It might surprise you to learn that there are actually 30 different levels of credit scores. With so many results popping up on Google, it can be confusing and overwhelming to navigate through the information and find the best credit score for you. Unfortunately, some of the information out there can be misleading and lead you astray. Lucky for you, I'm here to help! My name is Joe Mahlow and I've devoted over 15 years of my career to financial literacy and credit repair. My objective is to provide you with straightforward advice on various financial topics, starting with the topic of credit scores. Having helped over 20,000 clients elevate their credit scores, I'm confident I can help you do the same. So let's delve into the world of credit scores!
Contents:
Different Types of Credit Scores Explained
What is a good credit score?
Determining a Credit Score to Qualify for a Mortgage
Determining the Ideal Credit Score for Buying a Car
Ways to Increase Your Credit Score
Joe's Advice on Credit Improvement
Different Types of Credit Scores Explained
There are two credit scoring models that are commonly used: the FICO model and the Vantage model. Each model calculates your credit score differently, making it important to understand the differences between them.
FICO Credit Score
The FICO model is the most widely used credit scoring model and consists of eight different versions, from FICO 2 to FICO 10. Each version calculates your credit score differently based on your credit report. For example, a mortgage lender would most likely pull your FICO 5 credit report, while a credit card company would use your FICO 8 credit report.
Why so many FICO scores?
Different lenders prioritize different factors when evaluating your creditworthiness. This means that some factors may carry more weight in certain reports. For example, the FICO 5 mortgage report places more importance on your previous mortgage history. In contrast, FICO 8, primarily used by credit card companies, weighs your credit card history more heavily. Other lenders, like auto lenders, typically pull FICO-2 reports.
To see your different FICO scores, you can sign up for an account at www.myfico.com.
Vantage Credit Score
The three major credit reporting agencies developed the Vantage Score to compete with the FICO model. Though it’s a newer scoring model than FICO, it’s becoming increasingly popular in certain sectors, like personal loans and auto lending.
Is the Vantage Score accurate?
While the Vantage Score is accurate, it’s not widely used for lending purposes. As a result, it may not accurately reflect your actual lending score. Nevertheless, it can serve as a useful indication of your overall credit score. In the future, lenders may increasingly use the Vantage model due to its ability to capture modern consumer behavior.
Credit scores are an essential aspect of your financial life, and it’s important to understand the different models available. By familiarizing yourself with the FICO and Vantage models, you can better manage your credit score and evaluate your creditworthiness.
What is a good credit score?
Credit scores for the FICO and Vantage models range from 350 to 850, with 350 being the worst and 850 being the best. Setting your goals for the highest credit scores is crucial to understand where you are in your journey toward building your credit scores, so here are some essential score thresholds.
1. 620 or below
This is considered to be bad credit, and if you're below this threshold, it's likely that you have some adverse credit history, high-balance credit card accounts, or no credit cards at all. The best way to improve your credit scores is by making timely payments and having ten active revolving credit accounts open. You can use the Credit Builder Card or OpenSky Credit Card, secured credit cards that can help you build your credit. If you reach the 620 credit score range, you can qualify for an FHA home mortgage.
2. 640-680
This is considered fair for good credit. Scores in this range suggest that you have established credit, but you may have derogatory marks or accounts on your credit, and you may have some high balances on your credit cards that you'll need to pay down. Newly opened accounts may temporarily drop your scores. If you're in this range and have recently opened a new account, don't panic; this is just temporary, and your scores will return.
3. 740+
Any credit score over 740 is "super-prime" and will provide you with the best interest rates for most loans. If you have a credit score over 740, you're considered part of the 20% of the US population with this score. Congratulations on the great achievement! Always pay your accounts on time and keep your revolving credit card accounts paid, and you'll be in great shape.
Determining a Credit Score to Qualify for a Mortgage
When it comes to qualifying for a mortgage loan, your credit score plays a significant role. However, the required credit score may vary depending on the type of loan you're applying for, as federal regulation and government support can impact the guidelines and requirements of each loan type. There are three common mortgage loan types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are among the most popular loans and generally the best option for those who don't qualify for VA loans. They usually have lower downpayment requirements and better interest rates compared to other types of mortgages. The credit score requirement for conventional mortgage loans is typically 640 or higher, and the debt-to-debt ratio should not exceed 43%.
