It may come as a surprise to many, but there exists a whopping 30 different levels of credit scores that lenders use to assess an individual's creditworthiness. With so much information out there on finding the best credit score, it's easy to get lost in a sea of conflicting advice and rabbit holes. My name is Joe Mahlow, and with over fifteen years of experience in the financial literacy and credit repair industry, I aim to offer you genuine and authentic advice on a range of topics, starting with credit scores. With a track record of helping over twenty thousand clients improve their credit scores, I hope to equip you with enough knowledge to do the same. So, without further ado, let's delve into the world of credit scores!
Contents:
Credit Score Models: FICO and Vantage
Understanding Different Credit Score Ranges
Determining the Appropriate Credit Score for Purchasing a House
Determining Your Creditworthiness for Car Loans
Ways to Improve Credit Score
Tips from Joe for Improving Your Credit Score
Credit Score Models: FICO and Vantage
When it comes to calculating your credit score, there are two main models: FICO and Vantage. Understanding the differences between these models is crucial to gaining a better understanding of your credit score.
FICO Credit Score Model
The FICO credit scoring model is the most commonly used model and includes eight different FICO models, from FICO 2 to FICO 10. Your credit score may differ depending on which FICO model is used to calculate it. This is because different lenders may use different FICO models, depending on the type of loan or credit you are applying for. For example, a mortgage lender would likely pull your FICO 5 report, while a credit card company would typically use FICO 8.
Why So Many FICO Scores?
Each credit report has a different "weight," meaning that certain factors are more critical for lenders than others, resulting in different scores. Therefore, different FICO models may be used depending on the type of loan or credit you are applying for. For example, previous mortgage or auto payment history may weigh more heavily on your FICO score if you are applying for a mortgage or auto loan.
Vantage Credit Score Model
The Vantage Score was developed by Equifax, Experian, and TransUnion to compete with the FICO scoring model. While it is gaining popularity in some sectors, such as personal loans and auto lending, FICO still dominates the lending sector. The Vantage Score is a good general idea of your overall credit score, although it may not be entirely accurate since it is not widely used by lenders.
Is the Vantage Score Accurate?
The Vantage Score may be accurate for giving you a general idea of your credit score, but your actual lending score will likely be calculated using a FICO model. However, as lenders continue to evaluate the accuracy of different scoring models, it is possible that the Vantage Score may become more widely used in the future. The credit reporting agencies have the most significant amount of data, meaning they have the upper hand in providing the most accurate and relevant scoring data. If you want to see all your different credit scores, including FICO and Vantage, you can sign up for an account at www.myfico.com.
Understanding Different Credit Score Ranges
Credit scores can range from 350 to 850, with 850 being the best score and 350 being the worst. To achieve the highest scores, it is essential to understand where you stand on your credit journey. Here are some crucial score ranges to keep in mind:
620 or below
If your credit score falls in this range, you have a bad credit score. You may have some adverse credit history, such as high-balance credit cards or no credit cards at all. To improve your scores, it is recommended to make timely payments and have at least ten active revolving credit accounts. Examples of secured credit cards include the Credit Builder Card or OpenSky Credit Card. Once you reach the 620 credit score range, you can start qualifying for an FHA home mortgage.
640-680
This is considered fair for good credit. Scores in this range mean that you have established credit and may have some derogatory marks or accounts. You may have high balances on your credit cards that need paying down. Also, if you recently opened a new account, your score may temporarily drop. Don't worry; this is temporary.
740+
Any score over 740 is considered "super-prime," giving you the best interest rates. Congratulations, you are part of the 20% of Americans with this score. Keep up the good work by always paying your accounts on time and keeping your revolving credit card accounts paid. You will be in excellent shape!
Determining the Appropriate Credit Score for Purchasing a House
The requirements and regulations for mortgage loans depend on the loan type you are considering. The most common types of mortgage loans are conventional, FHA, and VA loans, and they all have their unique requirements and guidelines.
1. Conventional Loans:
- Conventional loans are popular and the best savings option aside from VA loans.
- If you opt for a conventional loan, you don't need to have private mortgage insurance (PMI), which can be a financial burden and increase your monthly payment or downpayment.
- The credit score requirement for conventional loans is typically 640, and the debt-to-debt ratio must not exceed 43%.
- Additionally, conventional mortgage loans have lower downpayment requirements and better interest rates than other types of loans.
