It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? If you're on the hunt for the best credit score, chances are you've searched Google for answers on how to achieve it. Unfortunately, much of the information out there can be confusing and even misleading, leading you down a frustrating path. But fear not, my name is Joe Mahlow and I've dedicated over fifteen years to the financial literacy and credit repair space. My aim is to provide you with honest and practical advice on topics just like this one - credit scores. Over the years, I've assisted over twenty thousand clients in transforming their credit scores and my hope is that I can give you the information and tools to do the same. So, without further ado, let's dive into credit scores.

Contents:

Understanding the Different Types of Credit Scores

What Constitutes a Good Credit Score

What is the Required Credit Score to Secure a Mortgage Loan?

Determining Your Credit Worthiness When Purchasing a Car

Tips to Improve Your Credit Score

Joe's Insights on Improving Your Credit

Understanding the Different Types of Credit Scores

Credit scores are influential when it comes to securing loans or credit. There are two prominent credit scoring models that you need to be conversant with, namely the FICO and Vantage models. To better comprehend how these two models calculate your credit score, it is crucial to understand their differences.

FICO Credit Score

FICO, the most widely used credit scoring model, comprises eight different models, from FICO 2 to FICO 10. Since these models produce different scores depending on your credit report, you might be left confused. However, this article offers straightforward explanations.

When applying for credit, lenders pull different FICO reports depending on the loan you are seeking. For instance, mortgage lenders typically pull FICO 5 credit reports, while credit card companies use FICO 8 and auto lenders use FICO 2 reports. This approach ensures that your credit score is aptly evaluated based on prior history relevant to that particular loan.

So, why are there so many FICO scores? It all boils down to the fact that the factors critical to the lender affect your score more significantly than those that are less important. For instance, if applying for a mortgage loan, FICO 5 places substantial weight on your previous mortgage payment history. Similarly, a credit card company's primary focus is on your FICO 8 report and your previous credit card history.

To check all your different FICO credit scores, sign up for an account with myfico.com.

Vantage Credit Score

Equifax, Experian, and TransUnion, the three major credit reporting agencies, developed the Vantage Score scoring model to compete with FICO. Vantage, launched recently, has become popular among credit monitoring websites that offer free credit reports.

Although FICO dominates the lending sector, the Vantage model is gaining traction in specific sectors, such as personal loans and auto lending. While Vantage is an accurate scoring model, it is not widely used yet. Therefore, it will not accurately reflect your lending score. Use Vantage to give you a general idea of your FICO score.

In conclusion, FICO remains the most widely used credit scoring model, but Vantage is gaining momentum. Credit reporting agencies have access to vast amounts of data that enable them to offer accurate scoring models. However, it is up to lenders to decide which scoring model to use.

What Constitutes a Good Credit Score

The FICO and Vantage models both rate credit scores from 350 to 850, with 350 indicating the worst score and 850 being the best score one can achieve. To reach the highest score, it is vital to know where you stand. Here are some essential score thresholds:

1. 620 or below:

This is considered bad credit. Having a score below this threshold means that you may have derogatory credit history, high-balance credit card accounts, or no credit cards at all. Timely payments and ten active revolving credit accounts will help increase your credit score. Secured credit cards, such as Credit Builder Card or OpenSky Credit Card, can also aid in credit building. Once you reach the 620-score range, you will become eligible for FHA home mortgages.

2. 640-680:

Credit scores in this range are average, indicating that you have established credit, but some derogatory marks or accounts may reduce your score. High balances on your credit cards could also be a contributing factor. Recently opened accounts may cause a temporary drop in your scores. No cause for alarm, though, the scores will return.

3. 740+:

Any score over 740 is considered "super-prime," and will earn you the best interest rates for most loans. Congratulations if your score falls within this range; you are among the 20% of the US population with such an impressive score. Consistent on-time payments and low balances on your revolving credit card accounts are the keys to maintaining this score.

What is the Required Credit Score to Secure a Mortgage Loan?

The minimum credit score needed to buy a house depends on the type of mortgage you are applying for. While most mortgage loans share similar guidelines, specific requirements and regulations may differ. Generally, conventional loans, FHA loans, and VA loans are the three most commonly used mortgage types.

Conventional Loans

Conventional loans are the most popular type and typically offer the best savings option after VA loans. They do not require private mortgage insurance (PMI), which can increase your down payment or monthly payment, and have lower down payment requirements and interest rates compared to other mortgage loans. The minimum credit score requirement for conventional loans is around 640, while the debt-to-debt ratio should not be more than 43%.

