It may surprise you to learn that there are actually 30 distinct levels of credit scores out there. This is a fact that many people remain unaware of, and it can lead to confusion when they try to determine which credit score is the best. When searching for information on this topic, there are a lot of different answers available, but some of it is not entirely accurate or can even be misleading. My name is Sarah Johnson, and I've worked in the fields of financial literacy and credit repair for more than a decade. One of my primary goals is to provide straightforward and unbiased advice on a wide range of topics, including credit scores. Over the years, I've been fortunate enough to help more than 20,000 clients improve their credit scores, and I hope to share some of that expertise with you today. So if you're ready, let's get started!
Contents:
Exploring Credit Scores: FICO vs. Vantage
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a Home?
Determining the Appropriate Credit Score for Purchasing a Car
Ways to Improve your Credit Score
Joe's Expert Opinion
Exploring Credit Scores: FICO vs. Vantage
Credit scores are important factors that determine your creditworthiness. There are two main credit scoring models well-known to consumers - FICO and Vantage. Understanding these two models, their calculation differences, and how they work is essential.
FICO Credit Score
The FICO scoring model is widely used and currently dominates the lending sector. However, FICO has eight different models, from FICO 2 to FICO 10, each with a unique calculation method that could vary your credit score. For instance, depending on the type of lender, you will have a different FICO score. The report's weight will vary based on the lender, which means credit card companies primarily use the FICO 8 report, and auto lenders typically pull FICO-2 reports.
Why Several FICO Scores?
Lenders use a specific FICO report to weigh critical factors. For instance, a FICO 5 mortgage report weighs heavily on previous mortgage history. Each model weighs different elements of the report, and this results in multiple scores.
Vantage Credit Score
Vantage, a new scoring model compared to FICO, was developed by the three major credit reporting agencies. Some credit monitoring websites frequently use Vantage to offer a free copy of your credit report. Although less used when it comes to lending, Vantage is gaining popularity and is becoming a good “general idea†of your FICO score.
Is Vantage Score Accurate?
The Vantage scoring model is accurate, depending on the context within this question. Vantage is not widely used for lending purposes, so it will not give you an accurate lending score. It’s best to use Vantage scores as a guide to get the best idea of your overall scores. However, it won’t be accurate when it comes to your actual lending score. Lenders countrywide might well use Vantage as a scoring model, especially in personal loans and auto lending sectors, because it provides the best score based on the newest standards.
In conclusion, it’s essential to understand these two scoring models, their differences, and how they work to make the best decision. FICO dominates the lending sector, but Vantage is gaining popularity. It’s always a good idea to use both scores as a guide to getting the best idea of your overall scores. For a better visual representation of your different FICO scores, you can sign up for an account for www.myfico.com.
Understanding Good Credit Scores
Credit scores for both the Vantage and FICO models range from 350 to 850, with 350 being the worst score and 850 being the best. Setting your goals for the highest score is important, but knowing where you stand in your journey is also essential. Here are some vital score thresholds to help you out:
1. 620 or below:
This is considered "bad credit." It most likely means that you have some negative credit history, possibly with 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. OpenSky Credit Card and Credit Builder Card are excellent secured credit cards that can help you build your credit. When you reach a 620 credit score, you can start qualifying for an FHA home mortgage.
2. 640-680:
This score range is considered "fair" for good credit. Scores in this range usually mean that you've established credit, but you may have some derogatory marks/accounts on your credit or high balances on your credit cards that you need to pay down. Another common occurrence is that newly opened accounts can drop your scores temporarily. If you're in this range and have recently opened a new account, don’t panic, your scores will return.
3. 740+:
Any credit score over 740 is considered "super-prime," and will qualify you for the best interest rates for most loans. Congratulations if you have a 740+ credit score as you are part of the 20% of the US population with this score. To maintain this score, always pay your accounts on time and keep your revolving credit card accounts paid. You will be in great shape!
What Credit Score Do You Need to Buy a Home?
When it comes to determining a good credit score to buy a house, the answer depends on the type of mortgage loan you intend to qualify for. Although requirements for most mortgage loans are similar, you may discover some differences due to federal regulation and government backing. There are three main types of mortgage loans: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and usually the best option outside of a VA loan regarding savings. These loans do not require you to maintain private mortgage insurance (PMI), which is an added cost that can either increase your monthly payment or down payment. However, PMI protects the lender in case you stop making loan payments. Further, conventional loans usually have lower down payment requirements and better interest rates than other mortgage loan types. A credit score of 640 and a debt-to-debt ratio no higher than 43% is the standard requirement for conventional mortgage loans.
