Were you aware that you actually have 30 unique credit score levels? It's common for individuals to search for the best credit score online and stumble upon numerous different results. Unfortunately, the information provided is often not just perplexing but can also be deceptive—causing users to dive deeper into an obscure, confusing world of credit scores. My name is Sarah Johnson and for over 15 years, I've worked in both finance literacy and credit repair. My aim is to provide you with genuine advice on various topics, starting with credit scores. Across my career, I've helped over twenty thousand clients elevate their credit scores and I'd love to pass on my knowledge to you! So, let's begin.
Contents:
Different Types of Credit Scores Explained
Understanding Good Credit Scores
What Credit Score Do You Need to Qualify for a Home Mortgage Loan?
What Credit Score Is Necessary to Purchase a Car?
Ways to Improve Your Credit Score
Joe's Suggestions for Improving Your Credit
Different Types of Credit Scores Explained
Two credit scoring models - FICO and Vantage score - are important to understand, as they differ on how your credit score is calculated.
FICO Credit Score
FICO is the most popular credit scoring model, with eight different FICO models from FICO 2 to FICO 10, each providing a different credit score depending on your credit report. For example, if you are applying for a home, the mortgage lender may pull your Fico 5 credit report, whereas a credit card company will most likely use your Fico 8 credit report. The different FICO scoring models have varying weights for different credit reports, weighing heavily on factors important to lenders. As an illustration, your previous mortgage history has a more significant impact on FICO 5 scores than other historical data.
Vantage Credit Score
Vantage score is a newer competing scoring model to FICO, developed by the three major credit reporting agencies. Certain sectors, such as personal loans and auto lending, are starting to use it. Although it is gaining popularity, it is not widely used for lending purposes, and your ability to obtain a loan will depend on your FICO score. However, it can provide a good "general idea" of your FICO score.
Which Scoring Model Is More Accurate?
The accuracy of the Vantage score depends on the context. It is accurate as a general idea of your credit score, but it may not accurately reflect your actual lending score, as FICO is the most recognized scoring model. Vantage score may overtake FICO in the next five to ten years as the most widely used scoring model, both providing the best scoring data based on today's standards. Credit reporting agencies have the data and the upper hand in providing the best scoring data. To get a visual representation of your credit scores, visit www.myfico.com and sign up for an account.
Understanding Good Credit Scores
Credit scores from both the FICO and Vantage models have a range of 350 to 850. A score of 850 is the best, while a score of 350 is the worst. To know where you stand in terms of your credit score, here are some vital score thresholds to keep in mind as you aim for the highest scores possible.
1. 620 or below:
This is known as bad credit, indicating a history of adverse credit, possible high-balance credit card accounts, or lacking credit cards altogether. Ten active revolving credit accounts and timely payments can help improve your credit score. Consider getting a Credit Builder Card or OpenSky Credit Card, as these can help build your credit score. A credit score of 620 means you qualify for an FHA home mortgage.
2. 640-680:
This score is considered fair for good credit. A score in this range indicates established credit, but there may be some derogatory marks or accounts on your credit and high balances on your credit cards that need to be paid down. Temporary drops in your scores may result from newly opened accounts, so no need to panic.
3. 740+:
Credit scores over 740 are considered "super-prime" and grant the best interest rates for most loans. Congratulations if you fall in the 20% of the US population with a credit score over 740! Continue paying your accounts on time, keeping your revolving credit accounts paid, and you will be in great shape.
What Credit Score Do You Need to Qualify for a Home Mortgage Loan?
The minimum credit score requirement for a mortgage loan depends on the type of loan you're applying for. The federal regulations and government backing mean that most mortgage loans have similar if not identical, requirements and guidelines. Conventional loans, FHA loans, and VA loans are the three most common options.
1. Conventional Loans
Conventional loans are the most popular and best option for savings outside of the VA loan. Unlike some other mortgage loans, conventional loans don't require borrowers to maintain private mortgage insurance (PMI), a cost that can increase the down payment or monthly payment amount. A typical credit score requirement for conventional mortgage loans is 640, and borrowers' debt-to-income ratio mustn't exceed 43%.
2. FHA Loans
The FHA mortgage loan is an option for those with lower credit scores, usually between 580 and 619. Though different lenders have different loan programs, shop around for options that meet your credit score limits best. FHA loans require PMI for at least 11 years, which increases your mortgage costs. With a higher debt-to-income limit of up to 50%, an FHA loan allows borrowers with low income to purchase more homes than with a conventional loan. Also, the down payment can be as low as 3.5% of the purchase, but it results in higher interest rates.
3. VA Loans
VA loans don't have a strict credit score requirement, but they pre-qualify borrowers based on previous defaulted loans and past-due debts owed to the government. The loan is exclusively available to military servicepersons, veterans, and in some cases, their surviving spouses. The VA loan offers the best interest rates and usually doesn't require a down payment. We love the VA loan as it gives back to our veterans perfectly.
What Credit Score Is Necessary to Purchase a Car?
While credit score does have an impact on the interest rate of a car loan, it is important to understand that your credit history is the critical factor in determining what you qualify for. When applying for a car loan, lenders assess your risk level by examining your credit history. Late payments, repossessions, and other negative marks can make it more challenging to obtain loan approval. Special finance lenders are willing to work with borrowers regardless of their credit history, but will likely set stricter criteria such as higher down payments and additional fees. To have the most bargaining power when seeking credit to purchase a vehicle, it's ideal to have equity or a down payment.
As for the credit score range, it's not definitive but a score over 680 is ideal. Also, a higher credit score means lower interest rates. For instance, someone with a 720 or above credit score will pay about USD 5,500 in interest on a loan compared to someone with a 580 credit score that will pay over USD 15,000 in interest on a loan.
Ways to Improve Your Credit Score
Improving your credit score is achievable with some effort. Keep in mind that it takes time, and patience is key. Hasty decisions will only worsen your situation. Here are some steps you can take to strengthen your credit score:
1. Open 3-5 revolving credit accounts like credit cards.
Revolving credit can help you build credit scores more efficiently, making it the best option to obtain approval, especially for those with limited credit or seeking to rebuild credit. Opt for a secured credit card that emphasizes your ability to pay on time rather than your credit score. Make small purchases and keep your balance at $5-$10 when you pay. The credit utilization will show up on your credit score after 2-4 months. Make sure you pay your balance on time.
2. Ask for a credit limit increase
To help decrease the credit utilization percentage that can harm your credit scores if your credit card balances exceed 30% of your overall limits.
3. Pay down your balances.
Try to keep your balance low, close to zero by using your credit cards for small purchases only and leaving about a $1-$5 balance on your credit cards. If you can’t afford to pay your balance off, create a plan to pay down the credit card's balance each month while not using them to keep an eye on the interest rates.
Joe's Suggestions for Improving Your Credit
Many of us have faced the challenge of having poor credit at some point in our lives. However, if you are committed to improving your credit situation and putting in the necessary effort, you can see significant improvements in your credit score in a short amount of time. It's easy to get stuck in a cycle of poor credit, but don't lose hope – with dedication and focus on your spending habits, you can build a strong credit history. Start by creating a budget and addressing any problematic spending patterns. By doing so, you will make a positive impact on your credit score. For more information on credit and to obtain guidance or assistance with credit repair, contact us today at www.asapcreditrepairusa.com.