It's shocking that most people aren't aware of the 30 different credit score levels that exist. Finding credible information that actually answers your questions about credit scores can be an overwhelming and confusing process when using popular search engines. It's time to clear up this confusion! My name is Joe Mahlow, and I've been working in the financial literacy and credit repair industry for more than fifteen years. Sharing my expertise in topics like credit scores and providing honest advice to help people is something I'm passionate about. With over twenty thousand clients served, I know I can provide you with valuable insights on how to achieve a higher credit score. So, let's dive into this important topic!
Contents:
Different Credit Scoring Models: Understanding FICO and Vantage Scores
Understanding Credit Scores
Determining an Ideal Credit Score to Secure Your Dream Home
What Credit Score Do You Need to Buy a Car?
Tips for Improving Your Credit Score
Suggestions from Joe
Different Credit Scoring Models: Understanding FICO and Vantage Scores
When it comes to credit scores, two models are widely used: FICO and Vantage. Although both are essential to comprehend, there are differences in how each calculates your credit score.
FICO Credit Score
The most common and widespread credit scoring model is FICO, which offers eight different models from FICO 2 to FICO 10. Each model provides a different credit score depending on your credit history. This can be confusing, but it's essential to know why there are so many different FICO models.
When you apply for credit or purchase something, the lender pulls a different FICO report depending on the type of credit you're trying to receive. For example, a mortgage lender will typically pull your FICO 5 report, while a credit card company would pull your FICO 8 report.
Why are there different FICO scores?
Each credit report has a different weight, meaning critical factors to the lender will have a more significant impact on your credit score than less essential factors. For example, a weighting on the previous mortgage history is crucial in a FICO 5 report, while your previous credit card history impacts your FICO 8 report the most. Auto lenders usually pull FICO-2 reports, and again, your scores will depend on your previous auto history. You can check all the different FICO scores you have at one place by signing up for an account on www.myfico.com.
Vantage Credit Score
Equifax, Experian, and TransUnion developed the Vantage scoring model to compete with FICO. Although FICO dominates the lending sector, Vantage is gaining popularity in other areas, such as personal loans and auto lending. Many credit monitoring websites offer free Vantage scores to give you an idea of your credit reports.
Is the Vantage Score accurate?
While the Vantage Score is accurate, it depends on the context. It's not widely used for lending purposes, so it won't be as accurate as your actual lending score. But the Vantage model can provide a good "general idea" of your FICO score. As FICO is the most recognized scoring model, Vantage's accuracy can vary. However, I believe lenders nationwide will use the Vantage scoring model due to its ability to provide the best current scoring models in the next 5–10 years. The FICO scoring model can be outdated and doesn't provide a clear representation of your credit scores. As credit reporting agencies are among the significant data collection agencies besides social media companies, they have the upper hand in providing the best credit scoring data.
Understanding Credit Scores
Credit scores are a critical part of your financial portfolio. Both the FICO and Vantage models have a scoring range of 350 to 850, with 850 representing the best credit score and 350 considered the worst. To help you set goals and understand where you stand when building your scores, it's essential to know some vital score thresholds.
1. 620 or below:
This credit range is considered bad credit. If you fall below this threshold, you have adverse credit history, high-balance credit card accounts, or no credit cards at all. You can improve your credit scores by making timely payments and having ten active revolving credit accounts, like the Credit Builder Card or OpenSky Credit Card.
2. 640-680:
Falling in this range means you have fair to good credit. Though you may have some derogatory marks or high balances on your credit cards, you have established credit. If you recently opened a new account and experience a temporary drop in your credit scores, don't panic.
3. 740+:
Any credit score over 740 is considered super-prime and provides the best interest rates for most loans. Congrats if you belong to the 20% of the US population with this score. Always pay your accounts on time and keep your revolving credit card accounts paid, and you'll always be in excellent financial standing.
Determining an Ideal Credit Score to Secure Your Dream Home
The credit score necessary to purchase your perfect home varies depending on the mortgage loan type you aim to qualify for. You would generally find that most mortgage loans have similar terms and guidelines owing to government regulation and backing, but there could still be differences. Three of the most common mortgage loans are conventional, VA, and FHA loans.
