It's interesting to note that credit scores have 30 different levels. Although you might seek the best credit score, it's not uncommon to receive conflicting information from a simple Google search. The information available can be overwhelming and misleading, causing confusion and uncertainty. As someone with over fifteen years of experience in the financial literacy and credit repair sector, my name is Joe Mahlow. I'm committed to offering you honest advice on various topics, such as credit scores. Through my expertise, I have assisted more than twenty thousand clients in improving their credit scores. My primary goal is to give you enough information to do the same. So, let's dive into the topic!
Contents:
Types of Credit Scores: FICO vs. Vantage
Understanding Good Credit Scores
What Credit Score Do I Need To Buy A House?
Determining what you qualify for when purchasing a car depends largely on your credit history rather than your credit score
Tips for Improving Your Credit Score
Joe's Reflections on Credit Scores
Types of Credit Scores: FICO vs. Vantage
Credit scores play a crucial role when it comes to loans and credit, and knowing which scoring systems are used can help you better understand your report. There are two main credit scoring models that you need to know about: the FICO and the Vantage model. In this article, we will help you understand both models, including the differences in how they calculate scores and why credit reports have different FICO models.
FICO Credit Score
The FICO scoring model is the most widely used in the lending sector. It has eight different FICO models, all with varying degrees of factors that make up your score. For example, if you're applying for a mortgage, a mortgage lender will likely pull your FICO 5 report, whereas for a credit card, your FICO 8 report will probably be pulled.
Why are there so many FICO scores?
Each FICO report is weighted differently depending on the lender's criteria, meaning some factors have a more significant impact on your score than others. For example, a FICO 5 mortgage report will prioritize your mortgage payment history more than other factors, while a credit card company will primarily use your FICO 8 report, with credit card history weighing more heavily. To see all your FICO scores, you can go to www.myfico.com and sign up for an account.
Vantage Credit Score
The Vantage model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. While the FICO model has been used since the seventies, Vantage is a newer model used primarily in sectors such as personal loans and auto lending. Although it is accurate, it is not yet widely used for lending purposes.
However, the Vantage model may become more widely used in the future due to its ability to provide the best scoring models based on today's standards. In the meantime, it is a good general idea of your FICO score and can be used as a reference. Remember, the most significant data collection agencies outside of social media companies are credit reporting agencies. Therefore, they have the data and the upper hand in providing the best scoring data.
Understanding Good Credit Scores
Credit scores from both the Vantage and FICO models range from 350 to 850. With 850 being the best, and 350 considered the worst credit score. Setting your goal to achieve the highest credit scores requires an understanding of essential thresholds to reach along the way.
Important Credit Score Thresholds
1. 620 or Below
If your credit score falls below 620, this is considered bad credit. It suggests that you may have a history of adverse credit, high-balance credit card accounts, or you may not have any credit cards. To build your credit score, make timely payments, and keep at least ten active revolving credit accounts open. Secured credit cards like the Credit Builder Card or the OpenSky Credit Card can help you build your credit score. Once you reach the 620 credit score range, you will qualify for an FHA home mortgage.
2. 640-680
A credit score in the range of 640-680 is considered fair for good credit. You should have established credit, but with numerous derogatory marks or accounts on your credit, plus high balances on your credit cards. If you have opened new accounts, then your credit scores may have dropped temporarily, but they will return.
3. 740+
Any credit score over 740 is considered "super-prime" and qualifies you for the best interest rates for most loans. If you have a score over 740, you are in the top 20% of the US population with this score. Keep up the good credit habits, always pay accounts on time, and keep revolving credit accounts paid and in good shape. Congratulations!
What Credit Score Do I Need To Buy A House?
The credit score required to buy a house depends on the type of mortgage loan you are interested in obtaining. Regardless of what type of loan you seek, you’ll discover that the requirements and guidelines for most loans are comparable, though not necessarily identical. There are primarily three types of mortgage loans to consider: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
These are the most common type of loans and are often the preferred option outside of VA loans. Conventional loans don’t necessitate that you maintain private mortgage insurance (PMI), which can increase your down payment or monthly payments. PMI primarily safeguards the lender if you default on your loan. Conventional loans often require lower down payments and have more favorable interest rates than other mortgage loans. A conventional mortgage loan usually requires a credit score of 640 and a debt-to-debt ratio that does not exceed 43%.
