It may surprise you to learn that credit scores come in 30 different levels. When you search for information on the best credit score, Google can provide a range of answers. However, this information can often be confusing and even misleading. As someone who has worked in the financial literacy and credit repair field for over fifteen years, my name is Joe Mahlow and my aim is to provide you with useful insights on relevant topics such as credit scores. Having helped more than twenty thousand clients elevate their credit scores, I hope to offer enough valuable information that will enable you to do the same. Let's delve in.

Contents:

Different Credit Scoring Models: FICO vs. Vantage

Understanding Good Credit Scores

Ideal Credit Score for House-Buying

Determining Credit Score for Car Purchase

Tips for Boosting Your Credit Score

Insights by Joe on Credit Improvement

Different Credit Scoring Models: FICO vs. Vantage

Credit scores play a crucial role in financial decision-making, which is why it's essential to understand the different credit scoring models used. The two main scoring models are FICO and Vantage. Both are important, but there are significant differences in how they calculate credit scores.

FICO Credit Score

FICO is the most popular and widely used credit scoring model with eight different FICO models available, such as FICO 2 to FICO 10. These models calculate credit scores differently and are based on different factors that are essential to the lender. For instance, if you're applying for a mortgage, the lender will pull your FICO 5 credit report, whereas a credit card application will likely use your FICO 8 credit report.

Why so many different FICO scores? Each credit scoring model has a different "weight," meaning that the critical factors to the lender will have a more significant impact on a credit score than less important ones. For instance, a FICO 5 mortgage report will weigh heavily on previous mortgage history. In contrast, a credit card company predominantly uses the FICO 8 report, which emphasizes the previous credit card history.

Vantage Credit Score

The Vantage Score is a newer scoring model that was developed by Equifax, Experian, and TransUnion to compete with FICO. While FICO dominates the lending sector, the Vantage model is gaining popularity in personal loans and auto lending. Vantage is frequently used by credit monitoring websites in the United States to provide consumers with their credit reports.

Is the Vantage Score accurate? Yes, it is accurate, but it depends on the context. Since Vantage is not widely used for lending purposes, it won't accurately reflect your actual lending score. However, since it's hard to know your FICO score without paying for it or having a lender pull your credit report, Vantage can give you a general idea of your score.

Outdated FICO Model?

While FICO has dominated the market since the seventies, it's considered outdated by some experts. They believe the Vantage model is more accurate and provides a better representation of a person's credit scores. Since credit reporting agencies have the most significant data collection outside social media companies, they are in the best position to provide the best scoring data based on current standards. It's possible that Vantage credit scores will become more widely used in the next 5-10 years.

If you want a better visual representation of your different FICO scores or Vantage Score, visit MyFICO.com and sign up for an account to view your scores.

Understanding Good Credit Scores

Credit scores for both FICO and Vantage models range from 350 to 850, where 350 is the worst and 850 is the best. To help you set your goals during your credit-building journey, it is important to know where you stand regarding some score thresholds.

620 or below

This is considered a poor credit score, indicating adverse credit history, high-balance credit card accounts, or no credit cards at all. Building your credit requires prompt payments and having ten active revolving credit accounts, such as the OpenSky Credit Card or Credit Builder Card. When your score reaches 620, you'll start to qualify for an FHA home mortgage.

640-680

A score in this range is considered fair as it suggests established credit but could include some derogatory marks or accounts. High credit card balances that you need to pay down or newly opened accounts could be other factors that drop your scores temporarily. Don't worry, though, as the scores will return.

740+

A score over 740 is considered "super-prime," placing you in the top 20% of the US population with the best interest rates for most loans. Congratulations if you have over 740 credit score! Keep up the practice of paying your accounts on time, and maintain your revolving credit card accounts paid to keep the excellent score.

Ideal Credit Score for House-Buying

The good credit score you require to purchase a home depends on the type of mortgage loan you are aiming to get. Unlike other loans, mortgage loans are subject to guidelines and regulations due to federal backing and regulation. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.

Conventional Loans

The most popular loan option is the conventional loan, which is considered the best "savings" loan outside of the VA loan. Conventional loans do not require Private Mortgage Insurance, a cost that would increase your down payment or monthly payment, and they have lower down payment requirements and better interest rates than other mortgages. Although the typical credit score requirement is 640 and the debt-to-debt ratio must not be over 43%.

