Contents:
Different Credit Score Types: FICO and Vantage Models
Understanding Credit Score Ratings
Determining the Ideal Credit Score to Obtain a Home Loan
Credit history matters more than credit score when buying a car
Tips for Boosting Your Credit Score
Tips from Joe on Credit Improvement
Different Credit Score Types: FICO and Vantage Models
Credit scores are important for lenders to analyze and determine the risk involved in lending money. There are two primary credit scoring models: the FICO model and the Vantage model. Understanding the differences between these models is crucial in managing and monitoring your credit score.
FICO Credit Score
FICO is the most widely used credit scoring model consisting of eight different FICO models, from FICO 2 to FICO 10. Each of these models is specific to the type of credit lender and pulls a different FICO report from your credit history. For example, a mortgage lender will most likely pull a FICO 5 report, whereas a credit card lender may pull a FICO 8 report. This is because each report's "weight" is different, meaning some factors are more critical than others. For instance, the FICO 5 mortgage report weighs heavily on your previous mortgage history, whereas credit card companies focus more on the FICO 8 report.
Vantage Credit Score
Developed by Equifax, Experian, and TransUnion, the Vantage Score is a newer scoring model compared to FICO. It's gaining popularity in some sectors, such as personal loans and auto lending. However, it's not widely used for lending purposes yet, and its accuracy may vary compared to the FICO score. Despite this, the Vantage Score is an excellent general idea of your credit score, especially since the FICO score can be challenging to know without a lender's involvement.
Future of Credit Scores
While FICO dominates the lending sector currently, the Vantage Model's popularity is growing. The Vantage scoring model provides better scoring models based on today's standards. The FICO scoring model is outdated and doesn't offer a clear representation of credit scores. Credit reporting agencies have the most significant collection of data outside social media companies, and they will likely use the Vantage scoring model more widely in the future.
Understanding Credit Score Ratings
Credit scores can be assessed using the FICO and Vantage models, which range from 350 to 850. While 850 is the best score, 350 is the worst. Knowing where you stand along your journey in achieving the highest credit scores is essential. Here are the vital score thresholds based on the different ranges.
1. 620 or below:
This is considered bad credit.
Having a score below this threshold indicates negative credit history, high-balance credit card accounts, or no credit cards at all. To improve, it's essential to make timely payments and have ten active revolving credit accounts open. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can help you build your credit. Reaching a score of 620 can make you eligible for an FHA home mortgage.
2. 640-680:
This score range is considered fair for good credit.
While it indicates established credit, you may have derogatory marks or high balances on credit cards to pay down. A temporary drop in scores can occur with newly opened accounts, but it will revert.
3. 740+:
Any score above 740 is considered "super-prime."
Only 20% of the population holds this score. A score in this range gives you the best interest rates for most loans. Punctual payments and keeping your revolving credit card accounts paid will keep you in excellent standing. If you have this score, congratulations on your hard work!
Determining the Ideal Credit Score to Obtain a Home Loan
The credit score needed to secure a home loan largely depends on the loan type that you want to pursue. As a result of federal regulation and government support, many mortgages share similar or varying standards and requirements. There are three common mortgage types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
The most prevalent and viable loan option, aside from VA loans, are conventional loans. With these types of loans, you will not need private mortgage insurance (PMI). Because PMI is designed to protect the lender in the event of missed loan payments, it can increase your down payment or monthly payment. Conventional loans typically have more affordable down payment requirements and interest rates than other loans. A standard credit score of 640 and a debt-to-debt ratio of no higher than 43% are standard requirements for obtaining a conventional mortgage loan.