Conventional Loans
Conventional loans are one of the most popular options — the best savings loan option apart from VA loans. PMI insurance is not mandatory with these loans and can save you money that could go towards a downpayment or a monthly payment. It is recompense for the lender if you stop paying your loan. Lower downpayment requirements and better interest rates are characteristic of conventional loans compared to other forms of mortgage loans. They typically require a credit score of at least 640 and a debt-to-debt obligation ratio below 43%.
FHA Loans
FHA loans are for mortgage buyers with lower credit scores, usually ranging from 580 to 619. Please note that even though this program typically applies to this credit range, loan programs differ, so assess potential lenders that offer the best financial option for you. With FHA loans, you may require PMI insurance for a minimum of 11 years — be aware of this cost for budget purposes. The loan offers debt-to-income limit as high as 50%, allowing low-income earners to purchase more homes than with a conventional loan. FHA loans require a down payment for as low as 3.5% of the total purchase—while it enables you to secure a property with little funds out of pocket, be prepared for a higher interest rate.
VA Loans
VA Loans technically don't have a credit score requirement, but you will need to reveal any government-owned past-due debt and a previous loan default. Qualification requires you to have served in the military for at least 181 days, served 90 consecutive days during war, served six years with the National Guard, or be a military spouse who died during active duty. VA loans generally offer the best interest rates available and typically don't require down payments. VA Loans are a great gesture of appreciation to military veterans.
What Credit Score Do You Need to Buy a Car?
When it comes to buying a car, your credit history is more critical than your credit score in determining your eligibility. While having a good credit score is beneficial, it is not the only factor that influences the interest rate you qualify for. Lenders consider your past and present credit history to assess your creditworthiness before approving your loan application. If you have a history of late payments, repossession, or default, you may find it harder to secure a loan than someone with clean credit history. Even with bad credit, you can still get approved for a car loan, but with specific approval criteria, such as a higher down payment and additional dealership fees. Dealerships cover the risk factor involved in extending credit by charging a markup on the car's price. For better leverage when taking out a car loan, it is advisable to have equity or a substantial downpayment.
Credit Score Range for New Vehicle
Although other factors come into play during the loan approval process, having a credit score over 680 is ideal. A score below this range may increase the interest rate charged due to the risk you pose to the lender. A credit score above 720 will incur, on average, $5,500 interest on a loan, while a score of 580 or below will result in paying, on average, $15,300 in interest on a loan. Therefore, having a higher credit score will yield reduced interest rates and improve your overall credit score.
Tips for Improving Your Credit Score
When it comes to building a good credit score, it's important to be patient and make rational decisions. While there are several things you can do to improve your score, they all take time and effort. Here are some tips to get you started:
1. Open 3-5 revolving credit accounts.
Revolving credit, such as credit cards, can help you build credit quickly. Start with a secured credit card that doesn't focus on your credit score but rather your ability to pay on time and income level. Keep your balance low and pay it on time. Limit usage to small purchases like gas or groceries.
2. Raise your credit limits.
You can request a credit limit increase online or by calling your credit card company. This can help lower your credit utilization percentage, which is a key factor in your overall credit score. Most companies require a good payment history before approving a limit increase.
3. Pay down your balances.
Keeping your balance low and close to zero is crucial to maintaining a good credit score. Use your credit cards for small purchases and pay the balance off each month. If you have high balances, make a game plan to pay them down with a percentage of your paycheck each month. Limit usage to avoid high rates and interest payments.
Note: Remember to consult with a financial advisor or credit counseling service for personalized advice based on your individual financial situation.
Suggestions from Joe
We have all experienced times when our credit score was less than ideal. However, if you are serious about improving your credit situation, you can make significant progress in a short time by dedicating time and effort to fixing your credit. Many individuals with poor credit remain trapped in a never-ending cycle of financial difficulty, believing that the prospect of attaining good credit is out of reach. But building a strong credit score takes diligence, and those who make credit a priority and adopt healthier spending habits will ultimately succeed. Start by constructing a budget and focusing on remedying any unhealthy spending patterns you may have—doing so will result in an improved credit score. To learn more about credit and obtain guidance regarding repairing your credit score, don't hesitate to contact my office today at www.asapcreditrepairusa.com.