It may come as a surprise to learn that there are actually 30 different levels of credit scores. It can be confusing for individuals searching for information on the best credit score, as Google often yields various answers. Unfortunately, some of these answers can be misleading and lead individuals astray. My name is Joe Mahlow, and I have been working in the financial literacy and credit repair space for fifteen years. My intention is to provide honest and practical advice on an array of topics, including credit scores. Having aided over twenty thousand clients in improving their credit scores, my goal is to offer enough information to help you achieve the same success. Let's delve into this topic further.
Contents:
Different Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores: Thresholds and Tips for Improvement
What credit score do you need to buy a home?
Determining Your Qualification for a Car Loan
Tips for Improving Your Credit Score
Joe's Insights on Improving Your Credit Score
Different Types of Credit Scores: FICO and Vantage Models
When it comes to credit scoring, there are two key models that you should be familiar with – FICO and Vantage. Both models are important to understand, given the differences in how they calculate your credit score.
FICO Credit Score
The FICO credit scoring model is the most commonly used model. With eight different FICO models – ranging from FICO 2 to FICO 10 – the credit scores you receive will be dependent on the credit report used. While this can be bewildering, it's important to know why there are different FICO models.
Different types of lenders pull different FICO reports. For instance, if you're hoping to apply for a mortgage, the lender will most likely pull your Fico 5 credit report. On the other hand, if you're trying to get a credit card, they'll more likely use the Fico 8 credit report.
Why are there so Many FICO Scores?
Each credit report is given different weight, with the more important factors to the lender having a greater impact on the credit score. For example, a FICO 5 mortgage report will primarily weigh your past mortgage history. This means that if you had a good payment history on a previous mortgage, it would weigh more in your favor. The same is true for other FICO scoring models and lenders. Credit card companies primarily use the FICO 8 report, so your previous credit card history will impact this score more. Auto lenders usually pull Fico-2 reports, and your scores will weigh heavily on your previous auto history.
If you're interested in viewing your different FICO scores, you can sign up for an account at www.myfico.com.
Vantage Credit Score
The Vantage Score scoring model was developed as a competitor to the FICO scoring model by the three largest credit reporting agencies – Equifax, Experian, and TransUnion. While FICO has been the preferred scoring model since the seventies, Vantage is gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites all over the United States often use Vantage to provide a free copy of your credit reports.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but only in certain contexts. Since it's not widely used for lending purposes, it won't be an accurate representation of your actual lending score. A credit score is only as accurate as your ability to obtain a loan, and since FICO is the most recognized scoring model, Vantage's accuracy can vary. However, it's still a good "general idea" of your FICO score. You can use your Vantage score to give you a rough idea of your overall credit scores, since it's difficult to ascertain your FICO score without paying for it or having a lender pull your credit report.
In the next 5–10 years, I anticipate the Vantage scoring model will be more widely used by lenders as it provides the best-scoring models based on today's standards. I believe the FICO scoring model is outdated and fails to give users a clear representation of their credit scores. It's important to remember that credit reporting agencies are the most significant data collectors outside social media companies. Thus, if they have the data, they have the upper hand in providing the best scoring data.
Understanding Credit Scores: Thresholds and Tips for Improvement
Credit scores range from 350 to 850 for both FICO and Vantage models. A score of 350 is considered the worst, while 850 is the best. To achieve high scores, it is crucial to understand where you stand in your credit-building journey. Here are some significant score thresholds to help you.
1. 620 or below:
This score is regarded as bad credit. Having adverse credit history, high-balance credit card accounts, or no credit cards are some of the causes. To improve your credit scores, make timely payments and have ten active revolving credit accounts. Secured credit cards such as Credit Builder Card or OpenSky Credit Card can help you build your credit. If you have a score of 620 or above, you can qualify for an FHA home mortgage.
2. 640-680:
This range is considered fair for good credit. Scores in this category indicate that you have established credit, but you may have derogatory marks, high balances on your credit cards, or newly opened accounts that can drop your scores temporarily. A temporary drop in your credit scores should not cause you to panic and should return in due time.
3. 740+:
A credit score of 740 and above is considered "super-prime." This score range gives you the best interest rates for most loans. Only 20% of the US population has a score above 740, and if you are one of them, congratulations! Maintain an on-time payment and keep your revolving credit accounts paid to stay in great shape.
What credit score do you need to buy a home?
