It's fascinating to note that there are 30 unique levels of credit scores. However, people often struggle to find accurate information when searching for the best credit score online. The information found can be misleading, and one might end up confused. My name is Joe Mahlow, and I have spent the last 15 years in the financial literacy and credit repair industry. I am passionate about educating people about various topics such as credit scores and providing them with practical advice. Over the years, I have helped more than 20,000 clients improve their credit scores, and I hope to assist you as well. So, let's dive right in!
Contents:
Types of Credit Scores: FICO and Vantage Models
Understanding Credit Scores: What is Considered Good?
What Credit Score Do You Need to Buy a House?
Determining the Ideal Credit Score Range to Buy a Car
Tips for Improving Your Credit Score
Tips to Improve Your Credit: Insights from Joe
Types of Credit Scores: FICO and Vantage Models
Credit scores are critical when it comes to applying for credit since they give a lender a quick snapshot of your creditworthiness. There are two primary credit scoring models: the FICO model and the Vantage model; both models have notable differences in calculating your credit score.
FICO Credit Score
The FICO credit scoring model is currently the most popular and widely used credit scoring model in the lending sector. It has eight different models from FICO 2 to FICO 10, and each model calculates your credit score differently. The version of the report a lender uses depends on the type of credit you apply for. Additionally, the weight of each credit report varies, depending on the lender’s emphasis on specific factors. For example, if you are applying for a mortgage, the lender would likely pull your FICO 5 credit report, which places significant weight on previous mortgage history.
Vantage Credit Score
Equifax, Experian, and TransUnion designed the Vantage Score scoring model to compete with the FICO scoring model. Vantage is a relatively new credit scoring model compared to FICO, and although it is currently not widely used in the lending sector, it is gaining popularity in some sectors like personal loans and auto lending. Credit monitoring websites frequently use Vantage to provide a free credit report to interested individuals.
Vantage Score Accuracy
Although the Vantage Score is accurate, its accuracy can vary depending on the context. Since FICO is the most recognized credit scoring model, your Vantage Score may not be accurate in reporting your actual lending score. Nevertheless, the Vantage Score provides a good "general idea" of your FICO score, which can serve as a useful indicator in anticipating your overall creditworthiness. Given that credit reporting agencies are data collection behemoths, they will likely leverage the best scoring data to provide more accurate credit scores. The Vantage scoring model has the potential of being widely used in the next 5-10 years due to its ability to provide more accurate credit scores based on today's standards.
If you want a clear visual representation of your credit scores, you can go to www.myfico.com and sign up for an account to see all your different credit scores.
Understanding Credit Scores: What is Considered Good?
Credit scores are crucial when it comes to obtaining loans to buy a home, a car, or secure other types of financing. FICO and Vantage scores both range from 350 to 850, with higher numbers indicating excellent credit and lower numbers indicating poorer credit. Here are the key score thresholds to keep in mind:
620 or below:
If you fall within this range, you have bad credit with either no credit history or a history of late or missed payments. To improve your credit score, it's crucial to pay your debts on time and to have at least 10 active revolving credit accounts. Secured credit cards like Credit Builder or OpenSky can be helpful in establishing creditworthiness. Once you reach a 620 credit score, you may qualify for an FHA loan to purchase a home.
640-680:
A score within this range is considered fair for good credit. You may have some outstanding balances or derogatory marks on your credit, but payment history is positive, and you have established excellent credit. Recently opened accounts may temporarily lower your scores. Don't worry, your score will bounce back.
740+:
A credit score of over 740 is deemed as "super-prime," and you are among the 20% of Americans with this score. This score guarantees the best interest rates for most loans. It’s essential to continue always paying your accounts on time, keeping your revolving credit card accounts paid to stay in excellent shape and work to maintain your credit score. Congrats!
What Credit Score Do You Need to Buy a House?
When it comes to qualifying for a mortgage loan, the required credit score depends on the type of loan you are seeking. There are three common types of mortgage loans: conventional, FHA, and VA. Although the requirements and guidelines for these loans may be similar due to federal regulation and government backing, there are some differences to note.
Conventional Loans
Out of the three loan types, conventional loans are the most popular and cost-effective. These loans do not require private mortgage insurance (PMI) and typically have better interest rates and down payment requirements. To qualify for a conventional loan, you should have a credit score of at least 640 and a debt-to-income ratio of no higher than 43%.
