It is quite surprising to learn that credit scores have as many as 30 different levels. Many people are unaware of this fact and often end up searching for the best credit score on Google, only to find a plethora of conflicting answers. This abundance of information can be overwhelming and confusing, sometimes even leading individuals astray. My name is Joe Mahlow and I've been a financial literacy and credit repair expert for over 15 years. My primary objective is to provide you with unfiltered advice on a range of topics including credit scores. Over the years, I have helped over 20,000 clients improve their credit scores and I'm excited to share some tips with you in the following paragraphs. Let's dive in!

Contents:

Different Credit Scoring Models: FICO and Vantage Scores

Understanding Good Credit Scores

What Credit Score Is Needed to Buy a Home?

Credit History Matters More Than Score While Buying a Car

Tips for Improving Your Credit Score

Tips from Joe

Different Credit Scoring Models: FICO and Vantage Scores

The credit report of an individual is determined based on two credit scoring models, namely FICO and Vantage. The knowledge of both models is crucial, particularly when comprehending how they create credit scores differently.

FICO Credit Score

FICO is the most commonly and widely used credit scoring model with eight different models, ranging from FICO 2 to FICO 10, delivering different results based on an individual's credit report. The multiple models can be confusing, but it is essential to understand why FICO created them.

When you make a purchase and apply for credit, the type of lender you use will pull a different FICO report. If you apply for a home, the mortgage lender will most probably pull your FICO 5 credit report while a credit card lender will review your FICO 8 credit report.

Why So Many FICO Scores?

Each credit report carries different "weights." This implies that particular factors that are critical to the lender will have a much higher impact on the credit score than the less important ones. For example, an individual's FICO 5 mortgage report will weigh heavily against the previous mortgage history with excellent payment history having a greater influence in favor of the credit score versus negative or no history. These scoring factors apply to all FICO models. Credit card companies primarily use the FICO 8 report, making previous credit card history play a significant role in the score. Auto lenders, on the other hand, mostly pull FICO-2 reports, giving importance to the individual's previous auto history.

A better visual representation of the different FICO scores can be obtained by creating an account on www.myfico.com.

Vantage Credit Score

Vantage is a new credit scoring model developed by the three major credit reporting agencies in America (Equifax, Experian, and TransUnion) to compete with the FICO model, which has been in use since the 70s. Vantage is currently used by credit monitoring websites across the United States to give individuals a free copy of their credit reports. Although FICO dominates the lending sector, Vantage is becoming a popular scoring model in other sectors, such as personal loans, and auto lending.

Is the Vantage Score Accurate?

The accuracy of the Vantage score depends on the context. Since Vantage is not widely used for lending, it will not be accurate in calculating actual lending scores. A credit score's accuracy depends on the ability to obtain a loan. Since FICO is the most recognized scoring model, Vantage's accuracy may vary. However, the Vantage scoring model provides a decent "general idea" of an individual's FICO score, which is challenging to know without paying for it or having a lender pull the credit report. Eventually, lenders nationwide will use the Vantage scoring model since it provides the best scoring models based on today's standards. The FICO scoring model is outdated and does not give the user a clear representation of their credit score. Credit reporting agencies are the most significant data collection agencies outside of social media companies. If they have the data, they have the upper hand in providing the best scoring data.

Understanding Good Credit Scores

Credit scores are measured on a scale from 350 to 850 for both FICO and Vantage models. The highest credit score you can obtain is 850, while the worst credit score is 350. As you aim for the best scores, comprehending where you stand is crucial throughout your journey. Here are some essential score thresholds:

1. 620 or below

If you have a score below 620, it is regarded as bad credit with the possibility of some harmful credit history, high-balance credit card accounts, or a lack of credit history. The most effective way to elevate your credit is by making timely payments and having ten active revolving credit accounts open. You can opt for secured credit cards like Credit Builder Card or OpenSky Credit Card to help build your credit. You become eligible for an FHA home mortgage once your credit score reaches the 620 range.

2. 640-680

Having scores in this range is considered fair for good credit and indicates that you have an established credit history. However, it may feature some derogatory marks or accounts on your credit history, and you may have high credit card balances that you need to pay off. Also, newly opened accounts may temporarily drop your scores, so don't panic. Your scores will return to normal after some time.

3. 740+

If you have a credit score of 740 or higher, you are part of the 20% of the US population with "super-prime" credit, making you eligible for the best interest rates. Congratulations! Always ensure that you pay your accounts on time and keep your revolving credit card accounts paid to maintain a good credit score.

What Credit Score Is Needed to Buy a Home?

It's vital to understand that the answer to this question could vary based on the mortgage loan type since most loans have federal regulations and government backing, so requirements and guidelines are pretty similar. Below are the three most common loan types and their requirements for credit scores and debt-to-income ratios.

1. Conventional Loans

Conventional mortgages are sought-after because they are one of the best "savings" loans outside the VA loan. Usually, conventional loans have lower downpayment requirements and better interest rates than other loan types. Furthermore, they do not require private mortgage insurance (PMI), which is an added cost to your monthly payment or downpayment. However, if the borrower stops paying, the PMI ensures the lender is protected. The credit score requirement is 640, and the debt-to-debt ratio should be no more than 43%.

