It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Despite this fact, many people are unaware of the full scope of credit score options available to them. When trying to determine the best credit score for you, you may find that a simple Google search yields a plethora of varied responses. Unfortunately, much of this information can be overwhelming and difficult to understand, potentially leading you down a confusing path. My name is Jane Smith and I have been working in the financial literacy and credit repair industry for more than a decade. My main objective is to provide you with honest and straightforward advice on a variety of topics relating to credit scores. Over the years, I have aided more than twenty thousand clients in boosting their credit scores and I am eager to share some key information with you on the topic. So, let's dive in!
Contents:
Different Types of Credit Scores Understanding FICO and Vantage Models
Understanding What Qualifies as a Good Credit Score
Credit Score Requirement for Buying a Home
Good Credit Scores for Car Loans
How to Elevate Your Credit Score
Joe's Insights on Credit Improvement
Different Types of Credit Scores: Understanding FICO and Vantage Models
When it comes to credit scores, there are two models that you should know about: FICO and Vantage. Understanding their differences in calculating scores can help you make informed choices about your financing options.
FICO Credit Score
FICO is the most widely-used scoring model with eight different FICO versions available. Different versions are used by different lenders depending on the purpose of the loan. For instance, FICO 5 is used by mortgage lenders, while FICO 8 is used by credit card companies. Each version weighs different factors in your credit report, so a great payment history for a previous mortgage will affect a FICO 5 score more positively than a FICO 8 score.
Vantage Credit Score
Developed by Equifax, Experian, and TransUnion, the Vantage Score is a new scoring model that competes with FICO. It's gaining popularity in some lending sectors, like personal loans and auto lending. Credit monitoring websites commonly use Vantage to provide free credit reports.
Accuracy of Vantage Score
The accuracy of Vantage Score depends on the context. It's not as widely used for lending as FICO, so it may not be a good indicator of your actual lending score. However, it can give you a general idea of where your scores are. Since Vantage is getting more recognition, it's believed that the model will soon be widely used by lenders.
Which Model is Better?
Both models provide accurate scores but weigh information differently. FICO is more popular, but its many versions can create confusion. Meanwhile, Vantage is a new model, but it's gaining popularity and competition. Knowing your credit scores from both models can give you a better picture of your creditworthiness. To see your different FICO scores, you can sign up for an account at myfico.com.
Understanding What Qualifies as a Good Credit Score
Credit scores for both FICO and Vantage models range from 350 to 850, with 850 being the highest credit score one can obtain and 350 being the lowest. If you're striving to achieve the highest score possible, it's crucial to be aware of your current score, so I’ll provide you with some important score thresholds.
1. 620 or below
Having a score of 620 or below is considered a bad credit score, and it may indicate a negative credit history, high-balance credit card accounts, or no credit cards at all. Timely repayments and having ten active revolving credit accounts open are the most effective methods for increasing your credit scores. You may consider applying for Credit Builder Card or OpenSky Credit Card as they are secured credit cards that can assist you in building your credit. Once you reach the 620 credit score threshold, you may be eligible for an FHA home mortgage.
2. 640-680
A credit score between 640 and 680 is deemed as fair for good credit. Scores in this range signify established credit, but may also include derogatory remarks or accounts on your credit and high credit card balances that require repayment. If you recently opened an account, it may cause a temporary dip in your credit scores, but don't worry; your scores will return.
3. 740+
Any credit score above 740 is super-prime, and it makes you eligible for the best interest rates for most loans. Congratulations if your credit score exceeds 740 because only a minority of Americans (about 20%) have this score. Keep up the excellent work by paying your accounts on time and taking care of your revolving credit card accounts, and you'll be in excellent shape!
Credit Score Requirement for Buying a Home
The credit score you need to purchase a house will depend on the type of mortgage loan you are looking for. Different mortgage loans have different federal regulations and government backing, which leads to various requirement and guidelines. The most common mortgage loan types are: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular option as they typically have the best interest rates and lower downpayment requirements than most mortgage loans. A typical credit score requirement for a conventional loan is 640, and the maximum debt-to-debt ratio allowed is 43%. Moreover, conventional loans do not require private mortgage insurance (PMI).
