It’s a surprising fact that there are actually thirty distinct levels of credit scores. This is a piece of information that often gets overlooked, as many people who search for advice on improving their credit are likely to get a mixed bag of answers from Google. However, not only can this information be confusing, but it can also be misleading, and potentially steer people in the wrong direction. As someone who has been active in the financial literacy and credit repair industry for over fifteen years, I’ve made it my mission to offer practical, honest advice on various topics surrounding credit scores. With more than twenty thousand satisfied clients under my belt, I'm confident in providing you with the knowledge and insight you need to achieve similar results. So, without further ado, let's dive into this important topic!
Contents:
Understanding the Different Types of Credit Scores
Understanding Good Credit Scores
What Credit Score is needed to Buy a house
What is the appropriate credit score to purchase a car?
Tips for Improving Your Credit Score
Tips from Joe on Improving Your Credit Score
Understanding the Different Types of Credit Scores
An individual's credit score is a crucial element in almost all lending decisions, so it's important to understand how these scores are calculated. This article discusses the two primary credit scoring models that lenders use - the FICO model and the Vantage model - and outlines why they are critical to know.
FICO Credit Score
The FICO credit scoring model is the most widely used credit score type, featuring eight distinct FICO models, ranging from FICO 2 to FICO 10. A common misconception is that all these models will yield the same score, which is not true. Different models are used for different borrowing purposes, for example, you will receive a different score if you apply for a mortgage vs credit card. This score variation is a result of what the lenders consider to be essential elements in each scoring model to determine creditworthiness.
One of the reasons for different FICO models out there is to provide lenders with a more accurate representation of a borrower's ability to repay specific loans. For example, FICO 5 mortgage reports tend to focus on a borrower's mortgage payment history much more than card history or auto history.
If you're keen to view all your different FICO scores, go to myfico.com and sign up for an account.
Vantage Credit Score
The Vantage Score is only one among the many scoring models developed by the three major credit reporting agencies: TransUnion, Equifax, and Experian. Vantage is relatively newer compared to FICO which has been in use for 50 years. It is increasingly prevalent in personal loans and auto lending, but FICO still dominates the lending sector.
The Vantage Score is less commonly used for lending purposes as compared to FICO scores. However, its credit scoring methodology is still accurate and shows borrowers an estimated projection of their FICO score range. Moreover, Vantage scores are frequently offered by credit monitoring websites to provide a perspective on an individual's creditworthiness.
The Future of Credit Scores
With the rapid developments in credit scoring models and the ever-increasing data collection efforts of credit-reporting agencies, it is essential to stay informed as an individual seeking credit. In the coming years, it wouldn't be surprising to see Vantage emerge as formidable competition for FICO scoring and become widely accepted by lenders. Thus, it is crucial to understand both the FICO and Vantage scoring models and their differences.
Understanding Good Credit Scores
Both FICO and Vantage credit score models range from 350 to 850. A score of 850 is considered the best credit score, while 350 is the worst. To achieve the highest credit score, it is vital to know where you stand in your journey of building credit. Here are some important credit score thresholds to keep in mind:
1. 620 or below
- A credit score in this range is considered bad credit.
- You may have adverse credit history, high-balance credit card accounts, or no credit cards at all.
- To improve your credit score, make timely payments, and have ten active revolving credit accounts open.
- Consider getting a secured credit card like the Credit Builder Card or OpenSky Credit Card to help build your credit.
- A 620 credit score range qualifies you for an FHA home mortgage.
2. 640-680
- A credit score in this range is considered fair for good credit.
- A score in this range indicates established credit, but you may have derogatory marks or accounts on your credit report and high balances on your credit cards that you will need to pay down.
- Newly opened accounts may also cause a temporary drop in your credit score.
3. 740+
- A credit score over 740 is considered "super-prime" and will give you the best interest rates for loans.
- Only 20% of the US population achieves a score of 740 or above.
- Always pay your accounts on time and keep your revolving credit card accounts paid to maintain your excellent credit score.
What Credit Score is needed to Buy a house
The eligibility criteria for most mortgage loans are almost similar, but they may differ depending on the type of loan and federal regulations backing them. The three most common types of mortgage loans are conventional loans, VA loans, and FHA loans.
