It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Many people searching for the best credit score are often bombarded with a plethora of conflicting answers from Google. Unfortunately, this information can be very confusing and potentially lead individuals down the wrong path. As someone who has worked in the financial literacy and credit repair industry for over fifteen years, I understand these concerns very well. My name is Joe Mahlow, and I aim to provide you with reliable and trustworthy advice on different topics, including credit scores. With a track record of helping over twenty thousand clients improve their credit scores, I am confident that I can provide you with the knowledge needed to see similar results. So, let's dive in!
Contents:
Types of Credit Scores: Understanding FICO and Vantage Models
Understanding Credit Scores: Ranges & Thresholds
Credit Score Requirements to Buy a House
The Importance of Credit History When Buying a Car
Tips to Improve your Credit Score
Insights from Joe
Types of Credit Scores: Understanding FICO and Vantage Models
There are two main credit scoring models that you should know, namely the FICO and Vantage models. Both are crucial in determining your credit score, but the way they calculate it varies.
FICO Credit Score
The FICO credit scoring model is the most widely used scoring system with eight different FICO models, from FICO 2 to FICO 10. Each model generates a different credit score based on your credit report. These models exist because various lenders pull different FICO reports. For example, home mortgage lenders look at your FICO 5 credit report, while credit card companies use the FICO 8 credit report. Factors that are more critical to the lender carry more weight in the algorithm used to calculate your score. Different types of lenders use the model that is most relevant to their business.
Vantage Credit Score
The Vantage scoring model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO. Vantage is a relatively new scoring model, unlike the FICO model that has been in use since the 1970s. While FICO dominates the lending sector, Vantage is gaining popularity in some areas, especially for personal loans and auto lending.
Accuracy of Vantage Score
Vantage scores are accurate, but their accuracy depends on context. Since Vantage is not widely used for lending purposes, it might not reflect your actual lending score accurately. Therefore, use Vantage score as a general indicator of your credit score. If you want to access your FICO score, visit www.myfico.com and sign up for an account.
Why so many FICO Scores?
Different FICO models exist as they weigh the critical factors to the lender differently. Every credit report carries a different weight based on factors that are more relevant to the specific type of lender. Mortgage lenders primarily use FICO 5 reports, while credit card companies use the FICO 8 report. Auto lenders typically pull FICO-2 reports.
Outdated FICO Scoring
The FICO scoring model is outdated and doesn't represent your credit score as accurately as it should. However, lenders still use it for now, but Vantage is gaining popularity. Credit reporting agencies are the main data collectors outside social media companies, and they provide the best scoring data, considering current standards.
Understanding Credit Scores: Ranges & Thresholds
When it comes to credit scores, both the FICO and Vantage models have a scale between 350 and 850, where the lowest possible score is 350 and the highest is 850. It’s important to keep track of your score growing journey, so here are some score thresholds to aim for and keep in mind:
620 or below
If your score falls below 620, it means you have bad credit history, high-balance credit card accounts, or no credit at all. To improve your scores, make timely payments, and open ten active revolving credit accounts. We suggest trying the Credit Builder Card or OpenSky Credit Card - secured credit cards that help improve your credit. Once you achieve a score of 620, you could start qualifying for an FHA home mortgage.
640-680
Range of fair to good credit, meaning you have established credit, but may have derogatory marks or high balances on your credit cards. New accounts may also bring a temporary drop in the scores, but it’s usually just a short-term effect.
740+
This score range is considered super-prime and gives the absolute best interest rates for most loans. Only 20% of the US population has a score higher than 740, so congratulations if you’re among them! Remember to always pay your accounts on time and keep your revolving credit card accounts in good standing to stay in this range.
Credit Score Requirements to Buy a House
The credit score required to buy a house is determined by the type of mortgage loan you seek. Various mortgage loans have federal regulations and government backing policies that may require different credit scores. The three most common types of mortgage loans are conventional, FHA, and VA loans.
1. Conventional loans:
Conventional loans are the most popular loans and are a better "saving" loan option outside of VA loans. These require no private mortgage insurance (PMI), which can increase down payment or monthly payment. Conventional loans usually have lower down payment requirements and better interest rates than other mortgage loans, with a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.