FHA Loan
If you have a credit score between 580 and 619, you may qualify for an FHA loan. However, keep in mind that all loan programs are different, and it's best to shop around for lenders to find the best financial option for you. With the FHA loan, you will need to pay PMI for at least 11 years, which may increase your mortgage cost. But, it has a higher debt-to-income limit of 50%, enabling you to buy more homes if you have a lower income. Additionally, the minimum down payment required for an FHA loan is only 3.5% of the purchase price.
VA Loan
To qualify for a VA loan, you must have a history free of defaulted loans and past-due debts owed to the government. But, there isn't a minimum credit score requirement, and VA loans typically have the best interest rates available. Veterans, active military personnel, and their eligible spouses can apply for a VA loan, which does not usually require a down payment. Overall, the VA loan is an excellent option that honors and supports our nation's veterans.
Determining the Ideal Credit Score Range to Buy a Car
When you consider purchasing a car, your credit history, as opposed to your credit score, should be the chief factor in determining eligibility. Although having a high credit score is advantageous, it plays a lesser role in qualifying for a favorable interest rate. Auto lenders scrutinize the applicant's credit history to ascertain the risk of lending him/her money. Therefore, if your credit history shows a record of defaults, such as late car payments or repossession, you may find it difficult to get approved for a loan. Some lenders specializing in bad credit or special finance, however, may qualify almost anyone for a car loan. Nonetheless, they often impose additional requirements, like a high down payment and dealership fees, to mitigate potential losses. On the customer's end, equity or a down payment can provide more bargaining power while buying a car on credit.
Ideal Credit Score Range for Buying a New Car
While there isn't an exact credit score that guarantees loan approval, a score above 680 is preferred. Credit scores below this range increase the interest rate, as they suggest higher risk for the lender. An individual's credit score will also determine the interest rate incurred as per the following comparison:
Comparison of Interest Rates Based on Credit Score:
- A person with a 720 credit score or higher will pay an average of $5,500 in interest on a loan.
- A person with a 680 credit score or higher will pay an average of $6,600 in interest on a loan.
- A person with a 650 credit score or higher will pay an average of $8,100 in interest on a loan.
- A person with a 615 credit score or higher will pay an average of $10,200 in interest on a loan.
- A person with a 580 credit score or higher will pay an average of $13,900 in interest on a loan.
- A person with a credit score of 580 or higher will pay an average of $15,300 in interest on a loan.
The above data highlights that a high credit score is instrumental in reducing overall interest and, in turn, helps improve your credit score.
Tips for Improving Your Credit Score
Improving your credit score takes time and effort, but there are several things you can do right now to start seeing positive results. Patience is critical when building credit, as making hasty decisions can further harm your credit standing. Here are some tips for boosting your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit, such as credit cards, allows you to improve credit scores quickly. Start with secure credit cards that don't focus on your credit score, but instead, your ability to pay the card on time. Revolving credit makes up a significant portion of credit score, so be sure to 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 Credit Limit Increases
Active revolving credit card accounts allow you to request a credit limit increase. This can increase overall credit limits and lower your utilization percentage. Credit card companies will typically allow you to request a limit increase online or by phone. Ensure you have made excellent payment history for 7-15 months before requesting a credit limit increase.
3. Keep Your Balances Low
Pay down balances and try to keep them as low as possible. Only use credit cards for small purchases and leave a balance of $1-5 each month. Pay down high balances with a portion of your monthly income until you have paid them off. Try to limit credit card usage, as high rates and balances can harm credit scores.
Tips to Improve Your Credit: Insights from Joe
Having less-than-perfect credit is a situation most of us have faced at one point or another. However, it's important to take the matter seriously and dedicate time and effort to improving your credit score. Many individuals with poor credit become enmeshed in a cycle of credit problems, feeling like good credit is an unattainable goal. Achieving a favorable credit score requires sustained effort, but those who prioritize their credit and spending practices will experience positive results. Begin by devising a budget and tackling any unwise spending habits that contribute to weak creditworthiness. Your financial habits will have a direct impact on your credit rating. For further assistance with credit repair and building your credit score, contact my office at www.asapcreditrepairusa.com.