Were you aware that credit scores come in 30 different levels? It might surprise you to know that despite merely looking up the best credit score, one can often receive a multitude of different responses from Google. Unfortunately, such information can be vague, confusing, and sometimes even misleading, causing people to fall into a never-ending rabbit hole. However, my name is Joe Mahlow, and I have been educating people about financial literacy and repairing their credit scores for more than a decade and a half. My ultimate objective is to provide you with honest advice regarding various themes, like credit scores. I have aided more than twenty thousand customers in enhancing their credit scores, and I'm optimistic that I can equip you with enough knowledge to do the same. Let's dive in!
Contents:
What are the Various Kinds of Credit Scores?
Understanding Good Credit Scores
What is Considered a Good Credit Score for Homebuyers?
Credit Score for Car Buying: What's Ideal?
Tips to Improve Your Credit Score
Joe's Tips on Improving Your Credit Score
What are the Various Kinds of Credit Scores?
Understanding the two different credit scoring models, the FICO and Vantage models, is important as they calculate credit scores differently.
FICO Credit Score
The FICO credit scoring model is the most prevalent and widely used model, with eight different models ranging from FICO 2 to FICO 10, and each score dependent on individual credit reports. Consequently, the FICO scoring model can be confusing, but several factors influence it.
When you make a purchase or apply for credit, lenders tend to pull different FICO reports based on the credit type you're seeking. For instance, an individual applying for a mortgage will probably have to provide a FICO 5 report. On the other hand, an application for a credit card will likely require a FICO 8 credit report.
Why So Many FICO Scores
"Weight" is assigned to each credit report, with factors critical in determining your lending score impacting your credit reports' weight more than less critical ones. For example, a FICO 5 mortgage report places greater weight on your mortgage payment history. Similarly, a FICO 8 report for credit card companies places weight on your previous credit card history. Auto lenders, on the other hand, typically pull FICO-2 reports, which is based on the applicant's previous auto history.
A better visual representation of your different FICO scores can be obtained by joining myfico.com and registering for an account.
Vantage Credit Score
The Vantage scoring model was established by the three main credit reporting agencies to rival the FICO scoring model. It has gained popularity among credit monitoring sites as a method of providing free copies of credit reports.
Is the Vantage Score Accurate?
The accuracy of the Vantage score model depends on the context in which it is used since it is not extensively utilized for lending purposes. It may not be accurate as your actual lending score since it's difficult to get a loan with a Vantage score. Nevertheless, the Vantage scoring model provides an overall idea of your FICO score. It's a good idea to use your Vantage score as a guide to obtain an idea of your overall scores since they are difficult to access without a lender. The Vantage scoring model is gaining recognition in specific sectors like personal loans and auto lending.
The FICO scoring model can be outmoded and may not give users a clear representation of their credit scores. In the next five to ten years, due to its efficiency in providing the best models based on today's standards, the Vantage scoring model is likely to be used more widely. Credit reporting agencies have a vast amount of data; consequently, they are well-equipped to provide the best scoring data available.
Understanding Good Credit Scores
Credit scores are assigned based on models such as FICO or Vantage that range between 350 to 850. The higher the score, the better your credit standing. You must know where you stand in this range to have a goal of reaching the highest scores possible. For this purpose, let's take a look at some essential score thresholds.
620 or below
This is the range that is considered bad credit. It indicates adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your score, you should timely pay your bills and have ten active revolving credit accounts. You may apply for a secured credit card such as the Credit Builder Card or OpenSky Credit Card. After reaching this range, you become eligible for FHA home mortgages.
640-680
This range is considered fair to good credit. Although it indicates established credit, it may suggest derogatory marks, accounts, high balances on credit cards, or newly opened accounts that can temporarily drop your credit score. Don't worry; your score will return to the normal once the new account is established.
740+
Any score above 740 is considered "super-prime" and offers the best interest rates to borrowers. Congrats if you have a credit score higher than 740 because that means you belong to the top 20% of the US population. To maintain your high score, always pay your accounts on time, and keep your revolving credit card accounts paid. Good luck!
What is Considered a Good Credit Score for Homebuyers?
Depending on the type of mortgage loan you are seeking, the definition of a good credit score for buying a house varies. Due to government backing and federal regulations, most mortgage loans have similar requirements and guidelines, but there are notable differences between conventional loans, FHA loans, and VA loans.