2. FHA loans:
FHA loans typically require lower credit scores, generally between 580 and 619. If you are within the credit score limits, shop around for different lenders that provide the best financial options. FHA loans require you to pay PMI for a minimum of 11 years, which can be an added cost to your mortgage and a budgetary consideration. Your debt-to-income limit can be as high as 50% with this type of loan, meaning you can buy more homes with lower income. Despite having low down payment requirements, expect to pay a higher interest rate.
3. VA loans:
Although there isn't any specific credit score requirement with VA loans, they usually consider previous defaulted loans and any government-owed past-due debts when pre-qualifying you. Furthermore, VA loans have the best interest rates available and don't require down payments. VA loans are for veterans who have served in the US military for at least 181 days, 90 consecutive days during wartime, for at least six years with the National Guard, or if your spouse suffered a loss during active duty. VA loans are a great way of giving back to our veterans.
The Importance of Credit History When Buying a Car
When shopping for a car, your credit history holds more weight than your credit score in determining eligibility for a loan. While having a high credit score remains important, it plays a smaller role in determining the interest rate you qualify for. To determine the risk involved in extending credit, lenders will examine your previous and current credit histories in addition to your credit score. If you have a history of late or missed payments or have undergone repossession in the past, your loan application could face greater challenges. Nevertheless, some dealerships may work with bad credit borrowers offering car loans for higher interest rates and additional fees. To maximize your chances of approval, having a down payment or equity is recommended.
Credit Score Range for Car Loans
Credit score alone cannot determine your eligibility for a car loan, and there are several factors involved. Still, a credit score above 680 is ideal for securing an affordable interest rate. Lower scores pose a greater risk, increasing the interest rate. The following table shows examples of how interest rates differ based on credit score:
1. Credit score 720 or above will pay on average $5,500 in interest on a loan.
2. Credit score 680 or above will pay on average $6,600 in interest on a loan.
3. Credit score 650 or above will pay on average $8,100 in interest on a loan.
4. Credit score 615 or above will pay on average $10,200 in interest on a loan.
5. Credit score 580 or above will pay on average $13,900 in interest on a loan.
6. Credit score below 580 will pay on average $15,300 in interest on a loan.
As the data suggests, your credit score can significantly affect the interest rates you are offered when securing a car loan.
Tips to Improve your Credit Score
Improving your credit score takes time and effort. It's essential to have patience and avoid making rash decisions that could hurt your credit. Here are some things you can do to raise your credit score:
1. Open Revolving Credit Accounts
Revolving credit accounts, such as credit cards, are an excellent way to improve your credit score. They're easier to obtain than a large loan and can get you approved quickly. Start with a secured credit card like Open Sky or Credit Builder Card, which focus more on your ability to pay on time than your credit score. Revolving credit makes up 30–35% of your overall credit score. Make sure to pay your balance promptly and keep it at $5–10 after each payment. Use the card only for small purchases like gas or groceries.
2. Request a Credit Limit Increase
A credit limit increase can increase your overall credit limits and lower your credit utilization percentage. Contact your credit card company and request a "Credit Limit Increase." You may need to provide current income information to be eligible for this. The company will review your payment history and decide if they're open to increasing your limit.
3. Keep Your Balances Low
Keeping your balance low and close to zero is critical. If you currently have high balances, make a plan to pay them down gradually and stop using them. Using your credit card sparingly and leaving a small balance of $1–5 each month can help improve your credit score.
Improving your credit score takes time and patience, but by following these tips, you can create a better financial future for yourself.
Insights from Joe
It's common to struggle with less-than-impressive credit at some point in our lives. However, taking a proactive approach towards improving your credit can yield significant results in a short span of time. Often, individuals with poor credit find themselves stuck in a never-ending cycle where they believe that obtaining good credit is beyond reach. Developing a sound credit score requires constant effort and commitment, and those who prioritize their credit and keep a close eye on their spending habits are bound to succeed. Start by creating a budget and addressing any negative spending patterns, as this will have an immediate impact on your credit score. This article aims to provide you with a better understanding of credit. If you require assistance in boosting your credit score or require credit repair services, please get in touch with us at www.asapcreditrepairusa.com.