FHA Loan
FHA mortgage loans are specifically designed for people with lower credit scores, usually within the 580 to 619 range. Always shop for different lending options because loan programs differ. FHA loans require borrowers to maintain PMI for at least 11 years, which is an added cost worth considering, notably if you're working with a budget. Additionally, an FHA loan offers a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than a conventional loan if you have a lower income. The down payment requirement on FHA loans is as low as 3.5% of the purchase price, making it a feasible option if you intend to put less money out of pocket, but you'll typically have a higher interest rate.
VA Loan
While there isn't a specific credit score requirement for a VA loan, lenders lookout for previous defaulted loans and any past-due government-owned obligations during pre-qualification. To qualify, you must have served in the US military, either for at least 181 days, 90 consecutive days during wartime, six years with the National Guard, or your spouse lost their life during active duty. VA loans offer the best interest rates available, and they do not typically require a down payment. VA loans are perfect for veterans as they allow giving back to them.
Determining the Appropriate Credit Score for Purchasing a Car
When it comes to buying a car, your credit history carries more weight than your credit score. While having a higher credit score is vital, it only marginally affects the interest rate for which you qualify. Lenders assess your credit history to determine the risk of extending credit to you. For instance, if you have previously been late on an auto loan payment or had a repossession, you may have difficulty securing a loan compared to those with a good credit history. However, some car dealerships affiliated with subprime or special finance lenders can grant car loans to practically anyone with terrible credit histories, albeit with added criteria such as extra fees or a higher down payment. It’s noteworthy that most dealerships charge a fee to extend loans to customers with bad credit. Thus, it is essential to have equity or a down payment to have leverage when buying a car via credit.
Ideal Credit Score Range for Buying a New Vehicle
While credit scores do not indicate loan approval since many other factors come into play, a credit score of over 680 is the ideal range. A score below this could lead to higher interest rates due to the perceived risk. The following example illustrates how credit scores impact the interest rate charged:
A person with a credit score higher than 720 will pay an average of $5,500 in interest on a loan.
A person with a score higher than 680 will pay an average of $6,600 in interest on a loan.
A person with a score higher than 650 will pay an average of $8,100 in interest on a loan.
A person with a score higher than 615 will pay an average of $10,200 in interest on a loan.
A person with a score higher than 580 will pay an average of $13,900 in interest on a loan.
A person with a score of 580 or above will pay an average of $15,300 in interest on a loan.
The data above demonstrates that a higher credit score reduces the overall interest paid for the loan, thereby positively impacting the credit score.
Ways to Improve Your Credit Score
If you are looking to improve your credit score, there are several things you can do to make a difference. However, it is important to keep in mind that building a good credit score takes time and patience is key. Here are some tips that can help improve your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit is a great way to improve your credit score as it makes up 30-35% of your overall score. Starting with a secured credit card like Open Sky or Credit Builder Card, can be a good option since they focus more on your ability to pay on time rather than your credit score. Keep your balance low and use the card for small purchases such as gas or groceries.
2. Raise your Limits
Requesting a credit limit increase for your credit cards can help lower your credit utilization percentage. Contact your credit card company and request a "Credit Limit Increase" and provide them with your current income. Ensure that you have established a history of good payment practices for at least 7-15 months before making this request.
3. Pay down your balances
Keeping your balance low is key to improving your credit score. If your balances are high, make a plan to pay a certain percentage of your paycheck each month to pay it down. Leave a $1-5 balance on your credit cards each month and limit your credit card usage. Remember that high rates and interest charges can quickly add up and make it difficult to pay off the principal amount.
Joe's Expert Opinion
At some point in our lives, we have all faced the challenges of having poor credit. The truth is, if you want to improve your credit situation, it requires sincere dedication and time to work on improving yourself and your credit. Most people with bad credit feel like they are trapped in a never-ending cycle of financial troubles, making it nearly impossible for them to achieve good credit again. Nevertheless, the process of building an excellent credit score requires a lot of effort. Individuals who make credit a priority and focus on their spending habits will eventually triumph over their bad credit situation. An excellent starting point would be to set up a budget to help fix any bad spending habits, which will have a positive impact on your credit score. This article provides insightful information to better understand credit, but if you would like assistance improving your credit score or require credit repair services, feel free to contact my office today at www.asapcreditrepairusa.com.
Key takeaways:
Improving your credit score requires time and effort in self-improvement and credit management.
Don't resign to a lifetime of bad credit, prioritize your credit management to see substantial changes in your credit score.
Create a budget and work to correct any bad spending habits to enhance your credit score.
If you're looking for guidance or assistance with repairing your credit score, contact Joe's office at www.asapcreditrepairusa.com.