It may come as a surprise, but did you know that there are 30 different levels of credit scores? Most individuals do not realize this and turn to search engines like Google to find the best credit score. Unfortunately, the information available can be confusing and sometimes even misleading, leading some to a frustrating rabbit hole. Hi there, I'm Joe Mahlow, and I've been working in the financial literacy and credit repair industry for over 15 years. My goal is to provide you with practical advice on various credit-related topics, starting with credit scores. With my expertise, I've been able to assist over 20,000 clients to significantly improve their credit scores, and I hope to offer you enough information to achieve similar results. So, let's dive right in!
Contents:
Variations and Comparison of Credit Scores
Understanding the Importance of Good Credit Score
Credit Score Requirements for Different Types of Mortgage Loans
Determining a Good Credit Score to Obtain a Car Loan
Tips on Boosting Your Credit Score
Advice from Joe
Variations and Comparison of Credit Scores
Credit scores are calculated using different models, the most popular of which are the FICO model and the Vantage model. It is crucial to understand the differences between the two, especially when interpreting your credit score.
FICO Credit Score
The FICO model, with its eight different versions, is the standard credit scoring model used by the majority of lenders. These different versions use different weightings based on the history of your credit, and each one applies to specific lenders and types of credit. For example, your FICO score for a mortgage application is determined by your FICO 5 score, whereas credit card companies use FICO 8, and auto lenders rely on FICO 2.
The reason for the different versions is the differing emphasis on credit factors for different loan types. By analyzing these factors, including payment histories and previous lending history, different models can better determine loan outcomes.
To view your FICO scores by version, sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage model was developed by Equifax, Experian, and TransUnion as a competitor to the FICO model. Although the Vantage model is newer and not as widely used in lending as FICO, it has become popular in areas such as personal loans and auto lending. Credit monitoring websites use Vantage to offer free credit report copies, and it provides a "general idea" of your credit score.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but it is not widely used in lending. Because FICO is the most widely recognized credit scoring model, it is more important to monitor your FICO score if you need credit in the near future. However, because Vantage provides a good general idea of your credit score, it can be a valuable tool in monitoring your overall score.
As the Vantage model continues to gain popularity, it may soon be more widely used in lending. Where previous versions of credit scoring models may have been outdated, credit reporting agencies are continually working to implement newer versions to provide the most accurate credit scoring data.
Understanding the Importance of Good Credit Score
Having a good credit score is crucial when it comes to your financial well-being. Scores for both FICO and Vantage models typically range from 350 to 850, with 350 being the poorest score and 850 being the best. It's essential to understand where you stand on this range while building your score. Here are some vital score thresholds to keep in mind:
1. 620 or below:
This is considered a bad credit score, and it's possible that you have some adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit score, make timely payments and have at least ten active revolving credit accounts. Use secured credit cards like the Credit Builder Card or OpenSky Credit Card to build your credit score. You can start qualifying for an FHA home mortgage once your credit score is over 620.
2. 640-680:
This range is considered fair for good credit. If your score falls within this range, you have established credit, but you may have derogatory marks or accounts, high balances on your credit cards, or recently opened accounts that can drop your scores temporarily. Pay down high balances and wait for your scores to return if you recently opened a new account.
3. 740 or above:
A credit score over 740 is considered "super-prime" and will give you the best interest rates for most loans. If you have over 740 credit, congratulations, you are part of the 20% of the US population with this score. Continue paying your accounts on time and keep your revolving credit card accounts paid to maintain your score.
Credit Score Requirements for Different Types of Mortgage Loans
When you're looking to buy a house, the credit score requirement depends on the type of mortgage loan you want to qualify for. Although most mortgage loans have comparable guidelines and requirements due to federal regulations and government backing, there are some differences among the three most common mortgage loan types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and usually the best savings option apart from VA loans. They offer better interest rates and lower downpayment requirements than other mortgage loans. Besides, they don't require you to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment, providing you with substantial savings. A typical credit score requirement for conventional mortgage loans falls around 640, and the debt-to-debt ratio must not be higher than 43%.
2. FHA Loan
If you have a lower credit score ranging between 580 and 619, an FHA loan could be the right option for you. While it offers more relaxed credit score requirements, this loan type requires you to keep PMI for at least 11 years, which can cause your mortgage payments to increase. However, a higher debt-to-income limit of up to 50% can enable you to buy more homes than conventional loans if you have a lower income. Apart from this, the downpayment requirement on an FHA loan could be as low as 3.5% of the purchase.
3. VA loan
VA loans are only available to military personnel and veterans who have served the country for a certain period. These loans offer the best interest rates, and you won't need to make a down payment to buy a house. However, the VA loan doesn't technically have a credit score requirement but considers past loan defaults and government-owed debts while pre-qualifying you. The VA loan is a way of giving back to our veterans as it offers a hassle-free homeownership option.
Determining a Good Credit Score to Obtain a Car Loan
Obtaining a loan for a car purchase relies heavily on your credit history, rather than just your credit score. While having a good credit score is important, it plays a smaller role in the interest rate you qualify for. When applying for a car loan, lenders will examine your past and present credit history to assess the risk of extending credit to you. For instance, individuals who have had previous or current auto loan defaults or car repossessions will have a more challenging time getting approved for a loan than those who have not. Nonetheless, some bad credit or special finance lenders offer loans to almost anyone, even those with repossessions on their record, but approval comes with specified criteria such as higher down payments and additional dealership fees to minimize risk. Dealerships also pay a fee to cover any default risk and approve the loan for individuals with a low credit score. To have more leverage when purchasing a car on credit, it is advisable to have a down payment or equity.
The Credit Score Range for a New Car
While there is no exact credit score that guarantees approval for a car loan, a credit score above 680 is ideal. A score below this can increase the interest rate, as the individual is perceived as a higher risk to the lender. To further understand the impact of a credit score on a loan interest rate, the following example illustrates average interest payments based on various credit scores. It is evident that the higher the credit score, the lower the interest rate and subsequently, overall loan expense.
Example Interest Rates Based on Credit Scores:
- A credit score of 720 or above will pay, on average, $5,500 in interest on a loan.
- A credit score of 680 or above will pay, on average, $6,600 in interest on a loan.
- A credit score of 650 or above will pay, on average, $8,100 in interest on a loan.
- A credit score of 615 or above will pay, on average, $10,200 in interest on a loan.
- A credit score of 580 or above will pay, on average, $13,900 in interest on a loan.
- A credit score of below 580 will pay, on average, $15,300 in interest on a loan.
Tips on Boosting Your Credit Score
Improving your credit score requires effort and patience; it will not happen overnight. However, there are several steps you can take right now to help you raise your credit score. Building a good credit score is a process that takes time, so avoid making irrational or bad decisions with your credit. The following are things you can do to improve your credit score:
1. Open 3-5 revolving credit accounts (credit cards)
To help maximize your credit scores. A secured credit card, such as Open Sky or Credit Builder Card, can help you get started. Revolving credit, which makes up 30–35% of your overall credit score, is an excellent option to quickly build credit scores.
- Pay your balance on time and keep it at $5–10 each time you make a payment.
Limit the use of the card to small purchases like gas or groceries.
2. Request a credit limit increase for your credit cards
To help increase your overall credit limits and lower your credit utilization percentage. Credit cards account for a significant factor that can impact your credit scores, so ensure your balances do not exceed 30% of your overall limits.
- Call your credit card company and request a "Credit Limit Increase."
Most companies will have you fill out an application, including your current income, which will go to their credit team for review.
3. Keep your balance low and close to zero
Using your credit cards for small purchases and leaving a $1–5 balance on your credit cards when paying your bill each month can help you improve your credit score. If you have high balances, make a game plan to pay your credit card down and avoid using them.
- Limit your credit card usage since your spending habits affect your overall credit score.
Interest rates on a credit card are high, and most payments go towards interest and not principal.
Remember, building a good credit score takes time. Instead of looking for quick fixes, focus on regularly practicing healthy credit habits.
Advice from Joe
We all know what it's like to have less than satisfactory credit. However, if you make a conscious effort to improve your credit standing and put in the time and hard work, you'll notice significant improvements in your credit score in no time. Many people with bad credit believe they'll always struggle with financial issues, but that's not the case. Building an excellent credit score requires commitment and careful attention to your spending habits. It's essential to create a budget and work on revamping any negative spending behavior to see a direct impact on your credit score. This article is a great resource to help you understand credit more fully. If you're seeking professional guidance or credit repair services, don't hesitate to contact us at www.asapcreditrepairusa.com.