2. FHA Loans
The FHA mortgage loan is intended for applicants with lower credit scores, typically ranging between 580 and 619. Bear in mind that different lenders provide varying financial options. While you may meet the credit score criteria of one lender, it is always wise to explore options with other lenders. PMI is required for at least 11 years with FHA loans, which can significantly boost the cost of your mortgage payments. These loans often provide higher debt-to-income limits, which allow you to buy a house even with a lower income. A down payment requirement of as little as 3.5% may apply to an FHA loan, making it a suitable mortgage option for individuals looking to minimize their out-of-pocket expenses. However, interest rates for FHA loans are usually higher than conventional loans.
3. VA Loans
There is no set credit score requirement for VA loans. Still, when seeking loan pre-qualification, the lenders will examine your previous defaulted loans and any government-owned debts that are past due. To be eligible for a VA loan, you must have served in the United States Military for at least 181 days, served 90 days during war, served six years with the National Guard, or lost a spouse who died during active military service. VA loans usually have the most affordable interest rates available, and they do not require a down payment. The VA Loan program is a great way to thank our veterans for their service to the nation, and it is one of my favorite options.
Credit history matters more than credit score when buying a car
When it comes to qualifying for a car loan, your credit history is more important than your credit score, although a good score is still beneficial. Loan providers evaluate your credit histories, both current and past, to determine the risk involved in extending credit. Late payments on previous auto loans or repossession make it harder to secure a car loan compared to those without such issues. While bad credit or special finance lenders may qualify anyone for a car loan, you may still need to meet certain criteria such as higher down payment and additional dealership fees. To lower the risk of loan default and approve the loan, the dealership may choose a car with higher price markups. Additionally, equity or a down payment gives an extra advantage when purchasing a car on credit.
Credit score requirements for a new vehicle
Since several factors determine auto loan eligibility, knowing an exact credit score to guarantee approval is impossible. However, a credit score above 680 is preferred. Credit scores below 680 can result in higher interest rates because of the perceived risk to the creditor. As an example, a borrower with a credit score above 720 pays less interest than someone with a score of 680. A person with a score lower than 580 pays the highest interest rates, translating to relatively higher overall expenses.
Tips for Boosting Your Credit Score
Improving your credit score requires consistent effort and patience. It is not a quick fix but a gradual process that can take months or even years. However, you can take steps right now to help increase your credit score. Here are some of the helpful things you can do today:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit accounts such as credit cards offer the easiest and fastest way of building your credit score. If you have limited credit or need to rebuild your credit, getting a large loan will be difficult. Instead, consider opening a secured credit card that doesn't focus on your credit score. Focus on paying your balances on time and keeping it at $5-$10 each time you make payment. It may take 2-4 months to reflect the increase in your credit score, but it is an excellent way of building credit quickly.
2. Increase Your Credit Limits
Requesting an increase in your credit limits for active revolving credit card accounts can lower your credit utilization percentage, a critical factor that can negatively impact your credit score. To do it, contact your credit card company and request a credit limit increase. Provide your current income and make sure you have 7-15 months of excellent payment history on a credit card before requesting an increase.
3. Pay Down Your Balances
Paying down your balances can help you keep your credit utilization percentage low. Use your credit cards only for small purchases and pay off your balance in full each month. If you have high balances and cannot pay it off, make a game plan to pay it off gradually each month. Do not run the balance back up after paying it down.
By following these tips, you can boost your credit score over time and achieve your financial goals.
Tips from Joe on Credit Improvement
Let's face it, we all deal with the reality of having less than impressive credit at some point. However, if you want to make a positive change in your current credit situation, it is crucial to invest time and effort in working on yourself and your credit. Often, people with poor credit accept this as a fact of life, feeling hopeless about ever having good credit again. Nonetheless, it is possible to improve your credit score substantially and relatively quickly. If you prioritize your credit score and focus on your spending habits, you can break this vicious cycle that holds you back. Start by creating a budget and identifying areas in which you overspend, and then work on fixing these habits. Your credit score will soon reflect these changes positively. We want to help you navigate the world of credit. If you need guidance or professional assistance with credit repair, don't hesitate to contact us at www.asapcreditrepairusa.com. Here's a summary of the key takeaways: