It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? This is something that most individuals tend to overlook when trying to determine their ideal credit score. When attempting to search for accurate information on the best credit score, you may be met with a sea of conflicting answers, leaving you feeling confused and unsure of where to begin. As someone who has been deeply entrenched in the field of financial literacy and credit repair for more than fifteen years, my objective is to provide clear and concise advice on a variety of topics, starting with credit scores. Over the course of my career, I have assisted more than twenty thousand clients in transforming their credit scores, and I am eager to offer you the same kind of guidance. So, let us dive in!
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores
What Credit Score Do You Need to Buy a Home?
Determining Eligibility for a Car Loan Based on Your Credit Score and History
Ways to Increase Your Credit Score
Advice from Joe
Different Types of Credit Scores: FICO and Vantage Models
In understanding credit scores, there are two scoring models to consider - FICO and Vantage. Both are crucial to comprehend because they differ when it comes to calculating credit scores.
FICO Credit Score
FICO is the most widespread and commonly used credit scoring model with eight different models from FICO 2 to FICO 10. The reason for this variation is that credit reports have a different "weight," with different factors impacting the credit scores more heavily. Typically, the lender you use will determine what FICO report to use based on the type of credit or purchase. For instance, a mortgage lender would likely pull your FICO 5 credit report, and a credit card company may pull your FICO 8 credit report.
Vantage Credit Score
The Vantage Score scoring model is a new competitor to the FICO scoring model, developed by the three major credit reporting agencies - Equifax, Experian, and TransUnion. Vantage is becoming more popular in some sectors, such as auto lending and personal loans, although FICO is still dominant in lending. Credit monitoring websites use Vantage to provide free copies of credit reports.
Is the Vantage Score Accurate?
The accuracy of the Vantage Score depends on the context. Although it is accurate, it may not be precise when it comes to lending scores since it is not widely used for lending purposes. However, it can offer a good "general idea" of your FICO score, which is better than nothing. The FICO scoring model is outdated, and Vantage has the potential to provide better scoring models based on today's standards. Thus, one should keep an eye on the Vantage scoring model in the next five to ten years; it could become widely used in the lending sector. Remember, credit reporting agencies are the most significant data collection agencies, and they have the upper hand in providing the best scoring data.
Visualizing Different FICO Scores
Visit www.myfico.com and sign up for an account to get a visual representation of your different credit scores across various FICO scoring models. It can help you understand the differences between the models and how different lenders use them.
Understanding Credit Scores
Credit scores are measured on a sliding scale ranging from 350 to 850 for both the FICO and Vantage models. A score of 350 is considered the worst credit score imaginable, while 850 signifies the highest. To aim for the highest possible score, it’s crucial to note some score thresholds pivotal to your journey.
1. 620 or below
If your score is 620 or below, you have bad credit. Your credit report shows a history of adverse credit or high-balance credit card accounts. Alternatively, you may lack credit cards or have none at all. Make sure to pay on time and open ten revolving credit accounts for improvement. The OpenSky Credit Card or Credit Builder Card is recommended in building your credit. Reaching 620 qualifies you for an FHA home mortgage.
2. 640-680
Scores from 640-680 are fair for good credit. This indicates that while having established credit, your credit report also includes derogatory marks, some accounts, and high balances on credit cards that require payment. Newly opened accounts can also cause a temporary drop in the score. Don't panic or worry if you fall within the range and have recently opened a new account; your scores will bounce back up.
3. 740+
Any score over 740 is considered "super-prime" and most attractive to lenders. This subgroup belongs to only about 20% of the U.S. population, and if you're in it, pay your account on time, maintain revolving credit card accounts and cheers to you! You will have great loan interest rates.
What Credit Score Do You Need to Buy a Home?
The credit score you need to buy a home depends on the type of mortgage loan you plan to qualify for. While there are similarities between most mortgage loans due to government backing and regulation, there are also differences. The most common types of loans are conventional loans, FHA loans, and VA loans. Here is what you need to know about each loan type:
1. Conventional Loans
Conventional loans are the most popular and often the best option for savings outside of VA loans. With conventional loans, there is no need to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment. Generally, these loans have lower downpayment requirements and better interest rates compared to other loans. For this type of loan, you need a credit score of at least 640, with a maximum debt-to-debt ratio of 43%.
