Credit scores can be more complicated than you think. Did you know that there are actually 30 different levels of credit scores? It's common for people to search for the best credit score, only to receive a plethora of different answers from Google. Unfortunately, much of this information can be misleading and confusing, leading some down a frustrating rabbit hole. Hi, my name is Joe Mahlow and I've spent over fifteen years in the financial literacy and credit repair space. My goal is to provide straightforward advice on various topics, such as credit scores. Having helped over twenty thousand clients improve their credit scores, I hope to give you the knowledge and tools to do the same. Let's dive in.

Contents:

Different Types of Credit Scores

Understanding Good Credit Score Ranges

What is the Ideal Credit Score When Buying a Home?

Determining Creditworthiness for a Car Purchase

Tips for Improving Your Credit Score

Insights from Joe on Credit Improvement

Different Types of Credit Scores

Two main credit scoring models frequently used are the FICO model and the Vantage model. Understanding both scoring models is crucial in comprehending the variations of how each model calculates your credit score.

FICO Credit Score

The FICO credit scoring model is the most widely used model compared to other credit scoring models. The FICO model has eight different models, ranging from FICO 2 to FICO 10, that give a different credit score depending on the credit report. The reason behind having different FICO models is to calculate varying credit scores for different situations.

When applying for credit, the type of lender that you use will pull out a specific FICO report. For instance, if you apply for a home, the mortgage lender will pull your Fico 5 credit report, whereas if you apply for a credit card, the lender will pull your Fico 8 credit report.

Why So Many FICO Scores?

The answer is simple; each credit report has different "weight," meaning that the factors that are critical to the lender have a significant effect on the credit score than the less crucial ones. For example, a FICO 5 mortgage report will weigh your previous mortgage history heavily; this means that if you have a positive payment record on a previous mortgage, it will count positively towards your score than having a negative history. This applies to all FICO scoring models, where FICO 8 score weighs heavily on previous credit card history since credit card companies usually use it. Auto lenders typically pull FICO 2 reports, which also weighs heavily on the previous auto history.

You can monitor your different FICO scores using www.myfico.com.

Vantage Credit Score

The Vantage Score scoring model is a new scoring model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO. Credit monitoring websites in the United States frequently use Vantage to provide individuals with a free copy of their credit reports. Although FICO still dominates the lending sector, the Vantage model is gaining popularity as a scoring model in some sectors, such as personal loans and auto lending.

Is the Vantage Score Accurate?

The Vantage score is accurate; however, its accuracy varies depending on the context within this question. Since Vantage score is not widely used for lending purposes, it may not be accurate when it comes to your actual lending score. A credit score is only as accurate as your ability to obtain a loan; hence, since FICO is the most recognized scoring model, Vantage's accuracy can be different. Vantage score serves as a good "general idea" of your FICO score. Use your Vantage score to approximate your overall score since it's challenging to know your FICO score without a lender pulling your credit report or paying for it.

FICO scoring model may be outdated and doesn't provide a clear representation of credit scores. Credit reporting agencies are the most significant data collection agencies outside social media companies. If they have the data, they have the upper hand in providing the best scoring data, period. I believe that lenders will widely use the Vantage scoring model in the next 5–10 years due to its ability to provide the best scoring models based on today's standards.

Understanding Good Credit Score Ranges

The FICO and Vantage models both have credit score ranges from 350 to 850. While 350 is the worst score you can have, 850 is the best. If you aim to achieve high scores, it's crucial to track your progress and understand where you stand. Here are some essential score thresholds:

620 or below:

This is considered bad credit and indicates adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your scores, ensure timely payments and have at least ten revolving credit accounts. Secured credit cards like Credit Builder or OpenSky can help build your credit. A 620 credit score qualifies you for an FHA home mortgage.

640-680:

This is deemed fair for good credit, showing established credit but with some derogatory marks, high balance credit cards, or newly opened accounts that could lower your score temporarily. Don't worry, and your score will recover soon.

740+:

Any credit score over 740 is considered "super-prime" and can get you the best interest rates for many loans. You are among the 20% of the US population with this score. Keep up the good work by paying your accounts on time and keeping your revolving credit card accounts paid.

What is the Ideal Credit Score When Buying a Home?

The credit score you need to buy a house varies depending on the type of mortgage loan you want to acquire. While federal regulations and government support mean that most mortgage loan requirements are similar, there are differences that you need to be aware of. The most common types of loans are conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans are the most popular savings loan option outside of VA loans. With this loan, you will not have to pay for private mortgage insurance (PMI), lowering your down payment or monthly payment. The credit score required for conventional loans is similar, at 640, and the debt-to-debt ratio should not go beyond 43%.

