It's surprising to learn that there are actually 30 different levels of credit scores. Many individuals are unaware of this and often end up with ambiguous information when searching for the best credit score online. This can be both confusing and misleading, leading to a frustrating experience. My name is Sarah Williams and I have been working in the finance industry for the past 15 years, focusing on financial education and credit repair. My ultimate goal is to provide you with valuable insights on various topics, including credit scores. Throughout my career, I have helped over 20,000 clients improve their credit scores and I am determined to help you do the same. So, let's dive into the topic of credit scores and discover what you need to know!
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores
Credit Score Requirements for Different Types of Mortgage Loans
Determining a Good Credit Score to Buy a Car
Ways to Increase Your Credit Score
Advisory Remarks from Joe
Different Types of Credit Scores: FICO and Vantage Models
Understanding how credit scores are calculated and the models used is essential for anyone who wants to have a good credit score. There are two primary models used – FICO and Vantage. The FICO model, with eight distinct models for different purposes ranging from FICO 2 to FICO 10, is by far the most popular and widely used credit scoring model, accounting for differences in credit reports. Lenders pull different FICO reports based on the type of credit or loan you request. For example, a mortgage lender usually pulls your Fico 5 credit report, while a credit card issuer typically uses the Fico 8 report. The different models exist because each credit report has a specific weight measuring the essential factors particular to that type of credit accurately.
To make more sense of the different scoring models, take, for instance, a FICO 5 mortgage report. This report weighs heavily on your previous mortgage history, which means that successful payment history will positively impact your score more than otherwise. This approach applies to all FICO scoring models. In contrast, credit card companies primarily use the FICO 8 report, with the most critical factor being your previous credit card history. Auto lenders use FICO-2 reports, and the score will depend heavily on your previous auto history.
Another model is the Vantage scoring model, developed by the three significant credit reporting agencies (Equifax, Experian, and TransUnion). Vantage aims to compete with FICO, though FICO dominates the lending sector while Vantage has gained some popularity in some sectors, like personal loans and auto lending. Many credit monitoring websites in the United States use Vantage to give free credit reports, but it is not widely used for lending purposes and probably less accurate than FICO.
Considering the credit reporting agencies' role and the vast data collection, the Vantage scoring model is the best general idea of your FICO score. Although FICO currently dominates the lending sector, the Vantage model provides the best scoring models based on today's standards, making it plausible that the Vantage scoring model will gain popular use in the next 5-10 years. The FICO scoring model can be outdated, and it doesn't give the user an accurate representation of their credit scores.
Understanding Credit Scores
Credit scores are important for establishing your creditworthiness. They are determined by both the FICO and Vantage scoring models, which range between 350 to 850. The higher your score, the better off you are. Here are some vital thresholds to help you understand where you stand:
1. 620 or below:
This is considered bad credit. If your score is in this range or below, you may have a history of adverse credit or high balance credit card accounts. To improve your score, make timely payments and have ten active revolving credit accounts.
2. 640-680:
This is considered fair credit. Scores in this range suggest established credit, but you may have some derogatory marks or high balances on your credit cards. Don't fret if you've recently opened a new account as your score will return.
3. 740 or above:
This is considered "super-prime" and puts you among the top 20% of the US population. With this score, you will get the best interest rates on loans. To maintain this score, always make payments on time and keep your revolving credit card accounts paid. Congratulations!
Credit Score Requirements for Different Types of Mortgage Loans
When it comes to buying a house, the credit score you need to qualify for a mortgage loan depends on the type of loan you're applying for. Most mortgage loans have similar requirements due to federal regulation and government backing, but there are differences you need to know. Here are the three most common mortgage loan types and their credit score requirements:
Conventional Loans:
Conventional loans are the most popular and the best option for savings outside the VA loan. They typically have lower downpayment requirements and better interest rates than other mortgage loans. Conventional mortgage loans require a credit score of at least 640 and a debt-to-debt ratio no higher than 43%. You don't need to maintain private mortgage insurance (PMI), which can be an added expense, increasing your downpayment or monthly payment.