2. FHA Loan
FHA loans cater to borrowers with lower credit scores, typically between 580 and 619. However, the credit score limit may vary from one lender to another. PMI must be maintained for 11 years or more, which can be costly, and the interest rates on FHA loans are typically higher than conventional loans.
3. VA loan
The VA Loan does not have a strict credit score requirement, but they will check your credit for past defaulted loans or government-owed past-due debts during pre-qualification. The interest rates are usually the best available. To be eligible for VA loans, you must have served in the military, served with the National Guard, or have a spouse who was in the military and lost their lives while on active duty. The VA loan typically doesn't require a down payment, making it an excellent option for eligible applicants.
Determining the Ideal Credit Score for Buying a Car
Your credit history is the most important factor when it comes to determining your eligibility to buy a car, rather than just your credit score. Although a higher credit score can be beneficial, it doesn't have as much impact on the interest rate for which you'll qualify.
When applying for an auto loan, lenders consider your previous and current credit histories rather than just your credit score. Late payments on car loans, repossessions, and other credit issues can make it more challenging to get approved for a loan. However, there are lenders who specialize in bad credit auto loans and are likely to offer loans to virtually anyone, but they may require a higher down payment and additional fees to mitigate the risk involved.
It’s important to have equity or a downpayment to have more leverage when buying a vehicle on credit. So, if you have a credit score over 680, it's considered ideal for getting approved for a car loan. Any score lower than 680 may increase the interest rate you'll be charged, and the lower your score, the higher the interest rate.
Here's an example of how your credit score can impact the interest rate you'll pay:
Comparison of Credit Scores and Corresponding Interest Rates:
- A credit score of 720 or above can result in paying, on average, $5,500 in interest on a loan.
- A credit score of 680 or above can result in paying, on average, $6,600 in interest on a loan.
- A credit score of 650 or above can result in paying, on average, $8,100 in interest on a loan.
- A credit score of 615 or above can result in paying, on average, $10,200 in interest on a loan.
- A credit score of 580 or above can result in paying, on average, $13,900 in interest on a loan.
- A credit score of 579 or below can result in paying, on average, $15,300 in interest on a loan.
It's clear from the data that a higher credit score results in paying lower interest rates. However, the overall credit history plays a vital role in your eligibility and the interest rate charged on your loan.
Ways to Increase Your Credit Score
Improving your credit score is a gradual process that requires patience and effort. Hasty decisions and irrational behaviors with your credit can make matters worse, so it's essential to be patient and take measured steps towards building good credit. Here are some things you can do to improve your credit score:
1. Open Revolving Credit Accounts
Opening three to five revolving credit accounts like credit cards can maximize your credit score. If you have limited credit or are looking to rebuild your credit, obtaining a large loan is not advisable. Secured credit cards like Open Sky or Credit Builder Card focus more on your ability to pay the card on time and offer the best chance of approval. Revolving credit makes up 30-35% of your overall credit score, so pay your balance on time and keep it at $5-10 each time you make a payment, limiting the use of the card to small purchases.
2. Request a Credit Limit Increase
Active revolving credit card accounts present an opportunity to raise overall credit limits and lower credit utilization percentage by requesting a credit limit increase. Each credit card company has a different process, but typically, you will need to fill out some information and have seven to fifteen months of excellent payment history before your request is approved.
3. Pay Down Your Balances
Lowering credit card balances and keeping them close to zero is critical. Use credit cards for small purchases and leave a $1-5 balance when paying your bill each month. If you cannot pay off high balances, make a game plan to pay an “x†percentage of your paycheck each month until the balance is paid down. Limit credit card usage to avoid high-interest rates and using finances to pay down credit card bills repeatedly.
Joe's Advice on Credit Improvement
We all know the feeling that comes with having less-than-perfect credit. However, if you take the time to prioritize your credit and work on improving it, you will see significant improvements in your score in a short amount of time. Unfortunately, many people with bad credit resign themselves to a lifetime of struggling with credit issues. The truth is, building a great credit score takes hard work and dedication. By focusing on your spending habits and creating a budget, you can take control of your credit situation. Following these steps will help you see a direct improvement in your credit score. If you need help repairing your credit, don't hesitate to contact my office for guidance and support at www.asapcreditrepairusa.com.