It may come as a surprise to many that credit scores have 30 different levels. Often, when people search for the best credit score, they are presented with a multitude of answers from various sources. The information out there can be hard to decipher and potentially lead to confusion. My name is Joe Mahlow and I have over 15 years of experience in financial literacy and credit repair. My aim is to provide straightforward guidance on different topics, such as credit scores. Having helped more than 20,000 clients improve their credit scores, I hope to equip you with sufficient knowledge to do the same. So, without further ado, let's delve into it.
Contents:
Understanding Different Credit Scoring Models
Understanding Good Credit Scores
What Credit Score Do You Need to Buy a House?
The Role of Credit Score when Buying a Car
Tips to Increase Your Credit Score
Insights from Joe
Understanding Different Credit Scoring Models
In order to have a good understanding of your credit score, it’s important to know about the different credit scoring models that are used. Two popular models are the FICO model and the Vantage model, and each of these has its own approach to calculating credit scores.
FICO Credit Score
The FICO credit scoring model is the most widely used scoring model, and it has eight different versions ranging from FICO 2 to FICO 10. The credit score that you receive may vary depending on which FICO model is used by your lender. For example, a mortgage lender will typically pull your FICO 5 credit report, while a credit card company will usually use your FICO 8 credit report. This is because each FICO model places different importance on various factors that are relevant to different types of credit.
Why So Many FICO Scores?
Credit reports have different "weights" for various factors, depending on the type of credit in question. For example, a FICO 5 mortgage report will place heavy emphasis on your history with previous mortgages. To get a complete picture of all of your FICO scores, you can sign up for an account with www.myfico.com.
Vantage Credit Score
The Vantage Score scoring model is a newer competitor to the FICO model. Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), Vantage Score is used by credit monitoring websites to provide free credit reports. While FICO is currently the dominant scoring model, Vantage is gaining popularity in some sectors, such as personal loans and auto lending.
Is the Vantage Score Accurate?
The accuracy of the Vantage Score depends on the context in which it is used. While it is generally a good indicator of your overall credit score, it may not be the most accurate representation of your lending score, as FICO is still the most widely recognized model for lending purposes. However, Vantage is a good way to get a general idea of your credit score if you don't have access to your FICO score. It is likely that Vantage will become increasingly popular in the coming years, as it provides more accurate scoring models based on current standards.
Understanding Good Credit Scores
Credit scores can range from 350-850 for both FICO and Vantage models, with 850 being the best score and 350 being the worst. Knowing where you stand on your journey to achieving the best score is essential. Here are some important score thresholds to keep in mind:
1. Bad Credit: 620 or below
If your credit score is below 620, you have bad credit. You may have a history of adverse credit, high-balance credit card accounts or no credit cards at all. Timely payments and ten active revolving credit accounts can improve your credit score. Secure credit cards, such as the Credit Builder Card or OpenSky Credit Card can help with building your credit score. On achieving a score in the 620 credit score range, you may start qualifying for an FHA home mortgage.
2. Fair to Good Credit: 640-680
Scores in this range are considered fair for good credit. While you may have established credit, it is essential to note that you may have some derogatory marks or accounts on your credit, and you may have high balances on your credit cards to pay down. A temporary score drop may occur due to newly opened accounts. However, your scores will return, and there is no need to panic.
3. Excellent Credit: 740+
If your credit score is 740 or higher, congrats! It is considered "super-prime" and gives you the best interest rates for most loans. This score is part of the 20% of the US population. Ensure that you keep up the great work of paying your accounts on time and maintaining your revolving credit card accounts.
What Credit Score Do You Need to Buy a House?
The qualification standards for mortgage loans rely on the type of loan you are applying for. Although requirements may vary, most loans have similar guidelines due to federal regulations and government support. Generally, there are three types of mortgage loans available, namely conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and best way to save on a loan other than VA loans. With conventional loans, there's no need to pay for private mortgage insurance (PMI), which adds to the downpayment or monthly payment. PMI provides coverage for the lender when the borrower can no longer pay the loan. Conventional loans usually have lower downpayment requirements and better interest rates than other mortgage loans. Typically you will need a credit score of 640 and have a debt-to-income (DTI) ratio of no higher than 43%.