2. FHA Loans
If you have a credit score between 580 and 619, you qualify for an FHA loan. Keep in mind that loan programs differ, and it pays to look around for a lender that offers the best financial option. FHA loans require you to maintain PMI for at least 11 years, making it costlier to borrow, especially on a tight budget. However, you can purchase more homes with this loan if you have lower income since it has a higher debt-to-income limit of up to 50%. Although the downpayment requirement is as little as 3.5% of the purchase, the interest rate is usually higher.
3. VA Loans
If you're a veteran or part of a military family, you may qualify for a VA loan that doesn't have a credit score requirement but checks for previous defaulted loans and any past-due, government-owned debts. To qualify, you must have served in the US military for at least 181 days, 90 consecutive days during war, served six years with the National Guard, or have a spouse who died on active duty. VA loans often have the best interest rates, and no down payment is typically required, making them a perfect financial option for veterans.
Determining Eligibility for a Car Loan Based on Your Credit Score and History
When it comes to buying a car, your credit history is a more important determinant of what you qualify for, rather than your credit score. Even though a good credit score is important, it plays a lesser role in determining the interest rate you qualify for. If you have credit issues, lenders will look at both your current and previous credit histories to assess the risk involved in extending credit. For instance, if you have had a previous repossession or have been late on a current or previous auto loan, you may find it challenging to get approved for a loan. However, lenders specializing in special finance or with higher lending rates may qualify almost anyone for a car loan, though you will have to meet specific criteria, such as a higher down payment and extra fees to the dealership. Dealerships will select a vehicle for you to be approved for, mainly because they have a higher markup on the vehicle to cover the fee. Lastly, to gain the most leverage when buying a vehicle on credit, it's essential to have equity or a down payment.
Credit Score Range for a New Vehicle Purchase
Although there is no exact credit score that determines approval for a car loan, a credit score over 680 is ideal. A score lower than this may increase the interest rate during loan approval, increasing the risk you pose to the lender. The level of interest you will pay on a car loan is determined by your credit score, and it is evident that the higher the credit score, the less the interest you are charged. For example, a person with a credit score of 720 or above will pay interest on a loan, on average, at around $5,500, while someone with a credit score of 580 or less will pay interest on a loan, on average, at around $15,300. By assessing this data, it's clear that paying attention to maintaining a good credit score will go a long way in lessening the interest rates you'll pay, ultimately affecting your credit score positively.
Ways to Increase Your Credit Score
Boosting your credit score may seem daunting, but there are many simple and effective steps you can take right now. While it will take time to improve your credit score, patience is key. Acting impulsively can lead to poor decisions that will only make your situation worse. To raise your credit score, you can take the following actions:
1. Open 3-5 revolving credit accounts:
For those with limited or damaged credit history, securing a large loan may be challenging. Instead, opening a few revolving credit accounts (i.e., credit cards) is a great option. These accounts make up 30-35% of your total credit score and enable you to build credit quickly. Opt for secured credit cards, such as Open Sky and Credit Builder Card, that focus on on-time payments and income, not credit score. Make sure to limit usage to small purchases and pay your balance on time, keeping it at $5-10.
2. Raise Your Limits:
If you already have active revolving credit card accounts, requesting a credit limit increase may be an easy way to increase your overall credit limits and lower your credit utilization percentage. This step can prove beneficial, especially if your credit limits are lower and you have high credit card balances.
3. Pay Down Balances:
Keeping your balances low is key to a healthy credit score. Only use your credit cards for necessary expenses and leave a small balance of $1-5 when paying your bill each month. If you have high balances, pay down a percentage of it each month until your cards are paid off; refrain from running up balances once you finish paying them off. High credit card usage not only hurts your credit score, but also leads to high-interest rates.
Before you know it, implementing these simple steps will yield noticeable improvements to your credit score.
Advice from Joe
Everyone experiences less than perfect credit at some point in their lives. However, if you're willing to invest the time and effort to improve your situation, you will see significant improvements in your credit score in a relatively short period. It's easy to get trapped in a cycle of bad credit, feeling like there's no way out. But the truth is, it takes consistent hard work to achieve a great credit score. Those who make their credit a priority and focus on their spending habits will be successful. To begin the process, start by creating a budget and addressing any negative financial behaviors. This will positively impact your credit score. Remember, with dedication and effort, it is possible to improve your credit. For assistance with credit repair and guidance, please contact my office at www.asapcreditrepairusa.com.
Key Points:
- Everyone experiences bad credit at some point
- It takes consistent effort to achieve good credit
- Focus on spending habits and create a budget
- Positive financial behaviors will lead to better credit scores
- Reach out for assistance with credit repair and guidance at www.asapcreditrepairusa.com.