Conventional Loans
Conventional loans are a popular option and an excellent savings option, aside from VA loans. You do not need to maintain private mortgage insurance (PMI), which can increase your monthly payments or downpayment. In comparison to other mortgage loans, conventional loans usually have lower downpayment requirements and better interest rates. Typically, conventional loans require a credit score of 640 and a debt-to-income ratio of not more than 43%.
FHA Loan
FHA loans are suitable for borrowers with lower credit scores ranging between 580 and 619. It is essential to consider that all loan programs are different. Therefore, if you meet credit score limits, look for different lenders who will offer you the best financial option. FHA loans require you to keep PMI for at least 11 years, which may increase your monthly mortgage payment and affect your budget. FHA loans typically have a higher debt-to-income limit of up to 50%, which may enable you to buy more homes than with a conventional loan if you have a lower income. You will usually have a higher interest rate, but the downpayment requirements can be as low as 3.5%.
VA Loan
There is no specific credit score requirement for VA loans, but the lender may check if you have previously defaulted on loans or have any past-due government debts before pre-qualifying you. To qualify, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse died during active duty. VA loans typically have the best interest rates available, and you may not need to make any downpayment. The VA loan is highly regarded for giving back to our veterans.
What is the appropriate credit score to purchase a car?
When purchasing a car, the determining factor in what credit you are eligible for is not solely based on your credit score, but your credit history. While having a higher credit score is advantageous, the interest rate you qualify for is not solely based on it. Your credit report, both past and current, is used to determine the risk of extending credit. If you have had previous issues like late car payments or a repossession, you may have a harder time securing a loan. Nevertheless, even with bad credit, some lenders will qualify nearly anyone, but with higher down payments and additional fees. Dealerships will also charge a fee to help mitigate the risk of the loan. Thus having an equity or downpayment is essential when buying a vehicle on credit.
As for credit scores, the ideal score to increase your chance of approval is anything over 680. Scores below 680 increase the interest rate due to the risk a borrower poses to the lender. A higher score equates to lower interest rates as proven by the data below:
Interest Rates by Credit Score
- 720 credit score or above: $5,500 in interest on a loan
- 680 credit score or above: $6,600 in interest on a loan
- 650 credit score or above: $8,100 in interest on a loan
- 615 credit score or above: $10,200 in interest on a loan
- 580 credit score or above: $13,900 in interest on a loan
- Below 580 credit score: $15,300 in interest on a loan
The higher the credit score, the lower the interest rates, positively affecting your credit score as a whole.
Tips for Improving Your Credit Score
Building a good credit score takes time and requires patience to avoid making irrational and bad decisions that can worsen your financial situation. However, there are a few vital things you can do today to start improving your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit, such as credit cards, can help maximize your credit score. A secured credit card like Open Sky or Credit Builder Card can offer a better chance of approval for someone with limited or poor credit history. Revolving credit accounts make up 30-35% of your credit score, so make sure you pay balances on time, keep them around $5-10, and limit their use to small purchases.
2. Raise your limits:
Requesting a credit limit increase for your revolving credit cards can help lower your credit utilization percentage, which can negatively affect your credit score. Each credit card company has different procedures, but you can typically do it online or by phone. They may want to see 7-15 months of excellent payment history before agreeing to a credit limit increase.
3. Pay down your balances:
Keeping your balance low and close to zero is critical for improving your credit score. Consider using your credit cards for small purchases only and leaving a balance of about $1-5 each month. If you have high balances, make a plan to pay them down with a percentage of your paycheck each month and avoid running the balance back up, as high-interest rates can make it challenging to pay off the principal.
Tips from Joe on Improving Your Credit Score
Let's face it: many of us have faced challenges with our credit history. However, if you approach your credit situation with a sense of purpose and commit to making the necessary changes, you'll soon see significant progress towards improving your credit score. Unfortunately, many people with poor credit become trapped in a cycle of financial difficulties, leading them to believe that attaining good credit is beyond their reach. Building a great credit score requires a lot of effort and dedication, but those who prioritize their credit and are mindful of their spending habits will ultimately succeed. To start your journey, establish a budget and work on eliminating any harmful spending habits - this will directly impact your credit score. In addition to this article, if you need guidance or help in repairing your credit score, consider reaching out to my office at: www.asapcreditrepairusa.com.