It might surprise you to know that there are actually 30 varying levels of credit scores out there. Despite this, many people are often left feeling overwhelmed and uncertain when they search for information about the best credit score available. Unfortunately, there is a lot of information out there that can be misleading or downright confusing, leading many individuals down a confusing path. My name is Sarah and, with over 15 years of experience in financial literacy and credit repair, I'm here to give you straightforward advice on important financial topics, including credit scores. Over the years, I've successfully helped over 20,000 clients improve their credit scores, and my hope is that the insights I share with you will be equally impactful. So, let's dive in!
Contents:
Types of Credit Scores: FICO and Vantage
Understanding Credit Scores: What is a Good Credit Score
Determining the Right Credit Score to Buy a House
Determining a Suitable Credit Score to Purchase a Vehicle
Steps to Increase Your Credit Score
Advice from Joe
Types of Credit Scores: FICO and Vantage
There are two types of credit scoring models, namely FICO and Vantage. When it comes to calculating credit scores, it is important to understand the differences between the two models.
FICO Credit Score
FICO is the most popular credit scoring model and has eight different FICO models, ranging from FICO 2 to FICO 10. Depending on the type of lender you use, the credit score you receive may vary. Mortgage lenders typically use FICO 5, whereas credit card companies usually use FICO 8. The reason for the difference in FICO models is that each credit report has a different "weight" based on critical factors; this means that certain factors impact the credit score more than others. For example, FICO 5 considers mortgage history, whereas FICO 8 considers credit card history. For a more comprehensive overview of your FICO scores, sign up for an account on www.myfico.com.
Vantage Credit Score
Vantage is a new scoring model created by Equifax, Experian, and TransUnion to compete with FICO. Although it is gaining popularity in some sectors, such as personal loans and auto lending, it is not widely used in the lending industry. Therefore, the Vantage score may not accurately represent your actual lending score. However, it can still provide a general idea of your credit score and help you understand your overall scores. With time, lenders may start using Vantage more frequently due to its ability to provide the best scoring models based on today's standards.
Conclusion
While FICO remains the dominant credit scoring model, the Vantage model provides a good general overview of your credit score. However, given the significant role credit reporting agencies play in the lending industry, they have the upper hand in providing the best scoring data.
Understanding Credit Scores: What is a Good Credit Score
Credit scores can either be FICO or Vantage, and both range from 350 to 850. The lowest score is considered the worst, while the highest is seen as the best. To give you an idea of where you stand on your journey to building your score, here are some vital score thresholds:
620 or below:
620 or below: This is considered bad credit, and it indicates adverse credit history, high-balance credit cards, or no credit card at all. To improve your score, ensure timely payments and have ten active revolving credit accounts. You can build your credit with secured credit cards like Credit Builder Card or OpenSky Credit Card. At a 620 credit score range, you can start qualifying for an FHA home mortgage.
640-680:
640-680: This is a fair credit score. It shows that you have established credit, but you may have some derogatory marks or accounts on your credit score, high balances on your credit cards, or newly opened accounts. If you're in this range and have recently opened a new account, your score might temporarily drop but don't panic because it's just temporary.
740 or above:
740 or above: This is a "super-prime" credit score and is considered the best. Having a credit score over 740 guarantees the best interest rates on most loans. Congratulations if you have over 740 because you are among the 20% of the US population with this score. To maintain a good score, always pay your accounts on time and keep your revolving credit card accounts paid.
Determining the Right Credit Score to Buy a House
When it comes to buying a house, the required credit score can vary based on the type of mortgage loan you are trying to qualify for. Federal regulations and government backing ensure that most mortgage loans have similar, if not different, eligibility criteria. The three most common loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
These are the most popular and usually offer the best savings loan option apart from VA loans. One of their advantages is that they do not require you to maintain private mortgage insurance (PMI), unlike some other loans. This can prevent additional costs that could increase either your monthly payment or downpayment. These loans have lower downpayment requirements and better interest rates than other mortgage loans. Conventional mortgage loans require a minimum credit score of 640 and a debt-to-debt ratio no higher than 43%.
2. FHA Loans
These loans are available for people with lower credit scores, usually between 580 and 619. Since different lenders offer different loan programs, you should shop around to find the best financial option after making sure you fall within the credit score limits. You will need to keep PMI for at least 11 years, which could be an added cost to your mortgage, especially if you are operating on a budget. This loan comes with a higher debt-to-income limit of up to 50%, which allows people with less income to purchase more homes than they can with a conventional loan. With low downpayment requirements of as low as 3.5%, an FHA loan could be an ideal option if you are looking to get into a mortgage with less money out of pocket. However, the interest rate is usually higher than that of a conventional loan.
3. VA Loans
The VA loan does not technically have a credit score requirement, but pre-qualification involves assessing any past defaulted loans and government-owed past-due debts. 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 have a spouse that was in the military and lost their lives during active duty. VA loans have the best interest rates available and usually do not require a down payment. These loans are especially favorable to veterans and their loved ones.
Determining a Suitable Credit Score to Purchase a Vehicle
Your credit history carries more weight than your credit score in determining your eligibility for auto financing. Although a high credit score is beneficial, it has less impact on the interest rate you receive. The lender evaluates your past and current credit histories to determine the lending risk. An individual with a history of late payments, repossession, or other credit issues will find it challenging to qualify for a loan. Special finance lenders offer loans to people with poor credit but may add stringent requirements, such as a higher down payment and additional fees for the dealership. In some cases, the dealership may have to pay a fee to approve you for the loan. Having a substantial down payment or equity is beneficial when purchasing a vehicle on credit.
Credit Score Range for a New Car
Although there is no specific credit score that guarantees loan approval, a credit score above 680 is ideal. Your score significantly impacts the interest rate you qualify for, which affects the overall interest amount. For example, an individual with a score of 720 or higher pays an average of $5,500 in interest on a loan, while someone with a score of 580 pays an average of $15,300 in interest on a loan. Therefore, having a high credit score can reduce the interest you pay and positively impact your credit score.
Steps to Increase Your Credit Score
Improving your credit score is not an overnight process, but taking small actions can make a significant difference. Developing patience is crucial since impulsive decisions can negatively impact your credit. Below are some things you can do to improve your score:
1. Open 3-5 revolving credit accounts:
Revolving credit, particularly in the form of credit cards, can help maximize your credit score. A secured credit card that focuses on your payment history and income can be a good start. Revolving credit accounts for 30-35% of your credit score and can increase it within 2-4 months. Limit usage to small purchases, and pay off your balance on time each month.
2. Increase your credit limits:
Requesting a credit limit increase can raise your overall credit limit and lower your credit utilization percentage. You can do it online or by calling your credit card company. Companies usually require several months of excellent payment history before agreeing to an increase.
3. Pay down your balances:
Keeping your balances low and around $1-5 each month is ideal. If your balances are high, make a plan to pay them down gradually to avoid running up credit cards. You should also limit your credit card usage to help maintain your credit score.
Remember that making small but consistent efforts can build your credit score over time.
Advice from Joe
We've all experienced the frustration of having less-than-perfect credit. However, taking the necessary steps to improve your credit can lead to significant improvements in a short amount of time. Many individuals with poor credit assume that it's impossible to recover, but taking the time to prioritize your credit and modify your spending habits can make a world of difference. To begin, create a budget and work on breaking any unhealthy spending patterns you may have. This behavior will have a direct impact on your credit score. If you need help with credit repair, don't hesitate to contact my office at www.asapcreditrepairusa.com. This article aims to provide a better understanding of credit.