right now to improve your credit include opening 3-5 revolving credit accounts, raising your limits, and paying down your balances.
Here’s how you can achieve these goals:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit is a simple way to maximize your credit scores. If you have limited credit or are rebuilding your credit, it might take a lot of effort to get a big loan, so opening a secured credit card is your best bet. Focus on credit cards that don’t require a high credit score and emphasize your ability to pay the card on time. Revolving credit accounts make up 30-35% of your overall credit score, so you need to keep your balance at $5-10 every time you make a payment. Use the card only for small purchases like gas or groceries.
2. Raise Your Limits
Requesting a credit limit increase for your credit cards is an easy way to raise your overall credit limit and reduce your credit utilization percentage. If your credit card balances exceed 30% of your overall limits, it may hurt your credit scores. To avoid this, increase your credit limits to help lower your utilization percentage. Each credit card company has its process for requesting a credit limit increase, so call your credit card company to request one. They will review your payment history before agreeing to do this.
3. Pay Down Your Balances
Keeping your balance low is integral to your credit score. If you have high balances and cannot pay your credit cards off, make a plan to allocate a percentage of your paycheck each month to pay down the credit card. The worst thing you can do is to pay down the card and run the balance back up. Limit your credit card usage and use them for small purchases only. Also, remember that credit card rates are incredibly high, and most of your payments will go towards interest and not principal.
Insights from Joe on Credit Repair
We have all encountered poor credit ratings at some point in our lives. However, taking a sincere interest in your credit situation and making a conscious effort to improve it can quickly result in significant changes to your credit score. Unfortunately, many people with bad credit assume that their credit status is irreparable and remain stuck in a vicious cycle for their entire lives. On the contrary, building a good credit score requires hard work, and those who prioritize their credit and pay attention to their spending patterns will succeed. You can start by creating a budget and working towards correcting any bad spending habits that affect your credit score. This article provides valuable insights into the world of credit repair. Reach out to our office at www.asapcreditrepairusa.com for guidance and assistance if you need credit repair services.