The credit score required to qualify for a mortgage loan varies depending on the type of loan you seek. Mortgage loans are subject to federal regulations and government backing, therefore, whether it is a conventional loan, FHA loan, or VA loan, the requirements and criteria for most loans typically share similarities with others.
1. Conventional Loans
Conventional loans are the most widely used outside of VA loans and typically the best option for saving money. With conventional loans, private mortgage insurance (PMI) is not required, which can save you added costs that may increase your downpayment or monthly payment. PMI provides cover for the lender in the event you default on your loan. Conventional loans often have lower downpayment requirements and better interest rates than other loans, with typical credit score requirements of 640 and a debt-to-income ratio that should not exceed 43%.
2. FHA Loan
FHA mortgage loans are ideal for borrowers with lower credit scores, generally ranging from 580 to 619. Given the differences in loan programs, it is advisable to compare lenders for the best financial deal if you are within the required credit score limits. For FHA loans, PMI must be maintained for at least eleven years which is an added cost to your mortgage. Additionally, an FHA loan allows for a higher debt-to-income limit of up to 50%, enabling you to purchase a home even with a lower income. While the downpayment requirement is relatively low, starting at 3.5% of the purchase price, the interest rate is higher compared to a conventional loan.
3. VA Loan
There is no fixed credit score requirement for the VA Loan, however, lenders consider previous defaulted loans and any government-owned past due debts when pre-qualifying you. The eligibility criteria for a VA Loan include having served in the United States Military for a minimum of 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse was in the military and lost their lives during active duty. The VA Loan typically offers the best interest rates and generally does not require a down payment, making it an excellent option for veterans.
Determining Your Qualification for a Car Loan
When it comes to buying a car, lenders pay more attention to your credit history than your credit score. Although a high credit score is beneficial, the interest rate you are offered is determined by your credit history. Creditors evaluate your credit histories when you apply for a car loan, particularly if you have a history of late loan payments or repossession. A bad credit score might not disqualify you from getting a loan, but you may be asked to fulfill extra requirements, such as paying a higher down payment or adhering to specific dealership fees. To optimize your chances of getting approved for a car loan, it is essential to establish equity or have a down payment.
What is an Ideal Credit Score for a New Car
While a precise credit score cannot determine whether or not you will be accepted for a loan, a credit score of 680 or more is considered ideal. An individual with a credit score of 720 or more will pay $5,500 in interest on average, whereas someone with a credit score of 580 or more will pay $15,300 in interest on average. This indicates the higher your credit score, the less interest you will be charged, thereby increasing your overall credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time, effort, and patience. Rushing to build a good credit score overnight will only result in irrational and bad decisions with your credit, which can worsen your problems. However, there are a few things you can do right now to help improve your credit score, including:
1. Open 3-5 revolving credit card accounts
To maximize your credit scores, open 3-5 revolving credit card accounts. If you have limited credit or are rebuilding your credit, starting with a secured credit card like Open Sky or Credit Builder Card can give you the best chance of approval. Revolving credit makes up 30-35% of your overall credit score and can help you build credit scores quickly if used responsibly.
2. Request a credit limit increase
For your active revolving credit card accounts, request a credit limit increase to increase your overall credit limits and lower your credit utilization rate. Aim to maintain a balance of $5-$10 each time you make a payment, and limit the use of the card to small purchases like gas or groceries.
3. Keep your balances low and close to zero
To avoid hurting your credit score, keep your balances low and close to zero. You're not obligated to use your credit cards each month, so consider using them only for small purchases and leaving a balance of $1-$5 on them when paying your bill. If you have high balances, make a plan to pay them down gradually and stop using your credit cards until the balance is manageable.
Remember, your credit card spending habits play a crucial role in your overall credit score, so it's essential to limit usage and pay balances on time. With time, responsible credit use and payments will result in an improved credit score.
Joe's Insights on Improving Your Credit Score
Credit problems can happen to anyone, and it can feel overwhelming to get out of a poor credit situation. However, taking your current credit situation seriously and devoting the necessary time and effort to work on your credit can yield noticeable changes to your credit score in a short amount of time. Unfortunately, many people with bad credit feel like it's impossible to rebuild their credit, and so they continue to struggle with credit issues for their entire lives. Building a good credit score requires consistent work and dedication, but those who prioritize their credit and spending habits will come out on top. Start by creating a budget and addressing any bad spending habits you may have, as this will directly impact your credit score. For additional help and guidance with your credit, you can contact my office at www.asapcreditrepairusa.com.