It may surprise you to learn that your credit score rating isn't a one-size-fits-all metric. In fact, there are 30 different levels of credit scores that you can achieve depending on your financial history and habits. However, when searching for the best credit score, many people encounter conflicting information online. Sorting through this conflicting information can be overwhelming and even lead you to incorrect assumptions about your credit score. As someone who has spent over 15 years working in financial literacy and credit repair, I'd like to provide you with reliable advice on this important topic. My name is Joe Mahlow, and my mission is to help you transform your credit score. Throughout my career, I have assisted more than 20,000 clients with this same goal. Let's dive in and explore the essentials of credit scores together.
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding What Constitutes a Good Credit Score
Determining an Ideal Credit Score for Home Buying
Understanding Credit Score's Impact on Car Loans
Ways to Improve Your Credit Score
Joe's Insights on the Importance of Credit Repair
Different Types of Credit Scores: FICO and Vantage
Credit scores are essential when it comes to determining whether you can borrow credit. There are two main credit scoring models: FICO and Vantage. Knowing the differences between them and how they calculate your credit score is important.
FICO Credit Score
The FICO model is the most commonly used credit scoring model and has eight different models (from FICO 2 to FICO 10) that produce varying scores for each credit report. The reason that there are multiple FICO scores is that different lenders require different models depending on the type of credit they are offering. For instance, a mortgage lender would check a FICO 5 credit report, while a credit card lender would check the FICO 8 credit report. These different reports have varying levels of significance for each credit scoring factor, so a good payment history on a previous mortgage would have a more substantial impact on the FICO 5 score.
Vantage Credit Score
The Vantage scoring model was developed by the major credit reporting agencies (Equifax, Experian, and TransUnion) in competition with the FICO model. Although it is a newer model, Vantage is frequently used by credit monitoring websites to provide a free copy of your credit reports. Vantage is gaining popularity as a scoring model in some sectors such as personal loans and auto lending, but it is not widely used for lending purposes.
Is the Vantage Score Accurate?
The Vantage score is accurate as a general idea of your FICO score. It is hard to know your FICO score without paying for it or having a lender pull your credit report, so using your Vantage score can give you the best idea of roughly where your overall scores stand. However, since FICO is the most recognized scoring model, Vantage's accuracy can vary when it comes to an actual lending score. Though the FICO model is dominant in the lending sector, the Vantage scoring model may find wider usage in the future by providing the best scoring models based on current standards. Credit reporting agencies are the most significant data collection agencies outside of social media companies, so they have the upper hand in providing the best scoring data.
In summary, FICO and Vantage are the two main credit scoring models. Your credit score will vary depending on which model the lender uses, so understanding the differences between the models is crucial. You can check your different FICO scores at www.myfico.com and use your Vantage score as a general idea of your credit scores.
Understanding What Constitutes a Good Credit Score
Both the FICO and Vantage models grade your creditworthiness on a scale of 350 to 850, with the latter being the highest and the former the lowest score you can receive. As you strive towards achieving the best possible credit scores, it's essential to know where you stand, so here are some key thresholds to bear in mind:
620 or below:
This is considered a poor credit score, possibly resulting from a history of adverse credit, high-balance credit card accounts, or the lack of credit cards altogether. To raise your credit scores, aim for timely payments and maintain ten active revolving credit accounts. Consider securing a credit builder card, like the OpenSky Credit Card, to start building credit. A score of 620 puts you in line to qualify for an FHA home mortgage.
640-680:
This is an acceptable range for good credit. You may have established credit but could have some derogatory marks, some high credit card balances, or recently opened accounts that temporarily bring down your scores. Avoid panicking and pay off your debts; your scores will soon bounce back.
740 or above:
Any score above 740 is considered "super-prime" and opens doors to the most favorable interest rates for loans. Congratulations, you are part of the top 20% of the US population with this standing. Keep it up by paying your accounts on time and maintaining low balances on your revolving credit card accounts.
Determining an Ideal Credit Score for Home Buying
The ideal credit score required for home buying varies depending on the type of mortgage loan you are interested in getting. Most mortgage loans have similar requirements and guidelines due to federal regulation and government backing. The three most common mortgages are conventional, FHA, and VA loans. Below are their respective credit score requirements and other conditions.