2. FHA Loan

FHA mortgage loans are viable options for low-credit score borrowers, usually ranging between 580 and 619. On average, a borrower must maintain PMI for 11 years, an additional cost to the mortgage, so if you are on a tight budget, you will need to investigate other loan types. Moreover, the loan has higher debt-to-income limits that could enable you to purchase more homes if you have a lower income. FHA loans require a minimum down payment of only 3.5%, and the credit score requirement is lower than other loan types.

3. VA Loan

The VA Loan doesn’t have a strict credit score requirement. However, VA lenders will scrutinize your credit history to check for previous defaulted loans or government-owed past-due debts. To qualify for VA loans, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was a military personnel who lost their life while on duty. VA loans have some of the best interest rates available, and lenders do not typically require a down payment. This loan type is ideal for veterans as it gives back to them in the best way possible.

Credit History Matters More Than Score While Buying a Car

When it comes to car loans, your credit history holds more importance in determining eligibility than your credit score. Even though having a good credit score is crucial, the interest rate offered to you depends more on your credit history. The lenders scrutinize your current and past credit history to gauge the risk of extending credit. Those who have had repossessions or late payments will find it harder to get approval for the loan. However, some lenders tend to approve anyone, regardless of their credit history, but will impose additional criteria such as higher down payments and fees. The dealerships also have to pay extra fees to mitigate risks due to customer's bad credit history.

The credit score range for buying a new vehicle is not set in stone, but a credit score over 680 is recommended. Having a score lower than this can result in increased interest rates. Your credit score has a significant influence on the amount of interest you pay. For instance, someone with a credit score of 720 or above can expect to pay an average of $5,500 in interest on a loan, while someone with 580 or above will pay an average of $15,300 in interest on the loan. This shows how a higher credit score can lower your interest rates, ultimately affecting your overall credit score. So, having a downpayment or equity can come in handy while buying a vehicle on credit.

Tips for Improving Your Credit Score

Improving your credit score requires time, effort, and patience. Rushing things may lead to irrational decisions that can harm your credit score. Here are some steps you can take to improve your credit score:

1. Open 3-5 Revolving Credit Accounts

Revolving credit is an effective way to boost your credit score. If you have limited credit or are rebuilding your credit, obtaining a large loan to build credit may not be feasible. In this case, a secured credit card from credit companies like Open Sky or Credit Builder Card provides the best chance of approval. Revolving credit accounts constitute up to 35% of your credit score and help build your credit score quickly. Although it may take two to four months to reflect the increase in your credit score, ensure you pay your balance on time and limit your card usage to small purchases like gas or simple groceries.

2. Request for a Credit Limit Increase

High credit card balances that exceed 30% of your overall limits can hurt your credit score. You can avoid this by requesting a credit limit increase. Each credit card company has a different process for increasing limits, with some allowing you to do it online through your portal, while others require you to make a call. Fill out the necessary information, including your current income, and wait for a credit team review. Typically, credit card companies require seven to fifteen months of an excellent payment history before agreeing to increase your credit limits.

3. Pay Down Your Balances

Keeping your balance low and close to zero is crucial. While you are not obligated to use your credit cards each month, as limiting usage helps your credit score. Leave about $1-5 balance on your credit card after making payments each month. If you have high balances that you cannot afford to pay, create a plan to pay "x"% of your paycheck each month and stop using your credit cards. Increasing your credit cards debt after paying it off is detrimental to your credit score. Remember, credit card spending habits significantly affect your credit score, so limit your usage accordingly. Additionally, high-interest rates on credit card payments mean most payments go towards interest and not the principal.

Tips from Joe

Whether due to financial difficulties, irresponsible spending habits, or other reasons, many individuals face the challenge of having a poor credit rating. However, it is possible to turn things around and improve your credit score with some dedication and effort. Unfortunately, some people get caught in a never-ending cycle of credit issues and lack of progress, feeling like they are stuck with bad credit forever. The truth is that working towards a great credit score is a demanding but achievable goal, especially if you are willing to prioritize your credit and make positive changes to your financial habits. You can begin by creating a budget and addressing any problem areas in your spending patterns. These efforts can have a direct impact on your credit score, and you will see significant improvements in no time. To learn more about credit and how to improve your score, please read this article. Additionally, if you're looking for expert guidance and assistance with credit repair, feel free to contact my office at www.asapcreditrepairusa.com.

Bullet Points:

• Many people struggle with poor credit scores for various reasons
• It's possible to improve your credit score with determination and effort
• Some individuals get stuck in a cycle of poor credit without seeing progress
• Prioritizing credit and being proactive about financial habits can help you achieve a great credit rating
• Start by creating a budget and addressing any problematic spending patterns
• You can see significant improvements to your credit score with consistent effort
• For more information about credit and credit repair services, refer to this article or contact www.asapcreditrepairusa.com.