It's quite surprising how many people are unaware of the 30 levels of credit scores that exist. Google is often the go-to source for information on credit scores, but searching for the best credit score can lead to a lot of conflicting information that can be confusing and even counterproductive. My name is Joe Mahlow, and I have spent over 15 years working in the financial literacy and credit repair industry. My aim is to provide straightforward advice on topics like credit scores. With my experience, I have been able to assist over 20,000 clients in improving their credit scores. In this post, I will share some raw advice that can help you achieve similar results. Let's dive in!
Contents:
Different Types of Credit Scores FICO vs. Vantage
Determining a Quality Credit Score
What Credit Score is Needed to Buy a House?
Determining the adequate credit score for buying a car
Tips for Increasing Your Credit Score
Tips from Joe on Improving Your Credit Score
Different Types of Credit Scores: FICO vs. Vantage
Understanding the two main credit scoring models – FICO and Vantage – is crucial for anyone looking to know their credit score. Each model varies in how it calculates credit scores, which is why we often have multiple FICO scores. In this article, we take a detailed look at the FICO and Vantage scoring models, provide insight into why there are different FICO scores, and examine the accuracy of the Vantage Score.
FICO Credit Score
The FICO scoring model is the most popular and widely used in the United States, with eight different FICO models available. Lenders may pull a different version of the FICO report depending on the type of credit you're applying for. For instance, applying for a home loan means your lender will most likely pull your FICO 5 credit report, whereas applying for a credit card means they'll most likely pull your FICO 8 credit report. The different FICO scores exist because each credit report has a different "weight" depending on the critical factors for the lender.
Vantage Credit Score
The Vantage Score is a newer scoring model developed by the three major credit reporting agencies – Equifax, Experian, and TransUnion – to compete with the FICO model. Although not as widely used as FICO for lending purposes, Vantage has been gaining popularity in sectors such as personal loans and auto lending. While accuracy varies depending on the context, the Vantage Score can provide a general idea of your credit score and give an indication of where your overall scores may lie.
Is the Vantage Score Accurate?
The Vantage Score can be accurate, but this depends on the context within which you're using it. Since the Vantage Score is not yet widely used for lending purposes, it may not be as accurate for your actual lending score compared to FICO. However, it can give a ballpark figure of where your overall scores lie. As credit reporting agencies collect vast amounts of data, they have the upper hand in providing the best scoring data. It's likely we'll see more widespread use of the Vantage Score in the coming years as it continues to provide the best scoring models based on today's standards.
Determining a Quality Credit Score
When discussing credit scores, it is important to recognize the range of scores possible, with models such as the FICO and Vantage systems rating scores between 350 and 850. To ensure you are working towards the top of the range, it is essential to understand score thresholds along your journey to improving your score. Below are important considerations for each range.
1. 620 or below
If your score falls into this category, it is considered poor, likely indicating negative credit history, high-balance credit card accounts, or a lack of credit cards altogether. To rebuild, it is recommended to make timely payments and maintain ten active revolving credit accounts, such as those offered by Credit Builder Card or OpenSky Credit Card. Once reaching a 620 credit score, you can qualify for an FHA home mortgage.
2. 640-680 range
This range is considered fair for good credit, indicating established credit with some derogatory marks, possibly high balances on credit accounts, and recently opened accounts that may temporarily lower your score. However, scores in this range can quickly improve with timely payments, paying down balances, and continuity in credit usage.
3. 740 and above
Having a score over 740 is considered super-prime and offers the best interest rates for most loans. Congratulations if you have a score in this range as it puts you in the top 20% of the US population! Keep paying your accounts on time and maintaining paid revolving credit card accounts to remain in great shape.
What Credit Score is Needed to Buy a House?
When considering the credit score necessary to buy a house, keep in mind that it depends on the type of mortgage loan for which you plan to apply. Mortgage loan requirements and guidelines vary and depend on loan type. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and often the best option for those who don't qualify for a VA loan. These loans do not require private mortgage insurance (PMI), which could increase your monthly payment or down payment amount. The average credit score requirement for a conventional mortgage is around 640 with a debt-to-debt ratio no higher than 43%.