FHA Loan

The FHA loan is for lower credit scores, generally between 580 and 619. Be aware that all loan programs have different rules, so searching for lenders providing the best financial option if you are in the credit score range is crucial. The FHA loan requires PMI payment for a minimum of 11 years, which can stretch your budget. However, this loan helps you purchase more homes than a traditional loan if you earn less, as its debt-to-income limit can go up to 50%. Additionally, its down payment requirements are as low as 3.5%, letting you enter the mortgage with less money, but the interest rate is usually higher than a traditional loan.

VA Loan

There is no specific credit score requirement for a VA Loan, but pre-qualification investigates defaulted loans and past due debts owed to the government. You need to have served in the United States military for at least 181 days, served 90 consecutive days during wartime, or served six years with the National Guard, or be the spouse of someone in the military deceased while performing their duties. The VA Loan typically has the best interest rates available and does not require any down payment. I think the VA Loan is fantastic because it’s precisely tailored to give back to our veterans.

Determining Credit Score for Car Purchase

When it comes to purchasing a car, your credit history is more vital than your credit score. While a good credit score is important, it's not the sole factor in determining the interest rate for which you qualify. When applying for a car loan, lenders will examine your credit history, including any late payments, repossession, and current credit issues to determine your risk level. Those with a clean credit history will have an easier time getting approved for a car loan than those with a spotty credit history. However, even with bad credit, you can still qualify for a car loan from special finance lenders who impose additional fees and higher down payments. Dealerships may also charge a fee to approve your loan, which can impact the vehicle options you have. It's best to have equity or a down payment before buying a vehicle on credit. While there's no exact credit score that ensures you'll get approved, a score above 680 is optimal to avoid paying hefty interest rates. The higher your credit score, the less interest you'll pay, as shown in the example below:

1. A credit score of 720 or above pays an average of $5,500 interest on a loan.
2. A credit score of 680 or above pays an average of $6,600 interest on a loan.
3. A credit score of 650 or above pays an average of $8,100 interest on a loan.
4. A credit score of 615 or above pays an average of $10,200 interest on a loan.
5. A credit score of 580 or above pays an average of $13,900 interest on a loan.
6. A credit score of 580 or below pays an average of $15,300 interest on a loan.

This illustrates that having a high credit score can save you money on interest rates, which ultimately affects your overall credit.

Tips for Boosting Your Credit Score:

Improving your credit score may seem like a daunting task, but taking some simple steps now can significantly increase your score without too much effort. It is important to recognize that building a good credit score takes time and cannot be achieved overnight. Developing patience is crucial because making irrational and bad credit decisions will only aggravate the issue.

Here are some simple ways to enhance your credit score:

1. Open 3-5 Revolving Credit accounts:

   Revolving credit is an excellent option to maximize your credit score. For those with limited credit or those who need to rebuild their score, obtaining a large loan could be challenging. A secured credit card is a great option, and cards such as Open Sky and Credit Builder Card would be my recommendation. These cards focus more on your ability to make timely payments rather than your credit score. Revolving credit accounts for 30-35% of your overall credit score, and this is the best way to build your score quickly. Remember to pay your balance on time and keep it between $5 and $10 each time.

2. Request a Credit Limit Increase:

   If you have active revolving credit card accounts, you can quickly request a credit limit increase from your credit card company. This increase can help to raise your overall credit limits and reduce your credit utilization percentage. Having high credit card balances exceeding 30% of your overall limit can harm your credit score. Contact your credit card company and request a credit limit increase, usually, the company wants 7-15 months of excellent payment history on a credit card before agreeing.

3. Pay down your balances:

   It's important to keep your balances low and close to zero. Use your credit cards for small purchases and leave about $1-5 on your card when paying your bill each month. If you find yourself with high balances and unable to pay off your cards, make a plan to pay a percentage of your paycheck each month to slowly reduce the balance and ultimately stop using them. Limit your credit card usage as your spending habits play a significant role in your overall credit score. Additionally, credit card rates are high, and most of the payment goes towards interest instead of the principal balance.

Insights by Joe on Credit Improvement

No one is immune to bad credit. Devoting time and effort to improve your credit standing can cause a significant boost in your credit score. The trap of being stuck in a perpetual cycle of poor credit can be avoided by taking responsibility and addressing the issue immediately. Getting an excellent credit score requires hard work and commitment, and those willing to prioritize credit management and spending habits will succeed. Start by outlining a budget and addressing any negative spending patterns to witness a direct impact on your credit score. If you wish to learn more about credit management or require credit repair assistance, don't hesitate to contact my office today at www.asapcreditrepairusa.com.