It may surprise you to learn that there are actually 30 different levels of credit scores. Despite this fact, many people seeking the best credit score are often met with conflicting information and confusion when conducting their research online. Unfortunately, this misinformation can be quite deceiving and lead one down a path of uncertainty. Fortunately, my name is Joe Mahlow and I've dedicated my career to financial literacy and credit repair for over 15 years. Through my work, I've been able to help more than 20,000 clients improve their credit scores. Now, I'm sharing my expertise with you, so you can achieve the same results. Let's dive into the topic of credit scores together.
Contents:
Different Credit Scoring Models: Understanding FICO and Vantage Scores
Interpreting Your Credit Score
What is the Ideal Credit Score for Buying a House
Ideal Credit Score Range for Buying a Car
Tips for Improving Your Credit Score
Joe's Insights on Improving Your Credit Score
Different Credit Scoring Models: Understanding FICO and Vantage Scores
There are two primary credit scoring models that you should be aware of: FICO and Vantage. It's essential to understand the differences between these two models and how they calculate your credit score, especially if you're planning to apply for credit.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used scoring system. With eight different FICO models available, FICO 2 to FICO 10, the credit score you receive can vary depending on which model is used and your credit report. Mortgage lenders usually pull a FICO 5 credit report, whereas credit card companies use FICO 8, and auto lenders typically use FICO 2.
There are several FICO models because each credit report has a different "weight." The factors critical to the lender have a more significant impact on your credit score than less important factors. For example, a FICO 5 mortgage report heavily weighs your previous mortgage history, while a FICO 8 credit report emphasizes your credit card history.
If you're curious about your different FICO scores, you can sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score model was developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, to compete with FICO. Although Vantage is a new scoring model, it's gaining popularity in some sectors, like personal loans and auto lending, even though FICO dominates the lending industry.
Vantage offers a free copy of your credit reports via credit monitoring websites throughout the United States. While the Vantage Score is accurate, it's not widely used for lending purposes. It's a suitable "general idea" of your FICO score, which is the most trusted score by lenders.
In the next 5-10 years, lenders nationwide may widely use the Vantage scoring model because of its ability to provide the best scoring models based on current standards. The FICO scoring model is outdated and does not give an accurate representation of credit scores. As credit reporting agencies are the most extensive data collection agencies outside of social media companies, it's safe to assume that they have the best scoring data available.
Interpreting Your Credit Score
Both FICO and Vantage models measure credit scores between 350 to 850. The higher the score, the better it reflects your credit history. To achieve the highest scores, it's essential to know where you stand in your journey towards building your credit score. Here are some vital thresholds:
Scores of 620 or below
Entail bad credit, indicating adverse credit history, high-balance credit card accounts, or no credit cards. The best way to improve credit scores is by making timely payments and having at least ten active credit accounts open. Secured credit cards, such as Credit Builder Card and OpenSky Credit Card, are recommended to build credit. Once you hit the 620 credit score range, you can begin qualifying for an FHA home mortgage.
Scores ranging between 640-680
Are considered fair for good credit. Credit established in this range may have derogatory marks or accounts, high balances on credit cards, or newly opened accounts, causing a temporary drop in scores. No cause for worry; your score will return.
Scores of 740 or above
Are regarded as "super-prime" and provide you with the best interest rates for most loans. You belong to the 20% of the US population with this score, so keep up the excellent work by always paying your accounts on time and keeping your revolving credit card accounts paid.
What is the Ideal Credit Score for Buying a House
If you are planning to apply for a mortgage loan, the credit score requirement will vary depending on the type of mortgage. Primarily, there are three types of commonly used mortgage loans - Conventional, FHA, and VA loans. Here's a brief on each loan type's credit score, down-payment requirement, interest rate, and other important factors:
Conventional Loans
Conventional loans are the most popular option and offer better interest rates than other loans. With a typical credit score requirement of 640, conventional loans usually have a lower down-payment requirement and do not require private mortgage insurance (PMI). Conventional loans typically have a debt-to-income ratio requirement no higher than 43%.