2. FHA Loans
The credit score requirement for an FHA loan is from 580 to 619. Unlike conventional loans, the FHA loan requires you to maintain PMI for at least 11 years, which can be an additional cost you should consider before deciding. Nevertheless, this loan typically has a higher debt-to-income limit of up to 50% and a downpayment requirement as low as 3.5% of the purchase.
3. VA Loan
The VA loan does not have a credit score requirement per se, but pre-qualifying for the loan will depend on the borrower's previous defaulted loans and past-due debts owned to the government. To qualify, the borrower should have served in the US military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or be a military spouse who lost their life during active duty. The VA loan usually offers the best interest rates and does not require a downpayment.
Good Credit Scores for Car Loans
When purchasing a vehicle, it's not just your credit score that's taken into account, but also an examination of your credit history. Even though a higher credit score is important, it isn't the most important factor when determining the interest rate for which you're eligible. Rather, lenders prioritize examining credit history to determine the risk entailed in lending.
Immaculate Record
For instance, if you've missed payments on previous auto loans or had a vehicle repossessed, it will be more difficult to get car loan approval than someone with an immaculate record. However, even those with poor credit or considered high-risk can still qualify for car loans from special finance lenders, albeit with additional criteria and fees. Dealerships might charge additional fees to cover the risks of the loan applicants.
Impact of Credit Score
Although there's no definitive credit score that guarantees approval for car loans, a credit score above 680 is beneficial. However, a lower score can increase the interest rate charged by creditors due to the risk the borrower poses. According to the provided interest averages, the higher your credit score, the less interest you pay, ultimately impacting your credit score.
How to Elevate Your Credit Score
Boosting your credit score requires consistent effort and a significant investment of time. A good credit score is not built overnight, and it is crucial to exercise patience when working towards it. Acts of impulsiveness can lead to damaging decisions that will prolong your progress. To increase your credit score, you can follow these steps:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit, in particular, credit cards, provides the best chance for improving your credit score. It is an efficient way to build your credit score, especially for those with limited credit or looking to rebuild their credit. Obtaining a large loan to build credit will be challenging, but credit cards can help you reach your goal. It would be best to open a secured credit card that does not primarily focus on your credit score, such as Open Sky or Credit Builder Card, but instead prioritizes your ability to make timely payments. Revolving credit accounts contribute 30-35% to your credit score and can significantly improve your credit score within 2-4 months. To ensure exponential growth, maintain low balances of $5-$10 and limit the card's usage to small purchases like gas and groceries.
2. Raise Your Limits
By requesting a credit limit increase, you can quickly increase your credit score by lowering your credit utilization percentage. A large percentage utilization of your credit card limit hurts your credit scores the most. To avoid this, you can request a credit limit increase online or by calling your credit card company. If unsure, ask for a "Credit Limit Increase" and fill out the necessary information, including your income. Your credit card company's credit team will decide whether granting a credit increase is appropriate, usually after observing excellent payment history for 7-15 months.
3. Pay Down Your Balances
To keep your balance low, it is essential to use your credit cards responsibly. Plan to use them for small purchases only and leave a balance between $1-$5 when it comes time to pay your bill. If backed with financing challenges, commit to finding a way to allocate a certain percentage of your income each month toward paying off the credit card balance. Avoid running up the balance again since your credit card utilization greatly impacts your credit score. An added disadvantage is the substantial interest rates charged by credit card companies.
Joe's Insights on Credit Improvement
It's common to experience credit troubles, but taking them seriously and making an effort to improve your situation can lead to significant score increases in a short period. Many individuals with poor credit fall into a cycle of continuous struggle and think that repairing their score is impossible. However, building a great credit score requires hard work and dedication to prioritizing credit and spending habits. To start, create a budget and identify and fix problematic spending behaviors, which will directly impact your credit score. This article provides valuable information about credit and suggests reaching out to Joe's office at www.asapcreditrepairusa.com if assistance is needed with credit repair or guidance.