It may surprise you to learn that credit scores come in 30 different levels. Despite this, many people are unaware of the breadth of credit scores available to them. When searching for information on the best credit score, individuals are met with a variety of responses that can be misleading and confusing. As an expert in financial literacy and credit repair with over 15 years of experience in the field, my name is Joe Mahlow, and I am here to provide honest advice on critical topics, just like credit scores. Over my career, I've aided over 20,000 clients in improving their credit score, and now, I want to assist you by providing all the necessary information. So without further ado, let's dive in.

Contents:

Types of Credit Scores

Understanding Credit Scores: Ranges and Thresholds

Credit Score Requirements for Different Mortgage Loans

What factors determine the eligibility of a car loan?

Ways to Improve Your Credit Score

Joe's Insights on Credit

Types of Credit Scores

There are two main types of credit scoring models you need to be familiar with: the FICO model and the Vantage model. Understanding the differences in how they calculate your credit score is essential.

FICO Credit Score

The FICO scoring model is the most popular and widely used. There are eight different FICO models, from FICO 2 to FICO 10, and each one depends on your credit report. Different lenders use different FICO models. For instance, mortgage lenders will typically use FICO 5, whereas credit card companies primarily use FICO 8. The different FICO scores depend on the different weights assigned to different factors, such as payment history, previous mortgage history, previous auto history, and previous credit card history.

Vantage Credit Score

The Vantage Score is a new credit scoring model that is gaining popularity, particularly for personal loans and auto lending. It was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) and is used by credit monitoring websites to provide free credit reports. While it is accurate, it is not widely used for lending purposes, unlike the FICO model. However, it is still useful as a good “general idea” of your FICO score, especially if you don't want to pay for your FICO score or don't want a lender to pull your credit report.

Which Score is Better?

The FICO score dominates the lending sector, and the Vantage Score is not widely used. However, that might change in the next 5–10 years as lenders realize the Vantage's ability to provide the best scoring models based on today's standards. The FICO model is outdated and doesn't give the user a clear representation of their credit score. Therefore, relying on the Vantage score for a general idea of your credit score is good advice. Remember, the credit reporting agencies have the data and the upper hand in providing the best scoring data.

If you want to see all your different credit scores, go to www.myfico.com and sign up for an account.

Understanding Credit Scores: Ranges and Thresholds

There are two widely-used credit score models: FICO and Vantage. Both models score creditworthiness on a scale from 350 to 850, with 850 being the highest and 350 being the lowest. Whether you're starting to build credit or looking to improve your score, it's important to know where you stand. Here are some fundamental score ranges to guide you:

1. Scores of 620 or below

Considered bad credit. If you fall under this category, you may have a track record of adverse credit history, high-balance credit card accounts, or no credit history at all. The best approach to increase your credit scores is to pay your bills on time and have around ten active revolving credit accounts open. One option you might consider is a Credit Builder Card or OpenSky Credit Card. These cards are secured and can help you improve your credit score. Once you hit the 620 credit score range, you can start qualifying for an FHA home mortgage.

2. Scores between 640 and 680

Considered fair for good credit. If you have a score in this range, you've already established credit, but you may have some derogatory marks or accounts on your credit report, or you may have high balances on your credit cards that you need to pay off. Keep in mind that opening a new account can temporarily drop your score. If your score is in this range and you've recently opened a new account, don't panic. Your score should return to normal soon.

3. Credit scores of 740 and above

Considered "super-prime." If you have a score over 740, congratulations! You belong to the 20% of the US population with this score, and you're eligible for the best interest rates on most loans. Keep up the good work by paying your accounts on time and maintaining low balances on your revolving credit card accounts.

Credit Score Requirements for Different Mortgage Loans

Different mortgage loans have different credit score requirements. The type of loan you choose will largely depend on your credit score as well as your financial situation. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.

1. Conventional Loans

Conventional loans are the most popular type of mortgage loans. They usually have lower downpayment requirements and better interest rates than other loans. With a conventional loan, you are not required to maintain private mortgage insurance (PMI), which can be an added cost. The credit score requirement for a conventional loan is usually 640, and the debt-to-income ratio should be no higher than 43%.

2. FHA Loans

FHA loans are designed for borrowers with lower credit scores, typically between 580 and 619. These loans require you to keep PMI for at least 11 years, which could add to the overall cost of your mortgage. However, the downpayment requirement for an FHA loan is as low as 3.5%. The debt-to-income ratio can also be higher, up to 50%.

3. VA Loans

VA loans have no specific credit score requirement, but other factors like previous defaulted loans and government-owed debts will be taken into account when pre-qualifying. These loans are exclusively for United States military members, veterans, and their spouses. They typically have the best interest rates and do not require a down payment.

What factors determine the eligibility of a car loan?

When determining eligibility for a car loan, credit history plays a more significant role than credit score. Although a high credit score is important, other factors, such as previous late payments or repossessions, may impact approval for a loan. Special finance and worst credit lenders may still offer approval to those with poor credit but impose additional criteria, such as higher down payments and fees. It is recommended to have equity or a down payment to increase leverage when purchasing a car on credit.

Credit score range for new vehicles

While there is no specific credit score that guarantees approval, for a new vehicle, a credit score of 680 or higher is recommended. A lower credit score may result in a higher interest rate due to the borrower's perceived risk. The interest rate on a loan can vary significantly based on the borrower's credit score. For instance, someone with a credit score above 720 may pay $5,500 in interest on a loan while, someone with a score below 580 may pay $15,300 in interest. In summary, a higher credit score can significantly reduce the amount of interest paid and affect the overall credit score.

Ways to Improve Your Credit Score

Improving your credit score can be achieved by taking small steps. It's essential to understand that the process is not an overnight fix. It requires patience to make sound decisions regarding your credit score. Without proper patience, people often make bad choices that lead to more problems. Here are some crucial steps to help improve your credit score:

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

   Revolving credit can boost your credit score faster, and this option is much easier to acquire. It's recommended to begin with opening a secured credit card that doesn't focus mainly on your credit score. With credit cards, you can build your credit score faster, but it takes about 2-4 months to see any increase. Be sure to pay your balance off on time and limit the usage of the card to small purchases such as gas or groceries.

2. Increase your credit limits

   You can increase your credit limits by requesting through your online portal or calling your credit card company. An increase in your credit limit will help lower your credit utilization percentage. An ideal percentage must not exceed 30+% as it can hurt your credit scores a lot. This option is only available to active revolving credit cardholders, and credit card companies typically want to see at least 7-15 months of excellent payment history before granting the request.

3. Pay down your balances

   It's critical to keep your balances low, preferably keeping it at zero. You don't have to use your credit card each month, but if you do, keep the balance at $1-5. High balances without the financial capability to pay them off can hurt your credit score. If you're having difficulty paying off your credit card bills, create a game plan to allocate a percentage of your paycheck each month to pay it down. Lastly, to maintain a good credit score, limit your credit card usage and avoid high-interest rates.

Joe's Insights on Credit

We have all found ourselves in situations where our credit isn't in the best shape. However, if you are ready to tackle your credit situation and devote your time and effort, you can quickly see positive changes to your credit score. Sadly, many individuals with poor credit are caught up in a cycle that lasts for their lifetime, feeling hopeless about the possibility of improving their credit score. Building a great credit score requires hard work and commitment, but those who make credit their priority and adopt healthy spending habits are the ones who come out on top. Start by establishing a budget and overcoming any negative spending tendencies as this will have a direct impact on your credit score. This article has insightful information on credit management. If you need assistance with credit score guidance or repair services, do not hesitate to visit my office at www.asapcreditrepairusa.com.