It might just surprise you that there are actually 30 levels of credit scores out there. It’s easy to get lost in the multitude of answers Google provides when searching for the best score. Unfortunately, much of the information floating around can be complex and even misleading, ultimately confusing borrowers more than helping them. But fear not, you don't have to navigate these murky waters alone. My name is Joe Mahlow and I bring 15 years of experience in the financial literacy and credit repair sector. I’m here to impart truthful advice on topics like credit scores, and have successfully helped over twenty thousand clients improve their own. Whether you’re looking to boost your credit or simply learn more about it, let's dive into what you need to know.
Contents:
Types of Credit Scores: FICO and Vantage Models
Understanding Credit Score Ranges
What Credit Score Do You Need to Buy a House?
Ideal Credit Score for a Car Loan
Tips to Improve Your Credit Score
Tips from Joe to Improve Your Credit Score
Types of Credit Scores: FICO and Vantage Models
Credit score calculation is done through various models, with the two most popular being the FICO model and the Vantage model, each with its unique calculation methodology. Understanding these models is crucial, especially when applying for credit.
FICO Credit Score
The FICO model is widely used and consists of eight different FICO models, with each providing a different credit score based on your credit report. The scores are weighted depending on various factors like the type of lender used, with the mortgage lender usually pulling the FICO 5 credit report and the credit card company pulling the FICO 8 report.
Why the variation in FICO scores?
Each report has a different weight, with the scores reflecting the critical factors that affect the lender's decision. This varies from an individual's previous mortgage, credit card, or auto history, depending on the type of loan being sought.
To understand your different FICO scores, you can sign up for an account on myfico.com.
Vantage Credit Score
Developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion, Vantage Score was designed to compete with the FICO scoring model. It is relatively new to the market, and some sites provide free credit reports analysis. Although FICO is widely used, Vantage Score ranks high in some sectors like personal loans and auto lending.
Is Vantage Score Accurate?
Vantage Score is accurate, but since it is not widely used for lending purposes, it isn't an accurate reflection of your lending score when you apply for a loan. However, it's a good measure of your credit score since it provides a general idea of your FICO score.
In conclusion, while the FICO score dominates the lending sector, Vantage Score is fast gaining popularity. Over the next 5-10 years, Vantage Score could be the preferred score model because of providing the best scoring data based on current standards. Overall, credit reporting agencies are in a better position to provide the best scoring data as they have the most massive collection of consumer data.
Understanding Credit Score Ranges
Credit scores are vital to your financial health. The FICO and Vantage score models use the range of 350 to 850, where 850 is the best credit score, and 350 is the worst credit score. In your journey to achieve the highest score possible, you need to understand the score thresholds, which I will discuss below.
1. 620 or below
Having a credit score of 620 or below is considered bad credit. It could mean that you have some adverse credit history, high-balance credit card accounts, or no credit cards. To improve your credit score, you need to make timely payments and have ten active revolving credit accounts. You can start qualifying for an FHA home mortgage when you reach this credit score range. I recommend using Credit Builder Card or OpenSky Credit Card as secured credit cards to improve your credit score.
2. 640-680
A credit score range of 640-680 is considered fair for good credit. This range usually indicates that you have established credit but may have derogatory marks or accounts on your credit report. You may also have high balances on your credit cards that you need to pay down, or you recently opened new accounts that temporarily dropped your score.
3. 740+
A credit score of 740 or above is considered "super-prime" and will get you the best interest rates for most loans. If you have a score of 740 or above, well done, as you are part of the 20% of the US population with this score. To maintain this score, ensure that you always pay your accounts on time and keep your revolving credit card accounts paid.
What Credit Score Do You Need to Buy a House?
The answer to this question relies on the type of mortgage you are seeking. Government regulations and backing usually make the requirements and guidelines for most mortgage loans very similar, but there are still some differences to consider between the three most common loan types: conventional, FHA, and VA loans.