FHA Loan

If your credit score is 580 to 619, the FHA mortgage loan is for you. Look for lenders that offer the best financial options if you are within the credit score limit. Although the loan requires a higher debt-to-income ratio of up to 50%, you can purchase more homes with a lower income. The down payment requirement is lower, at 3.5%, allowing you to pay less up-front, but the interest rate is usually higher.

VA Loan

The VA Loan does not require a specific credit score, but pre-qualification looks for defaulted loans and government-owed past-due debts. To qualify, you must have served in the military, such as 181 days for veterans, 90 consecutive days during wartime, or 6 years with the National Guard. This loan typically has the best interest rates available, and you do not have to pay a down payment. It is an excellent option for veterans and their families.

Determining Creditworthiness for a Car Purchase

When applying for a car loan, your credit history is the most important factor in determining your eligibility, not just your credit score. While a higher credit score is beneficial, it has less impact on the interest rate you qualify for.

Lenders assess the risk associated with extending credit to individuals with credit issues by reviewing their past and current credit histories. Those who have had late payments on a previous or current car loan or have had a repossession are less likely to be approved for a car loan. However, even the worst credit or special finance lenders will qualify almost anyone for a car loan, albeit with specific conditions, such as a higher down payment and additional fees to the dealership to reduce the risk of default.

A credit score over 680 is considered ideal for buying a new car, but lower scores increase the interest rate charged. Data shows that someone with a credit score above 720 will pay an average of $5,500 in interest on a loan, while someone with a credit score of 580 pays an average of $15,300 in interest on the same loan. Hence, having a higher credit score directly correlates with paying less interest on car loans and overall credit score.

Additionally, having a down payment can give the buyer more bargaining power when purchasing a car on credit.

Tips for Improving Your Credit Score

Improving your credit score requires effort and patience as building good credit takes time. Rushing things can lead to irrational decisions and worsen your problems. Here are some things you can do right now to improve your credit:

1. Open 3-5 revolving credit accounts (credit cards)

Obtaining revolving credit via credit cards can be the best option for individuals with limited or rebuilding credit, as it provides a better chance of approval. Starting with a secured credit card that focuses on your ability to pay on time can be a wise move. Revolving credit contributes 30-35% to your overall credit score.

2. Raise your limits

Requesting a credit limit increase can quickly raise your overall credit limits, which in turn lowers your credit utilization percentage. Most credit card companies allow online requests or phone calls for the process. A good payment history of 7-15 months is necessary to be considered for a credit limit increase.

3. Pay down your balances

To keep balances low, limit credit card usage to small purchases such as gas or groceries and leave a $1-$5 balance on payment due dates. For those with high balances, create a payment plan and limit credit card usage to improve the credit score.

1. Open 3-5 revolving credit accounts (credit cards): Obtaining revolving credit via credit cards can be the best option for individuals with limited or rebuilding credit, as it provides a better chance of approval. Starting with a secured credit card that focuses on your ability to pay on time can be a wise move. Revolving credit contributes 30-35% to your overall credit score.
2. Raise your limits: Requesting a credit limit increase can quickly raise your overall credit limits, which in turn lowers your credit utilization percentage. Most credit card companies allow online requests or phone calls for the process. A good payment history of 7-15 months is necessary to be considered for a credit limit increase.
3. Pay down your balances: To keep balances low, limit credit card usage to small purchases such as gas or groceries and leave a $1-$5 balance on payment due dates. For those with high balances, create a payment plan and limit credit card usage to improve the credit score.

Remember, it takes time for credit improvements to show, so patience is key. With consistent effort, you can build good credit and increase your credit score.

Insights from Joe on Credit Improvement

At some point, many of us struggle with poor credit scores. However, if you're serious about addressing your current credit situation, it's possible to see significant improvements in a short time. Unfortunately, many individuals with lousy credit become trapped in a cycle of ongoing credit problems, making it seem like the achievement of topnotch credit is unattainable. Building excellent credit requires substantial effort, and those who prioritize their credit can be rewarded by focusing on their spending habits. Begin by creating a budget and working on any damaging spending behaviors as that can have a direct impact on your credit score. This article highlights essential information about credit. If you need professional guidance on credit repair or improvement, feel free to contact my office at www.asapcreditrepairusa.com.