FHA Loan
An FHA loan is available for people with lower credit scores around 580-619. Since loan programs may differ, consult with various lenders to find the best financial solution for your situation. FHA loans usually require you to pay PMI for at least 11 years, which means you need to prioritize this added expense to your mortgage payment. It also usually has a higher debt-to-income limit of up to 50%, allowing people with lower incomes to purchase more homes. The downpayment requirement is only 3.5% of the purchase price, so you can save more money using an FHA loan, but higher interest rates are typical.
VA Loan
VA loans do not have a specific credit score requirement. However, VA loan pre-qualification looks into your previous default loans and any overdue government-related debts. It is necessary to have military service in the United States for at least 181 days, 90 consecutive days of wartime service, six years of National Guard service, or for your spouse to have died during active-duty military service. VA loans typically offer the best interest rates and usually do not need a down payment. The VA loan repays our veterans in many ways and is an excellent option to explore.
The Role of Credit Score when Buying a Car
When purchasing a car, contrary to popular belief, your credit history holds more weight than your credit score in determining your eligibility. A credit score is still significant in securing your loan; however, it does not solely determine the interest rate you will receive. Lenders assess your credit history, from past and present auto loans to any repossession or overdue payments, to appraise their risk level when lending to you. Someone with a poor credit history may find it difficult to qualify for a loan as compared to someone with an excellent record. While subprime lenders may approve those with a poorer credit score for a car loan, they often require higher fees and down payments to compensate for the risk. Dealerships may also add fees to the loan to cover any potential defaults. To maximize your chances of securing a car loan, having equity or a down payment can help.
As for the credit score range for a new car loan
A credit score of 680 or above is ideal, though various factors can influence approval. An individual with a credit score of 720 or higher, on average, pays $5,500 in interest, whereas someone with a score of 580 sees an average interest rate of $15,300. The higher your credit score, the lower your interest rate and the less interest you will pay overall.
Tips to Increase Your Credit Score
To improve your credit score, you need to be patient as building good credit takes time. It's important to avoid making decisions that can harm your credit. Here are some things you can do right now to improve your credit:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, can help you improve your credit scores. It's easier to get approved for credit cards, especially if you have limited credit or want to rebuild your credit. Start with a secured credit card that doesn't focus much on your credit score but considers your ability to pay the bill on time. Revolving credit accounts make up 30-35% of your credit score. Use your credit cards on small purchases, such as gas or groceries, and pay your balance on time. Keep the balance between $5-$10 each time you make a payment.
Recommended credit cards:
- Open Sky
- Credit Builder Card
2. Raise Your Limits
Requesting a credit limit increase can help decrease your credit utilization percentage and increase your overall credit limits. If your credit card balances exceed 30% of your overall limits, this can hurt your credit scores. Contact your credit card company to request a credit limit increase. Fill out the required information, including your current income, and the credit team will review your request. Most credit card companies require excellent payment history for 7-15 months before granting a credit limit increase.
3. Pay Down Your Balances
Keeping your balance low and close to zero is essential for a good credit score. If you have high balances, make a plan to pay them down each month. This can include taking a specific percentage of your paycheck each month to pay off the balance. Leave a $1-$5 balance on your credit cards when paying your bill each month. Avoid using your credit cards too much as your credit card spending habits are a significant factor in your overall credit score. High-interest rates can also add to the balance.
Insights from Joe
Let's face it, many of us have experienced poor credit at some point. However, by taking your credit situation seriously and investing time and effort, you can witness significant improvements to your credit score in a short span of time. It's common for those with bad credit to get stuck in a perpetual cycle, believing that good credit is out of reach. Building a strong credit score requires persistence and dedication. Putting your credit first and being mindful of your expenses will pay off. Begin by creating a budget and fixing unhealthy spending habits to start seeing positive changes reflected in your credit score. This write-up provides valuable insights into understanding credit. If you require guidance or credit repair assistance, do not hesitate to contact my office at www.asapcreditrepairusa.com.