It's surprising to learn that there are actually 30 varying levels of credit scores. Many people who are looking for the best credit score are often met with a range of answers from their Google search. Unfortunately, this can complicate matters and even mislead individuals on their quest for better credit. My name is Joe Mahlow and I've spent more than 15 years working in financial literacy and credit repair. My aim is to offer straightforward advice on a range of topics, including credit scores. Through my work, I've helped more than 20,000 people improve their credit scores and I'd like to do the same for you. So, let's dive in and explore this topic further.
Contents:
Different Types of Credit Scores: A Guide to Understanding and Comparing FICO and Vantage Models
Understanding Good Credit Scores
What is the Ideal Credit Score for Buying a House?
Credit History vs. Credit Score for Buying a Car
Tips for Boosting Your Credit Score
Refining Your Credit Score: Tips from Joe
Different Types of Credit Scores: A Guide to Understanding and Comparing FICO and Vantage Models
When it comes to credit scores, there are two main models: FICO and Vantage. Both are important to understand, as they differ in how they calculate your score. The FICO model is the most widely used, with eight different FICO models available from FICO 2 to FICO 10. Each model is used by different lenders, depending on the type of credit you are applying for. For example, mortgage lenders typically use the FICO 5 model, while credit card companies primarily use FICO 8. This is because each model weighs different factors more heavily, depending on the type of credit being sought.
The Vantage model was developed by Equifax, Experian, and TransUnion to compete with FICO. Though it is gaining popularity in some sectors, such as personal loans and auto lending, it is not widely used for lending purposes. Instead, it can be seen as a "general idea" of your FICO score. While FICO scores are available through myfico.com or a lender pulling your credit report, Vantage scores can be obtained through many credit monitoring websites for free.
Despite its popularity, some argue that the FICO model is outdated and doesn't give the user a clear representation of their credit scores. However, as long as FICO scores are the most recognized scoring model, they are the most accurate for lending purposes. As the credit reporting agencies evolve and improve their models, Vantage scores may become more widely used in the future. It's important to understand both models to get a better understanding of your creditworthiness.
Understanding Good Credit Scores
Credit scores are measured on a scale from 350 to 850, with 850 being the highest score and 350 being the lowest. To aim for better scoring, it's crucial to know where you stand as you build your credit. Below are some vital score thresholds that can guide you on your journey:
1. 620 or below:
This is categorized as bad credit, indicating a history of negative credit. You may have high-balance credit card accounts or no credit cards at all. Timely payments and having ten active revolving credit accounts open can help improve your credit score. Consider using secured credit cards like Credit Builder Card or OpenSky Credit Card. When your credit score crosses the 620 threshold, you can begin qualifying for an FHA home mortgage.
2. 640-680:
Falling in this range is considered fair for good credit. It indicates that you have established credit and may have some derogatory marks, high balances on your credit cards or newly opened accounts that affect your credit score temporarily. However, scoring in this range suggests there is room for improvement.
3. 740+:
Any credit score over 740 is deemed "super-prime" and garners the best interest rates for most loans. Having over a 740 credit score means you belong to the 20% of the US population with this score, so keep up the excellent work. Always pay your accounts on time, and keep your revolving credit card accounts paid to stay in great shape. Congratulations!
What is the Ideal Credit Score for Buying a House?
When it comes to purchasing a house, your credit score plays a critical role in the type of mortgage loan you can qualify for. Three of the most common mortgage loan types are conventional loans, FHA loans, and VA loans. Federal regulation and government backing ensure that the requirements and guidelines for most mortgage loans are similar to some extent, although there may be some differences.
Conventional Loans
Conventional loans, popular and reliable, are typically the best option outside of VA loans. They do not necessitate you to maintain private mortgage insurance (PMI), which can jack up your down payment or monthly payment. By providing protection to the lender if you go into default on your loan, PMI may be an extra expense to consider. Conventional loans have lower down payment requirements and better interest rates than most other mortgage loans, with a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.