1. Conventional Loans
- Most popular and best "savings" option
- No need to maintain private mortgage insurance (PMI)
- No higher than a 43% debt-to-debt ratio
- Requires a typical credit score of 640
- Lower downpayment requirements and better interest rates
2. FHA Loan
- Best for lower credit scores
- PMI required for at least 11 years
- Higher debt-to-income limit of up to 50%
- As low as 3.5% downpayment requirements
- Higher interest rates than conventional loans
3. VA Loan
- No technical credit score requirement
- Previous defaulted loans and past-due debt from the government considered
- Best interest rates available
- No need for a down payment
- Eligible for those who served in the military or their spouses
Credit Score for Car Buying: What's Ideal?
When it comes to buying a car, your credit history is more critical than your credit score. Though a high credit score is crucial, it is not a deciding factor in the interest rate that you get. What matters is your past and current credit history, and lenders assess the risk involved in extending credit. Therefore, if you have any credit issues, like a repossession or delayed payment of an auto loan, it can make getting a car loan approval challenging. However, you can still qualify for a loan through bad credit or special finance lenders. Still, you will need to meet specific approval criteria like making a higher down payment and paying additional fees to the dealership. Moreover, to increase your leverage to buy a car, you should have equity or a down payment.
What is the recommended credit score for a new car?
As there are many factors that decide if you are approved for a car loan, a credit score of 680 or above is recommended. If your score is below this, the lender may charge a higher interest rate since it sees you as a greater risk. Your credit score also determines the amount of interest you will need to pay. This can be seen in the following examples:
A person with a credit score of 720 or higher will pay about $5,500 in interest on a loan.
A person with a credit score of 680 or higher will pay roughly $6,600 in interest on a loan.
A person with a credit score of 650 or higher will pay about $8,100 in interest on a loan.
A person with a credit score of 615 or higher will pay roughly $10,200 in interest on a loan.
A person with a credit score of 580 or higher will pay about $13,900 in interest on a loan.
A person with a credit score of 580 or higher will pay approximately $15,300 in interest on a loan.
Therefore, a higher credit score leads to paying less interest, which means you can save money in the long run.
Tips to Improve Your Credit Score
Improving your credit score is a gradual process that requires patience and smart financial decisions. Rushing in can lead to irrational and bad decisions that will worsen your situation. Here are some things you can do to improve your credit score:
1. Open 3-5 Credit Card Accounts
Revolving credit, particularly credit cards, is the best way to maximize your credit scores. For those with limited credit or people trying to rebuild their credit, obtaining a large loan can be a challenge. Hence, applying for simple credit cards gives you a higher chance of approval. You may want to start with secured credit cards like Open Sky or Credit Builder Card. These cards primarily focus on your ability to pay the balance on time rather than your credit score. Revolving credit can boost your credit scores significantly. However, it may take 2-4 months to see the effect. Always make sure you pay your balance on time and keep it at $5–10 each time you make a payment.
2. Request a Credit Limit Increase
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. Every credit card company has different processes, but most of them allow you to do it online or through requesting it via a phone call. You will need to provide information on your current income and credit history. The credit team of your credit card company will decide if they will grant your request. Typically, credit card companies require seven to fifteen months of an excellent credit history before agreeing to a credit limit increase.
3. Pay Down Your Balances
Keeping your balance low and close to zero is critical. If you can, limit your credit card usage to small purchases like gas or groceries. You do not need to use your credit cards every month, but leave about $1-5 balance on your cards when paying your bill. If you have high balances and struggle to pay them off, make a game plan to allocate a certain percentage of your paycheck each month to pay down your credit card balance. The worst decision to make is to run up a balance on your credit card after paying it down. Limit your credit card usage as it plays a major role in your overall credit score. Also, note that credit card interest rates are high, and most of your payment will go towards interest and not reducing your balance.
Joe's Tips on Improving Your Credit Score
We've all experienced having less-than-ideal credit, but if you are willing to invest time and effort into improving your credit situation, you will see significant changes in your credit score in a short amount of time. Many people with poor credit find themselves stuck in a cycle of credit issues for most of their lives, making it feel like reinstating good credit is a lost cause. However, building a strong credit score requires serious dedication, and those who prioritize their credit and spending habits always emerge victorious. The first step towards a better score is to design a budget and work on shedding bad spending habits; doing so will definitely reflect on your credit standing. For more information on how credit works and if you need help with your credit repair, visit our website at www.asapcreditrepairusa.com. Here are some key takeaways: