It's surprising how many people are unaware that their credit score has 30 different levels. This could be one of the reasons why it's not uncommon to come across conflicting information online when searching for the best credit score. Unfortunately, deciphering the information isn't always straightforward and could even lead to further confusion. Hi, I'm Joe Mahlow, and for over fifteen years, I've been a specialist in financial literacy and credit repair. My objective is to give straightforward advice on various topics concerning credit scores, starting with the information on the available credit score levels. I've effectively helped over twenty thousand clients boost their credit scores, and I'm optimistic that I can provide you with enough information to achieve the same. So, let's dive in!
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Good Credit Scores
Credit Score Needed for a Home Loan
What Credit Score Do You Need to Buy a Car?
Tips for Improving Your Credit Score
Joe's Insights on Credit Repair
Different Types of Credit Scores: FICO and Vantage Models
Understanding the differences between credit scoring models is essential when trying to develop a solid credit strategy. There are two primary credit scoring models: the FICO model and the Vantage model. Here’s a breakdown of both models and why they’re important to know.
1. FICO Credit Score:
The FICO credit scoring model is the most popular credit scoring model used by lenders nationwide. With eight different FICO models to choose from, depending on the lender type, you will likely receive a different credit score depending on which version of the model is used. For example, if you’re applying for a mortgage, the lender will most likely pull your FICO 5 report, whereas if you’re applying for a credit card, they will most likely pull your FICO 8 report.
Why are there so many FICO scores? Each version of the FICO model is tailored to weigh specific factors more heavily than others based on the needs of the lender. For instance, a mortgage report will weigh your previous mortgage history far more heavily than your history with credit cards or auto loans.
2. Vantage Credit Score:
The three major credit reporting agencies developed the Vantage Score model to compete with the FICO scoring model. Vantage is a newer scoring model than FICO, and although it’s not used as widely for lending purposes, it’s gaining popularity in some sectors, such as personal loans and auto lending.
While the Vantage score is accurate, it’s important to note that it may not reflect your actual lending score, as FICO is still the most recognized credit scoring model. That said, Vantage can be used as a general indicator of your credit score – it’s hard to know your FICO score without paying for it or having a lender pull your credit report.
Conclusion:
Both the FICO and Vantage models are useful for analyzing your creditworthiness, and it’s important to know the differences between them. As credit reporting agencies continue to collect more data and develop new scoring models, it’s likely that the Vantage Score model will become more widely used in the coming years.
Understanding Good Credit Scores
Credit scores provided by both FICO and Vantage models range from 350 to 850, where 350 refers to the weakest score, and 850 indicates a superb score. Throughout your journey of building your credit scores, it is crucial to comprehend where you stand, which is why I will highlight some vital score thresholds.
1. 620 or below
If your score is within this range, you have bad credit. It is likely that you have adverse credit history, high-balance credit card accounts, or do not own credit cards. Making timely payments and having active revolving credit accounts can help you improve your scores. Secured credit cards like Credit Builder Card or OpenSky Credit Card can also aid in increasing your credit score. Once your credit rating hits 620, qualifying for an FHA home mortgage is possible.
2. 640-680
This credit score range is considered fair or good. If you have established credit, it could mean that you have some derogatory marks or accounts, high balances on credit cards, or newly opened accounts. The latter can temporarily decrease your score. However, if you have recently opened a new account and your score is in this range, do not worry, your score will eventually recover.
3. 740+
Credit scores above 740 are classified as "super-prime" and qualify you for the best interest rates for most loans. If your score exceeds 740, congratulations, because you belong to the 20% of the US population that falls within this category. Ensure you maintain your scores by always paying your accounts on time and keeping your revolving credit card accounts paid.
Credit Score Needed for a Home Loan
The credit score required to obtain a mortgage loan varies with every loan type. Each loan has its unique prerequisites and guidelines. The three most common mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most frequently processed loans in the mortgage industry, and they have the lowest interest rates. They usually don't require you to maintain private mortgage insurance (PMI). PMI shields the lender in case an applicant stops making payments on their loan. A credit score of at least 640 and debt-to-debt ratio of no higher than 43% are the standard requirements. Conventional loans often attract borrowers who have a lower down payment.
FHA Loan
The Federal Housing Administration (FHA) loan is a suitable option for individuals with lower credit scores, which typically range from 580 to 619. This loan lasts for a minimum of 11 years and requires PMI, which is a part of the mortgage and can be a cost to the borrower. Although, a borrower can avoid the PMI clause if they can afford to make a 10% down payment. FHA loans make it possible to purchase homes with up to a 50% debt-to-income limit and have low-interest rates.
VA Loan
VA loans are available to veterans. There isn’t a specific credit score requirement for a VA loan. However, to pre-qualify for this loan, the applicant must not have defaulted on any previous loans and must repay any government debts owed. The applicant must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or have a spouse that died during active duty. This loan offers the lowest interest rates and often doesn't require a down payment. It is a great way to honor our veterans.
What Credit Score Do You Need to Buy a Car?
When you're buying a car, your credit score is an important factor, but it's not the only one that matters. Your credit history plays a more significant role in determining what you qualify for and the interest rate you'll be charged on your car loan. Even if you have a high credit score, your credit history will still be evaluated to assess the risk of extending credit to you, especially if you've had issues with previous auto loans or loan defaults.
If you have a bad credit score, don't worry, as some lenders specialize in car loans for people with poor credit histories. However, they may impose specific criteria such as a higher down payment and additional fees to mitigate the risk associated with extending credit to you. Additionally, the dealership may charge a fee to approve your loan and select a vehicle that will maximize their profits.
To have more bargaining power when buying a car with credit, it's best to have either equity or a downpayment. There is no specific credit score that guarantees approval, but having a credit score of over 680 is ideal. If your score is lower than this, you'll end up paying higher interest rates due to the perceived risk you pose to the lender.
Consider these examples of how your credit score can affect the interest you'll have to pay:
- A credit score of 720 or above results in an average interest of $5,500 on a car loan.
- A credit score between 680 and 719 results in an average interest of $6,600 on a car loan.
- A credit score between 650 and 679 results in an average interest of $8,100 on a car loan.
- A credit score between 615 and 649 results in an average interest of $10,200 on a car loan.
- A credit score between 580 and 614 results in an average interest of $13,900 on a car loan.
- A credit score of 579 or below results in an average interest of $15,300 on a car loan.
This data shows that having a higher credit score leads to lower interest rates and better overall credit scores.
Tips for Improving Your Credit Score
Building a strong credit score is a process that takes time and patience. To boost your credit score, you can take several steps without much effort. It's essential to learn that impatience can lead to poor credit decisions, which can exacerbate the situation. Here's what you can do now to start improving your credit score:
1. Apply for 3-5 revolving credit accounts (credit cards):
Revolving credit is an excellent option to help maximize your credit scores. A secured credit card such as Open Sky or Credit Builder Card is an excellent starting point. Revolving credit makes up 30-35% of your overall credit score and is the best way to build credit scores quickly. Make sure you pay your balance on time and keep it at $5-10 each time you make a payment.
2. Increase your credit limits:
Requesting a credit limit increase can help increase your overall credit limits and lower your credit utilization percentage. You can do this by calling your credit card company or doing it online through your portal. Credit card companies usually want to see 7-15 months of excellent payment history.
3. Pay down your balances:
Keeping your balance close to zero is crucial to maintaining a good credit score. Use your credit cards for small purchases and leave a $1-5 balance each month for optimal results. If you have high balances, make a game plan to pay off your credit card each month and limit your usage since credit card spending habits significantly impact your credit score.
Joe's Insights on Credit Repair
We've all experienced the frustration of having subpar credit. However, if you're serious about improving your credit, there's hope. By putting in time and effort into improving your credit, you'll witness significant changes in your credit score sooner rather than later. Don't fall into the trap of believing that poor credit is a lifelong burden. In reality, achieving a great credit score requires hard work, dedication, and a willingness to prioritize your spending habits. Consider creating a budget and addressing any problematic spending tendencies you may have. These efforts will directly translate into an improved credit score. For more guidance on credit repair, visit www.asapcreditrepairusa.com today.