Conventional Loans
Conventional loans are popular and often the best "savings" loan option, except for the VA loan. Unlike other mortgage loans, conventional loans do not require you to maintain private mortgage insurance (PMI), which would be an additional, and often costly, expense included in your downpayment or monthly payments. Typically, conventional mortgage loans have lower downpayment requirements and better interest rates than other kinds of mortgage loans. A credit score of at least 640 and a debt-to-debt ratio no higher than 43% are usually required to qualify for a conventional mortgage loan.
FHA Loans
An FHA mortgage loan typically requires a credit score between 580 and 619. Keep in mind that loan programs have different requirements, so shopping around for different lenders who offer the best financial option for you is recommended if you fall within these credit score limits. FHA loans differ from conventional loans in that they require you to keep PMI for at least 11 years, which can be an added cost to your mortgage. However, you will likely have a higher debt-to-income limit of up to 50%, which allows for the purchase of more expensive homes than conventional loans if your income is not high. Finally, the downpayment requirement for an FHA loan can be as low as 3.5% of the purchase price, which means that you could get into a mortgage with less out of pocket money than a conventional loan, but you will generally have a higher interest rate.
VA Loans
Though there isn’t technically a credit score requirement for VA loans, you will be pre-qualified based on whether you have defaulted on previous loans and have any past-due government-owned debt. To qualify for a VA loan, you must have either served in the US military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or have a spouse that was in the military and passed away while on active duty. VA loans have the best interest rates available and generally do not require a down payment. The VA loan is a great option for veterans, as it provides them with deserved benefits.
Ideal Credit Score for a Car Loan
When it comes to purchasing a car, your credit score is not the only determining factor in your loan eligibility. Your credit history is equally, if not more, crucial. Although a good credit score helps, it has minimal effect on the interest rate you qualify for. Lenders evaluate your credit history to assess the risk of extending credit, especially when there are issues. For instance, if you have a repossession record or are late on previous or current car loan payments, it may affect your chances of being approved for a car loan. Numerous lenders will still qualify you for a car loan, but with stringent requirements such as a higher down payment or extra charges. Even dealerships pay extra fees to cover the risk associated with approving car loans for those with bad credit scores. This often results in them selecting a less expensive car with a higher markup to cover the fees, and they may require equity or a down payment.
Credit Score Ranges for Car Loans
While there is no clear-cut credit score range to determine approval, a score of 680 or above is preferable. Anything below this score may lead to increased interest rates and pose a greater risk to the lender. As indicated by recent data, a higher credit score translates to lower interest rates. For instance, a 720+ credit score is likely to pay an average of $5,500 in interest for a car loan, while a score of around 580 can see them pay up to $15,300 in interest. Therefore, having a higher credit score has a direct impact on your overall credit score, indicating financial responsibility.
Tips to Improve Your Credit Score
Improving your credit score is a gradual and time-consuming process that requires patience and discipline. Acting on the following tips can help you improve your credit score in the long run:
Obtain a good number of Revolving Credit Accounts (Credit Cards)
Increase Your Credit Limit
Pay Down Balances
Tips from Joe to Improve Your Credit Score
No one is immune to poor credit, but it can be fixed with dedication and effort. Those who are serious about improving their credit score must prioritize their credit and financial habits. Many individuals with bad credit feel they cannot improve it, but this is not true. The path to a better score starts with creating a budget and improving your spending habits. By focusing on these actions, your credit score will reflect your hard work and dedication. Don't get trapped in a cycle of poor credit; start taking control of your finances today. If you need guidance or assistance with repairing your credit score, visit www.asapcreditrepairusa.com, and we will be happy to help you. This article provides useful information on understanding your credit.
Here are the key takeaways:
Poor credit can be fixed with dedication and effort.
Prioritize your credit and financial habits to see changes in your score.
Start by creating a budget and improving poor spending habits.
Don't feel trapped in a cycle of bad credit.
Visit www.asapcreditrepairusa.com for more guidance on credit repair.