It's surprising to find out that there are actually 30 levels of credit scores. Many people would think that finding the best credit score is an easy task, but the reality is that dipping into the world of credit scores can be complex and confusing. Unfortunately, some online sources can provide misleading information, leaving you confused and frustrated. I'm Joe Mahlow and I've been involved in credit repair and financial literacy for more than 15 years. My aim is to give unfiltered advice on topics such as credit scores. I have already assisted over 20,000 clients in upgrading their credit scores, and I hope to share enough information to help you achieve the same. Let's dive in.
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
Understanding Credit Scores
The Ideal Credit Score to Purchase a House
Determining the Ideal Credit Score to Purchase a Car
Tips for Improving Your Credit Score
Tips from Joe on Improving Your Credit Score
Different Types of Credit Scores: Understanding FICO and Vantage Models
There are two main credit scoring models that are essential to know about: the FICO and Vantage models. Knowing the differences between these models is important because they determine how lenders calculate your credit score.
FICO Credit Score
The FICO model is the most widely-used credit score model, consisting of eight different models ranging from FICO 2 to FICO 10. The score you receive depends on your credit report, which is significant because of the various FICO models utilized by lenders.
When you apply for credit, a lender will pull a specific FICO report relevant to your needs. For example, a mortgage lender will pull your FICO 5 credit report, while a credit card company will look at your FICO 8 score.
But why are there so many FICO scores? Each credit report has a different "weight," which means that the factors considered crucial by the lender will have a greater impact on your score. For instance, your FICO 5 mortgage report will concentrate heavily on past mortgage history. In contrast, an auto lender will likely look at your FICO-2 report, which emphasizes your previous auto history.
Sign up for an account on www.myfico.com to see all your different FICO scores.
Vantage Credit Score
Developed by Equifax, Experian, and TransUnion, the Vantage model competes with the FICO model, although the latter has been in use since the seventies. Credit monitoring websites frequently use Vantage to provide free credit reports. Although FICO dominates the lending sector, Vantage is gaining popularity in some areas such as personal loans and auto lending.
Although the Vantage score is accurate, it is not widely used for lending purposes, and its accuracy varies when compared to FICO. However, it can provide a general idea of your FICO score.
Credit reporting agencies are essential data collection entities, and the Vantage model's potential makes it likely that it will be increasingly utilized in the next five to ten years. The FICO model may be outdated and not accurately represent credit scores.
Understanding Credit Scores
Credit scores are measured by two models, FICO and Vantage, each ranging from 350 to 850, where a higher score signifies a better credit rating. The score threshold for specific classifications can be crucial when striving for a healthy credit score. Here are some critical score thresholds:
1. 620 or below
- Considered bad credit, indicating a history of adverse credit or high-balance credit cards.
- To improve scores, make timely payments, and have ten active revolving credit accounts open.
- The Credit Builder Card or OpenSky Credit Card, secured credit cards, may help.
2. 640-680
- Considered fair to good credit, indicating established credit, with derogatory marks or high balances.
- New accounts may temporarily lower scores.
- Don't worry if in this range and recently opened a new account; scores will rebound.
3. 740+
- Considered "super-prime," provides the best interest rates available on most loans.
- Having a 740+ credit score puts you in the top 20% of the US population.
- Maintain great credit by paying accounts on time and keeping revolving credit card accounts paid.
The Ideal Credit Score to Purchase a House
To determine the best credit score to buy a house, you first need to know the type of mortgage loan you intend to get since different mortgage loans come with varying federal regulations and government backing. Conventional loans, FHA loans, and VA loans are the three most common types of mortgage loans accessible in the market.
Conventional Loans
Conventional loans are the most favored mortgage loans and the best option outside of VA loans. They typically have lower downpayment requirements and better interest rates than other mortgages. Furthermore, conventional loans don't require you to maintain private mortgage insurance if you maintain a solid credit score of 640 and a debt-to-debt ratio less than 43%.
FHA Loans
The FHA mortgage loan has lower credit score requirements, usually between 580 and 619. However, it requires you to maintain private mortgage insurance for at least 11 years. Moreover, if you have a lower income, the FHA loan may be a good choice as it has a higher debt-to-income limit of up to 50% than a conventional loan. Finally, FHA loans only require a downpayment as low as 3.5% of the purchase, meaning a lower upfront cost, but with a typically higher interest rate.