FHA Loan

The FHA mortgage loan is designed for lower credit scores, ranging from 580 to 619. Nevertheless, different lenders have different credit score limits, so it's still possible to get an FHA loan even with a lower credit score. However, you should note that FHA loans require PMI for at least 11 years, and a higher debt-to-income limit of up to 50% is allowed. The downpayment requirements on an FHA loan are only 3.5% of the purchase price, making it more accessible to those on a tight budget.

VA Loan

VA loans have no fixed credit score requirement, but lenders usually consider previous defaulted loans, past-due government loans, and more when pre-qualifying applicants. To be eligible for VA loans, you must serve in the military for at least 181 days, serve 90 consecutive days during wartime, or serve six years with the National Guard. Unlike conventional and FHA loans, VA loans have lower interest rates, and you don't need to provide a down payment. VA loans are an excellent option for veterans, and they provide sufficient benefits to support them.

Determining Your Credit Worthiness When Purchasing a Car

When assessing your eligibility for a car loan, your credit history carries more weight than just your credit score. While a high credit score is beneficial, it has less impact on the interest rate you qualify for. Aspects of your current and past credit activities are analyzed to determine the risk of loaning you money. Consequently, someone with late payments on a previous or existing auto loan, or has experienced repossession, may encounter difficulty when applying for a loan. Special finance and subprime lenders may approve anyone for a vehicle loan, but they typically add conditions like higher down payments and additional dealership fees to offset the risk of default. Depending on your credit score, you may also experience specific interest rates, which, on average, shows that higher credit scores yield lower interest rates. Experts suggest that a credit score of above 680 can secure a good loan, but anything below that may lead to higher interest rates. For instance, someone with a score of 720 or over pays roughly $5,500 in interest on a loan, whereas someone with a score of 580 or above pays approximately $13,900 to $15,300. The data reveal that the higher the credit score, the lower the interest rate, demonstrating how credit worthiness affects loan payments. Additionally, to have a more substantial impact on purchasing a car on credit, having equity or a proper down payment is crucial.

Credit Score Range for a New Vehicle:

1. A credit score of 720 or above results in roughly $5,500 interest on a loan.

2. A credit score of 680 or above results in roughly $6,600 interest on a loan.

3. A credit score of 650 or above results in roughly $8,100 interest on a loan.

4. A credit score of 615 or above results in roughly $10,200 interest on a loan.

5. A credit score of 580 or above results in roughly $13,900 interest on a loan.

6. A credit score of below 580 results in roughly $15,300 interest on a loan.

Tips to Improve Your Credit Score

Improving your credit score takes time, effort, and patience as it is not something that can happen overnight. Making informed financial decisions and following a strict plan is crucial in achieving a good credit score. Here are some things you can do right now to improve your credit:

1. Open 3-5 Revolving Credit Accounts (Credit Cards)

Revolving credit, such as credit cards, is a great tool to maximize your credit scores. Instead of applying for a large loan, consider starting with a secured credit card that focuses on your ability to pay the card on time. Revolving credit contributes to 30-35% of your credit score, making it an excellent option for building credit. It may take 2-4 months to show an increase in credit scores, but remember to pay your balance on time and limit the use to small purchases only.

2. Raise Your Limits

Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your credit utilization percentage. You can contact your credit card company online or by phone to request an increase. Typically, a credit card company wants to see at least 7-15 months of excellent payment history before agreeing to an increase.

3. Pay down Your Balances

Keeping your credit card balance low and close to zero is essential to improve your credit score. Use your credit card for small purchases only and leave a $1-5 balance on your credit card to show utilization. If you have high balances, make a game plan to pay down your credit card balance and limit your credit card usage to avoid running up the balance again. By doing this, you can stop paying interest and put more money towards the principal.

Joe's Insights on Improving Your Credit

Admittedly, many of us have experienced a shaky credit history at some point. However, by making a serious effort to address your current credit situation and striving to improve your creditworthiness, you can expect significant improvements over a relatively short period of time. A common trap that most people with bad credit fall into is believing that a good credit score is unattainable and simply accepting their predicament. Building a good credit score requires persistent effort and a focus on sound spending habits. Start by drawing up a budget and actively working to eliminate any counterproductive spending habits - this will definitely reflect positively on your creditworthiness. This article is designed to improve your understanding of credit. If you need guidance or support in rebuilding your credit score or resolving any credit issues, don't hesitate to visit my office at www.asapcreditrepairusa.com.