FHA Loans:
The FHA loan is designed for lower credit scores, typically between 580 and 619. However, all loan programs have different requirements, so you should shop around for different lenders that offer the best option for you. FHA loans require you to keep PMI for at least 11 years, although they have higher debt-to-income limits of up to 50%, allowing you to purchase more homes if you have a lower income. The downpayment is as low as 3.5%, making it an attractive option. Still, you'll typically have a higher interest rate than with a conventional loan.
VA Loans:
The VA loan requires no specific credit score, but you must meet their pre-qualifying requirements, which includes checking for any previous defaulted loans or government owed past-due debts. To be eligible, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a spouse who died in active duty. The VA loan typically has the best interest rates available, and they do not usually require a down payment, making them ideal for veterans.
Determining a Good Credit Score to Buy a Car
When it comes to purchasing a vehicle, your credit history is more important than your credit score. While having a high credit score is beneficial, it plays a lesser role in determining the interest rate you are qualified for. A car loan provider will primarily analyze your previous and current credit history to assess the risk associated with lending to you. Late payments, repossessions, and other credit issues can make it more challenging for you to get approval for a loan. However, there are lenders who will work with individuals who have poor credit, but may require a higher down payment and additional fees. In such cases, the dealership may also pay a fee to reduce the risk of loan default. Having equity or a downpayment is also advantageous when buying a vehicle on credit.
Credit Score Range for Buying a New Vehicle
While there is no set credit score that guarantees approval for a car loan, a credit score over 680 is ideal. Anything below this score can increase the interest rate charged due to the increased risk involved. The difference in interest rates paid by individuals with varying credit scores is significant, as indicated by the following examples:
A credit score of 720 or higher results in an average interest of $5,500 on a loan.
A credit score of 680 results in an average interest of $6,600 on a loan.
A credit score of 650 results in an average interest of $8,100 on a loan.
A credit score of 615 results in an average interest of $10,200 on a loan.
A credit score of 580 results in an average interest of $13,900 on a loan.
A credit score below 580 results in an average interest of $15,300 on a loan.
In conclusion, it's clear that having a higher credit score can result in a lower interest rate, ultimately affecting your overall credit score.
Ways to Increase Your Credit Score
Improving your credit score requires effort and time, and you must exercise patience to avoid impulsive actions that could worsen things. A credit card may be the most effective way to build credit, and opening 3-5 revolving credit card accounts can maximize your credit score. Opt for a secured credit card such as Open Sky or Credit Builder Card, both of which prioritize your payment ability over your credit score. Revolving credit contributes 30-35% to your credit score, so ensure timely payments and maintain a balance between $5 and $10. It may take about 2-4 months to see a positive impact on your score. Raising your credit limits can increase your overall credit limits and lower your credit utilization percentage. You can request a limit increase through your online portal or by contacting your credit card company. Most companies require 7-15 months of excellent payment history. Keeping your balances low or close to zero is critical, and you can use your credit card to make small purchases. Make a payment plan to pay off high balances to avoid accruing high interest and ruining your credit score.
Advisory Remarks from Joe
It's natural to have a less-than-perfect credit rating at times. Nevertheless, if you're willing to invest the necessary time and effort, you can turn your finances around and see substantial changes in your score soon enough. Many individuals with unfavorable credit scores find themselves stuck in a seemingly endless cycle and believe that rehabilitated credit is beyond their reach. Nevertheless, it's possible to improve your credit rating significantly if you prioritize your credit and your spending habits. One effective technique is to start by developing a budget and facing and fixing bad spending habits to reflect positively on your score. This informative article sheds light on credit improvement. You may contact my office at www.asapcreditrepairusa.com if you require guidance or assistance with credit repair.