FHA Loans
The FHA loan is for those with credit scores between 580 and 619. However, the credit score requirement is not the only consideration. Different lenders may offer varying financial options, so it's important to shop around. FHA loans require PMI for at least 11 years and allow for a maximum debt-to-income ratio of 50%. The down payment requirement on an FHA loan is as low as 3.5%, which may be an attractive option for those who wish to purchase a home with less upfront cash.
VA Loans
The VA loan is available to veterans who have served for at least 181 days, those who served 90 consecutive days during wartime, individuals with six years of National Guard service, and spouses of military members who lost their lives during active duty. There is no specific credit score requirement for this loan, but previous defaulted loans and government-owed past-due debts may be considered during pre-qualification. VA loans typically offer the lowest interest rates and often do not require a down payment. This option is a great way to honor our veterans and provide them with the necessary assistance to purchase a home.
Determining the adequate credit score for buying a car
When planning to purchase a car, your credit history takes precedence over your credit score in qualifying for a loan. While a credit score factors into the picture, it only plays a minor role in deciding interest rate eligibility. Essentially, lenders check your past and present credit records to assess how much risk they are taking while extending credit. If your credit report shows any default on previous or current credit payments or repossession, you might face a hard time getting approved for a loan. However, loan providers with more lenient policies could complete the approval process if you meet their specific criteria. These could include an increased down payment or additional fees paid to the dealership by the loan provider. The dealership carries the burden of paying a fee to mitigate the risk of loan default and approve your application. They could also recommend specific car options that come with higher markup costs to cover the fee. A substantial down payment or equity could provide you with more bargaining power while securing an auto loan.
The credit score range for a new car
Although there isn't an exact credit score that guarantees loan approval, credit scores above 680 might give you a better chance. Anything below this score poses a risk to the loan provider, increasing the interest rate on the loan. Here is an example detailing how credit score affects loan interest:
A client with a 720 credit score or higher will pay an average of $5,500 in interest on a loan.
A client with a 680 credit score or higher will pay an average of $6,600 in interest on a loan.
A client with a 650 credit score or higher will pay an average of $8,100 in interest on a loan.
A client with a 615 credit score or higher will pay an average of $10,200 in interest on a loan.
A client with a 580 credit score or higher will pay an average of $13,900 in interest on a loan.
A client with a credit score of 580 or higher will pay an average of $15,300 in interest on a loan.
As is evident from the above data, paying attention to your credit score can ultimately affect your credit rating. A higher credit score translates to less interest charged overall, presenting an opportunity for bigger savings.
Tips for Increasing Your Credit Score
Improving your credit score requires effort and patience as it doesn't happen overnight. Here are three things you can do to help increase your credit score:
1. Open revolving credit accounts:
To boost your credit score, it's best to start with revolving credit accounts such as secured credit cards from Open Sky or Credit Builder Card. This helps build credit, especially for those with limited or damaged credit. Paying your balance on time and limiting your use of the card to small, necessary purchases will show improvements within 2-4 months.
2. Raise credit limits:
Requesting credit limit increases for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. This process is different among credit card companies, but you can call and request a "Credit Limit Increase" for more information. Good payment history of 7-15 months is usually required before approval.
3. Pay down balances:
Keeping your balance low and close to zero is vital to maintaining a good credit score. It's not necessary to use your credit cards each month, but when you do, keep the balance around $1-5. If you have high balances, make a plan to pay them down gradually and avoid running them back up again. This helps limit credit card usage that could negatively impact your credit score, not to mention the high-interest rates.
Tips from Joe on Improving Your Credit Score
Having a less-than-ideal credit score is a common problem for many people. However, if you take your credit situation seriously and devote time and effort to improving it, you can witness significant improvements in your credit score in a relatively short time. Unfortunately, many individuals with poor credit feel trapped in a cycle of credit troubles and believe that attaining good credit is out of reach. While developing good credit may require significant commitment, those who prioritize their credit and spending habits can succeed. Begin by drafting a budget and addressing any negative spending patterns, which can help boost your creditworthiness. For a better understanding of credit, consider reading this article. If you require guidance on repairing or improving your credit score, please contact our office at www.asapcreditrepairusa.com.
Improving your credit score:
1. Devote time and effort to improving your credit score.
2. Do not fall into the cycle of credit issues.
3. Prioritize your credit and spending habits.
4. Create a budget and work towards fixing bad spending habits.