VA Loans
The VA loan does not have a set credit score requirement but looks at previous defaulted loans and any government-owed past-due debts when pre-qualifying you. To qualify for this loan, you must have served in the United States Military for a minimum of 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse lost their life while on active duty. VA loans typically have the best interest rates available and usually don't require a down payment. It is an excellent government-backed option that honors and assists our veterans.
Determining the Ideal Credit Score to Purchase a Car
When it comes to purchasing a car on credit, your credit history is more crucial in determining your eligibility than your credit score. Although a good credit score is necessary, it has a reduced impact on the interest rate you receive. Auto loan providers examine your past and present credit histories to assess the risk of extending credit to you. If you have defaulted on a previous auto loan or have a repossession in your present or prior credit history, you will have a harder time getting approved for a loan. However, some lenders who specialize in poor credit or special finance will approve almost anyone for a car loan, though they add specific criteria that the borrower must match, such as a higher down payment and additional dealership fees. Furthermore, when you purchase a car using credit with bad credit, dealerships may choose which vehicle you can get based on the higher markup on the car to compensate for the extended risk. Lastly, it is best to put down equity or a downpayment to have the most bargaining power when financing a car.
Credit Score Recommendations for Purchasing a New Vehicle
There is no precise credit score that guarantees approval, considering the factors mentioned above. However, having a credit score above 680 is the ideal score. If your score falls below this, the interest rate that lenders charge will increase owing to the risk you pose. As shown in the following data, your credit score directly influences the interest rate you pay, and consequently, the overall cost of the car:
Ordered List:
- Someone with a credit score above 720 would owe approximately $5,500 in interest on a loan on average.
- Someone with a credit score above 680 would owe approximately $6,600 in interest on a loan on average.
- Someone with a credit score above 650 would owe approximately $8,100 in interest on a loan on average.
- Someone with a credit score above 615 would owe approximately $10,200 in interest on a loan on average.
- Someone with a credit score above 580 would owe approximately $13,900 in interest on a loan on average.
- Someone with a credit score above 580 would owe approximately $15,300 in interest on a loan on average.
It is clear from the data that the higher your credit score is, the less interest you will owe.
Tips for Improving Your Credit Score
Improving your credit score requires patience and effort, as it takes time to build a strong credit history. Rushing the process can lead to poor decision-making and further harm to your credit standing. However, you can take steps right now to enhance your credit score that require minimal effort, such as:
1. Open 3-5 revolving credit accounts
One of the best options to maximize your credit scores is revolving credit, especially if you have limited credit history or are rebuilding your credit. A secured credit card like Open Sky or Credit Builder Card is highly recommended as it focuses more on your ability to pay on time rather than your credit score. Revolving credit comprises 30-35% of your overall credit score and can help you build credit scores quickly, provided that you pay your balance on time and keep it between $5-10 monthly.
2. Raise your limits
Requesting a credit limit increase for active revolving credit accounts helps increase your overall credit limits, in turn lowering your credit utilization percentage. You can generally do this online through your portal or by calling your credit card company. A seven to fifteen-month excellent payment history on a credit card is usually necessary before your request is approved.
3. Pay down your balances
The best way to keep your balance low and close to zero is to use credit cards for small purchases only and pay them off in full each month. Leave about a $1-$5 balance on your credit cards when paying your bill. Paying off high balances may require a game plan, and you may need to take a percentage of your paycheck each month to pay down the debt until paid off entirely. It is equally essential to restrict your credit card usage to limit your credit card spending habits' impact on your overall credit score.
Tips from Joe on Improving Your Credit Score
We have all experienced times when our credit score is not up to par. However, it is important to take your credit situation seriously and invest the necessary time and effort in improving your score. Don't fall into the trap of believing that having good credit is impossible, as many people with bad credit do. Developing a great credit score requires effort, but it is achievable for those willing to commit to prioritizing their credit and being mindful of their spending habits. Begin by creating a budget and addressing any problematic spending behaviors; this will have a direct impact on your credit score. This article provides information on how to better understand credit. Reach out to our office at www.asapcreditrepairusa.com if you want assistance and guidance with credit score improvement or credit repair.