FHA Loan
FHA mortgage loans are designed for borrowers with lower credit scores, typically ranging from 580 to 619. However, check out other lenders if you're within the credit score limits since not all loan programs are the same. PMI must be maintained for a minimum of 11 years with FHA loans, which will contribute to the cost of your mortgage and should be considered, particularly if you have a tight budget. This loan also has a higher debt-to-income limit of up to 50%, allowing you to purchase more homes than with a conventional loan if you have a lower income. The down payment requirement on an FHA loan is as low as 3.5%, allowing you to enter a mortgage with less money out of pocket than a conventional loan, but it usually comes with a higher interest rate.
VA Loan
Although there is no formal credit score requirement, the VA Loan looks at prior defaulted loans and any overdue government debts when pre-qualifying you. You must have served in the US Military for at least 181 days, 90 consecutive days during wartime, or six years with the National Guard, or your spouse was in the military and lost their life during service. The VA loan typically offers the best available interest rates and does not typically require a down payment. I wholeheartedly believe in the VA Loan as it is a perfect way to express gratitude to our veterans.
Credit History vs. Credit Score for Buying a Car
When it comes to buying a car, credit history outweighs credit score as the most critical factor in determining what you qualify for. A higher credit score is important but plays a smaller role in the interest rate you qualify for. Lenders look at your past and current credit histories to evaluate the risk of extending credit, making it more challenging for those with credit issues such as late payments or repossession. However, even those with bad credit can qualify for a car loan, albeit with a higher down payment and additional fees. Having equity or a down payment will provide more bargaining power when seeking financing for a vehicle.
While there is no exact credit score to determine approval, a credit score over 680 is considered ideal. Anything lower can increase your interest rate and risk to the lender. Based on current trends, someone with a 720 credit score would pay $5,500 in interest on a loan, whereas someone with a 580 credit score would pay $15,300. As such, having a higher credit score can significantly affect your interest rate and ultimately, your credit score.
Tips for Boosting Your Credit Score
Improving your credit score is a gradual process that requires time and patience. Rushing to achieve quick results will only lead to irrational and poorly informed decisions that can hurt your credit score even further. However, there are a few things you can do now to start building a good credit score and eventually reach your goal.
Here are some steps that you can take:
1. Obtain Several Revolving Credit Accounts
Opening 3-5 revolving credit accounts is an effective way to enhance your credit score. Revolving credit is easier to obtain than large loans, especially if you have limited credit history or are rebuilding your credit. You can start with secured credit cards that are not too demanding regarding your credit history and focus more on your ability to pay off the card regularly. Make sure you pay off your balance on time and avoid overspending.
2. Request Credit Limit Increases
You can quickly request a credit limit increase for your credit cards if you have active revolving credit card accounts. This can increase your overall credit limits and lower your credit utilization percentage. Make sure you have an excellent payment history for a few months before requesting a credit limit increase.
3. Pay Down Your Balances
Keeping your balance low and close to zero is important. Use your credit cards to purchase small items and leave about $1-5 balance on your credit cards when paying off your bill each month. If you have a high balance, make a plan to pay a percentage of your paycheck each month to pay off your credit card and stop using them.
By following these steps, you can gradually improve your credit score and reach your financial goals. Remember, patience and discipline are the keys to success when it comes to building good credit.
Refining Your Credit Score: Tips from Joe
We've all been in a situation where our credit is less than stellar. However, if you dedicate yourself to improving your credit situation and take it seriously, you'll see significant changes in your credit score rather quickly. Unfortunately, many people with bad credit get trapped in an endless loop of credit issues, causing them to feel as though getting good credit again is impossible. Building a great credit score takes consistent effort, but prioritizing your credit and spending habits pays off. To begin, establish a budget and concentrate on correcting any bad spending habits that may affect your credit score. This article aims to help you understand the complexities of credit. If you require professional guidance or assistance with credit repair, please don't hesitate to contact my team at www.asapcreditrepairusa.com.
Key Takeaways:
Improving your credit score requires time and effort.
Many individuals with poor credit feel hopeless about fixing it.
Prioritizing your credit and spending habits is necessary to build a great credit score.
Establishing a budget and correcting bad spending habits can impact your credit score.
To seek support and assistance with credit repair, visit www.asapcreditrepairusa.com.