2. FHA Loan
FHA mortgage loans cater to individuals with lower credit scores, typically between 580 and 619. Remember that loan programs can vary, so if you fall within the credit score range, it’s advisable to seek different lenders for the best option for you. FHA loans require PMI for a minimum of 11 years. This can raise the cost of your mortgage and consequently affect your budget. The loan usually has a higher debt-to-income limit of up to 50% and allows you to buy more homes than a conventional mortgage would if you have a lower income. FHA loans require down payments as low as 3.5% of the purchase price, which may permit you to get into a mortgage with less out-of-pocket expenses. However, the interest rate is generally higher.
3. VA Loan
There’s no explicit credit score requirement for the VA Loan, but the lenders will examine any previous defaulted loans and past-due debts owed to the government during the pre-qualification process. 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 your spouse was in the military and lost their lives during active duty. Usually, you’ll receive the best interest rates with a VA loan, and a down payment typically isn’t required. The VA loan is highly praised because it helps to give back to our veterans.
Determining what you qualify for when purchasing a car depends largely on your credit history rather than your credit score.
A high credit score is important, but it plays a smaller role in determining your interest rate. When you apply for a car loan, lenders examine both your current and past credit histories to determine the risk of extending credit. Those with bad credit or who have defaulted previously may have a harder time getting approved. However, some lenders extend loans to those with bad credit, but the approval comes with specific eligibility criteria such as additional fees and a higher down payment. A higher down payment can help buyers have a better chance of approval and equity when buying a vehicle on credit. Above 680 is an excellent credit score range for buying a new car. Your credit score significantly affects the amount of interest you will pay on a loan. The higher the credit score, the less interest one pays, with a credit score of 720 resulting in $5,500 in interest, whereas a credit score of 580 results in $15,300 in interest.
Tips for Improving Your Credit Score
Improving your credit score is a process that requires patience and effort. Although it may take time to build a good credit score, you can take several steps right now to help increase it with little effort. It is important to remember that without patience, most people make irrational and poor decisions that compound their problems.
Below are several things you can do right away to start improving your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
Opening a secured credit card with a company such as Open Sky or Credit Builder Card gives you the best chance of approval and is one of the best options for maximizing your credit scores. Revolving credit makes up 30-35% of your overall credit score and is the best option to help build credit scores quickly. It is important to pay your balance on time and keep it at $5-$10 each time you make a payment. Limit the use of the card to small purchases like gas or groceries.
2. Raise your credit limits
You can quickly request a credit limit increase for your credit cards to help increase your overall credit limits and lower your credit utilization percentage. This can be done online through your online portal or by calling the credit card company. Most credit card companies require 7-15 months of excellent payment history before agreeing to a credit limit increase.
3. Pay down your balances
Keeping your balance low and close to zero is critical. Use your credit cards for small purchases, and when it comes to paying your bill each month, leave about a $1-$5 balance on your credit cards. If you have high balances and cannot pay them off, make a game plan to take a percentage of your paycheck each month to pay the credit card down and ultimately stop using them.
Improving your credit score takes time and requires patience. By opening revolving credit accounts, raising your credit limits, and paying down your balances, you can help build a good credit score over time.
Joe's Reflections on Credit Scores
Many of us have faced the challenge of a bad credit score. But, by taking responsibility for our credit situation and committing to consistent effort, we can see significant improvements in a short period. It's not uncommon for people with poor credit to assume that they will never achieve a good credit rating. Nevertheless, building a strong credit score requires determination and the willingness to review and adjust our spending patterns. Creating a budget and eliminating negative spending behaviors can positively impact our credit score. As this article aims to help you understand credit, we invite you to take a step forward in achieving better credit. If you require guidance or support for credit repair, feel free to contact our office today at www.asapcreditrepairusa.com.
Main Points:
- Bad credit doesn't have to be the end of the road.
- A good credit score requires hard work and dedication.
- Start by implementing a budget and focusing on minimizing negative spending habits.
- For more assistance with credit repair, contact Joe's office at the provided website.