FHA Loan
FHA loans are designed for borrowers with lower credit scores typically between 580 and 619. With a higher debt-to-income limit of up to 50%, FHA loans may be more accessible than conventional loans for homebuyers with lower income. However, you need to pay the PMI for at least 11 years on the FHA loan, which can add to the monthly mortgage cost. The down-payment requirement on the FHA loan is as low as 3.5%, allowing you to put less money out of pocket, but you may face a higher interest rate.
VA loan
The VA loan is available only to those who have served the country. Though there isn't any credit score requirement, lenders may scrutinize your credit history for defaulted loans or past-due debts to pre-qualify you for the loan. VA loans typically offer the best interest rates, and zero-down payment is usually required. To be eligible for the VA loan, you must have served for at least 181 days, served for 90 consecutive days during wartime, served 6 years with the National Guard, or be the spouse of a veteran who lost his/her life during active duty.
In conclusion, the ideal credit score for buying a house depends on the mortgage loan type you choose. Before selecting a loan, research various lenders to find the best mortgage option for your financial situation.
Ideal Credit Score Range for Buying a Car
When you want to buy a car, your credit history is more important than your credit score. Higher credit scores matter less for the interest rate you qualify for. Your previous and current credit histories show the risk that comes with extending credit. The lender considers several factors, including your late payments, repossessions, and so on. Some lenders specialize in bad credit loans and approve anyone for a loan even if they have had a repossession. However, they impose specific conditions that you must meet, such as a higher down payment and additional dealership fees for extending a loan. Moreover, dealerships may charge a fee to approve you for the loan. Therefore, equity or a downpayment can be an advantage when buying a vehicle on credit.
There is no credit score that guarantees approval since it depends on many factors.
However, a credit score above 680 is ideal. Scores below this can increase the interest rate due to the risk you pose to the lender. According to the credit score, you will pay a different amount of interest on a car loan. For instance, a 720 credit score results in $5,500 in interest, while a 580 credit score corresponds to $15,300 in interest on average. This data shows that your credit score affects the overall amount of interest you pay. Therefore, the best strategy is to maintain a high credit score to reduce interest and improve your creditworthiness.
Tips for Improving Your Credit Score
Improving your credit score can be a lengthy process, but there are a few things you can do right away to increase it with minimal effort. Practicing patience and making rational decisions with your credit is key to building good credit over time. Here are some practical steps to take:
1. Open 3-5 Revolving Credit Accounts
Obtaining revolving credit, like credit cards, can help maximize your credit scores quickly. Starting with a secured credit card that doesn't solely rely on your credit score, such as Open Sky or Credit Builder Card, can increase your chances of approval. Revolving credit makes up 30-35% of your overall credit score, so make sure to pay your balance on time and maintain a low balance each month by using the card primarily for small purchases.
2. Raise Your Limits
Requesting a credit limit increase for your active revolving credit card accounts can help you lower your utilization percentage and increase your overall credit limits. Contact your credit card company and ask for a "Credit Limit Increase," but be prepared to provide personal and financial information.
3. Pay Down Your Balances
Keeping your balances low and close to zero can help maintain a good credit score. If you have high balances, make a plan to take a percentage of your paycheck each month to pay them down and minimize your credit card usage. The high rates on credit cards can lead to most of your payments going towards interest rather than the principal amount.
Joe's Insights on Improving Your Credit Score
We all have experienced financial setbacks that result in poor credit ratings. However, If you are committed to improving your credit standing and are willing to put in the effort and time to work on yourself and your spending habits, you will see significant changes in your credit score sooner than expected. Many people view improving their credit as an unattainable goal, and unfortunately, this mindset often creates a cycle of credit challenges that's hard to break. Improving your credit score requires a great deal of work, but those who prioritize their credit and make necessary changes to their spending habits will succeed. The first step is creating a budget and addressing any bad spending habits; this will have a direct impact on your credit score. If you'd like guidance or assistance to repair your credit, please visit www.asapcreditrepairusa.com. This article aims to provide a better understanding of credit.
Key Suggestions:
Take your credit position seriously
Focus on your spending habits
Make achieving a great credit score a priority