Conventional Loans
Conventional loans are the preferred loan option for most people outside of VA loans. They have a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%. Conventional loans are usually the best "savings" option as they don't require Private Mortgage Insurance (PMI), which can be an added cost increasing your down payment or monthly payment.
FHA Loan
If your credit score is between 580 and 619, the FHA mortgage loan is your best bet. You should shop around for different lenders offering this loan as they are different. FHA loans require you to keep PMI for at least 11 years, which increases your mortgage. However, they have a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan if your income is low. FHA loans require a minimum downpayment of 3.5% of the purchase, so they allow you to get a mortgage with less money out of pocket. However, you will typically have a higher interest rate.
VA Loan
The VA Loan doesn't technically have a credit score requirement. However, they'll look for any previous defaulted loans and past-due government debts before pre-qualifying you. To be eligible, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a spouse who was in the military and lost their life on active duty. The VA loan typically has the best interest rates available and doesn't require a down payment. The VA Loan is a great way for our nation to give back to our veterans.
Understanding Credit Score's Impact on Car Loans
When purchasing a vehicle, your credit history, rather than just your credit score, is the deciding factor in loan qualification. Although a strong credit score is important, its influence on the interest rate is minimal. Creditors assess your credit history to gauge the potential risks of approving your loan application. Issues such as previous or current auto loan defaults or repossession can impede approval. Special finance lenders may approve individuals with poor credit but with stricter criteria, such as higher down payments and added fees. Dealerships may also charge fees to cover the risk of loan default. Therefore, having equity or a down payment can help your credit leverage when making a purchase. While there is no precise score guaranteeing approval, a credit score of 680 or higher is recommended for optimal interest rates. Interest rates increase the risk you pose to lenders, with a credit score below 680. This is evident in the varying interest rates for different credit scores shown below:
Credit Scores and Average Interest Rates:
- A credit score of 720 or above pays an average of $5,500 in interest
- A credit score of 680 or above pays an average of $6,600 in interest
- A credit score of 650 or above pays an average of $8,100 in interest
- A credit score of 615 or above pays an average of $10,200 in interest
- A credit score of 580 or above pays an average of $13,900 in interest
- A credit score of 580 or below pays an average of $15,300 in interest
As demonstrated, a higher credit score correlates with lower interest rates, ultimately affecting your credit score.
Ways to Improve Your Credit Score
Improving your credit score can be achieved through small, yet significant, actions that you can start implementing now. It's crucial to understand that building a good credit score is a gradual process and cannot happen overnight. The key to success here is patience, as making impulsive and irrational decisions regarding credit cards can only deteriorate your financial situation.
Listed below are the steps you can take to improve your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit through credit cards can help you improve your credit score faster, especially if you have limited credit. Applying for a large loan to build credit will take longer than obtaining a credit card to boost your approval chances. A secured credit card such as Open Sky or Credit Builder Card is recommended.
2. Raise your limits:
Requesting a credit limit increase for your active revolving credit cards can increase your overall credit limits and lower your credit utilization percentage. It's advisable to keep credit card balances below 30% of your overall limits to maintain a good credit score.
3. Pay down balances:
Maintaining a low balance and paying credit card bills on time are crucial for improving your credit score. If you have high balances, make a plan to pay them down each month and stop using the cards excessively.
Remember, your credit card spending habits play a crucial role in determining your credit score. It's recommended to limit credit card usage and leave a small balance on them each month while avoiding high-interest rates. Building a good credit score takes time, and with the right mindset, determination, and discipline, you'll reach your goal.
Joe's Insights on the Importance of Credit Repair
Let's face it, we've all encountered a time in our lives when our credit scores weren't up to par. However, if you put effort and time into improving your credit, you can see significant improvements in your credit score pretty quickly. Most individuals with less-than-stellar credit fall into a pattern of having perpetual credit issues, which causes them to believe that good credit is unattainable. Nonetheless, developing a great credit score necessitates immense effort, which is why those who prioritize their credit and concentrate on rectifying their spending habits usually succeed in improving their credit scores. It all starts with creating a budget and addressing any bad spending habits, which will directly impact your credit score. If you're seeking credit repair guidance or assistance with your credit score, visit our website at www.asapcreditrepairusa.com. Here's what you need to know about credit.
Remember:
- Taking credit repair seriously will pay off in the long run.
- It is possible to have good credit again.
- Creating a budget and addressing spending habits is the first step to improving your credit score.