2. FHA Loan:
- FHA mortgage loans are perfect for lower credit scores, typically between 580 and 619.
- With an FHA loan, you may need to maintain PMI for about eleven years, which is an essential factor to consider, especially when you are on a budget.
- FHA loans usually have higher debt-to-income limits of up to 50%, allowing you to buy a house with lower income.
- Although the down payment requirements for FHA loans are low, as low as 3.5% of the purchase, the interest rates on the loans are relatively higher than on conventional loans.
3. VA Loan:
- There is no specified credit score requirement for VA loans, but your eligibility for the loan will depend on things such as past government-owed debts and defaulted loans.
- The VA loan is designed explicitly for veterans or active-duty military personnel, and it has the best interest rates and typically does not require a down payment.
- To be eligible for VA loans, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served for six years with the National Guard, or have a spouse who was in the military and lost their lives during active duty. The VA loan is an excellent option for veterans and their families.
Determining Your Creditworthiness for Car Loans
When trying to secure a car loan, your credit history is a crucial factor for lenders, not just your credit score. While a high credit score is important, it has less of an impact on the interest rate you are offered. Lenders check your previous and current credit histories for any issues to determine the level of risk they would be taking in granting you credit. Being late on payments or having a repossession in your credit history can make it harder to secure a loan. Even lenders that specialize in bad credit or special finance have specific criteria you must meet to qualify for a loan, including higher down payments and additional fees. Dealerships can also charge additional fees to help reduce their risk of approving loans for those with bad credit. A down payment or equity is helpful when looking to buy a car on credit.
Credit Score Range for New Car Loans
Even though an exact credit score is not a guarantee for loan approval, a score of over 680 is ideal for a new car loan. Credit scores below 680 pose more of a risk to lenders, which could result in higher interest rates for borrowers. The amount of interest you pay is affected by your credit score, as demonstrated by the example interest rates below:
A credit score over 720 leads to an average interest rate of $5,500
A credit score over 680 can lead to an average interest rate of $6,600
A credit score over 650 can result in an average interest rate of $8,100
A credit score over 615 can lead to average interest rates of $10,200
A credit score of 580 can mean an average interest rate of $13,900
Credit scores below 580 can result in an average interest rate of $15,300
This data makes it clear that having a higher credit score means you end up paying less in interest, which is beneficial for your overall credit score.
Ways to Improve Credit Score
You can take several steps to enhance your credit score with minimum effort, but it will require time and patience. Building good credit takes effort and perseverance, and most people make irrational decisions when it comes to credit, leading to further difficulties. However, you can significantly improve your credit with the following actions:
1. Open 3-5 Credit Card Accounts:
Revolving credit is an ideal way to boost credit scores, but it could be challenging for people with limited credit history. Applying for a secured credit card like Open Sky or Credit Builder Card that focuses on your ability to pay on time can increase your chances of approval. This type of credit accounts for 30-35% of your total credit score and enables you to build credit quickly. It might take a few months to observe an increase in credit scores, but it is essential to keep your balance at $5-10 and pay on time.
2. Raise Credit Limits:
Requesting a credit limit increase on your active revolving credit card accounts will boost your overall credit limits and decrease the credit utilization percentage. Each credit card company has its process of raising credit limits; you can check their online portal or call the customer service center. It is essential to have an excellent payment history of 7-15 months, and your income will determine the credit limit.
3. Pay down your balances:
Keeping your balance low or close to zero is critical for your credit score. Try to use your credit cards for small purchases, and when it is time to pay your bill, leave about $1-5 as a balance. If you have a high balance, try to pay it off gradually instead of running your balance back up. It is also essential to limit your credit card usage since rates are significantly high, and most of the payments will go toward interest rather than the principal.
Tips from Joe for Improving Your Credit Score
Let's face it, many of us have struggled with poor credit at some point. However, by taking your credit situation seriously and investing the effort and time needed, you'll witness significant improvements in your credit score in no time. Most people with bad credit feel like they're stuck in a perpetual cycle of credit troubles and believe that improving their credit is an unattainable goal. Nevertheless, crafting a superb credit score requires hard work and those who prioritize their credit and expenditure habits will be victorious. The first step is to create a budget and focus on fixing your problematic spending habits; improving these can lead to a direct improvement in your credit score. Beyond this article, if you require guidance or assistance with credit repair, my office at www.asapcreditrepairusa.com is just a click away.