It's a little-known fact that credit scores actually have 30 different levels. Many people search for the best credit score without realizing the complexity of the subject. Unfortunately, a simple Google search can lead to a maze of contradicting and confusing information. That's where I come in. My name is Joe Mahlow and I've spent over 15 years working in the financial literacy and credit repair field. My goal is to provide you with honest and straightforward advice, like the importance of understanding credit scores. With my help, over twenty thousand clients have successfully improved their credit scores and I hope to share enough knowledge with you to do the same! Let's take a deep dive into the world of credit scores.

Contents:

What are the Various Types of Credit Scores?

Understanding What Constitutes a Good Credit Score

Finding the Right Credit Score to Qualify for a Mortgage Loan

Determining Credit Score Range for Purchasing a Car

Tips for Building Your Credit Score

Insights by Joe

What are the Various Types of Credit Scores?

As you delve into credit reporting, it is crucial to familiarize yourself with the two credit scoring models: the FICO model and the Vantage model. It is important to understand the differences in how these models calculate your credit score.

FICO Credit Score

The FICO model is the most widely used credit scoring model and has eight different FICO scores ranging from FICO 2 to FICO 10. You may receive different credit scores depending on which credit report is pulled. When you apply for credit, the lender pulls a specific FICO report depending on the type of lender. For example, if you're applying for a mortgage, the lender will most likely pull your FICO 5 score. On the other hand, if you're applying for a credit card, your FICO 8 score might be pulled.

Why So Many FICO Scores?

Each credit report has a varying "weight," which means that different factors that are critical to the lender will have more impact on the credit score. When a mortgage lender pulls your FICO 5 report, the scores will weigh heavily on your previous mortgage history. This holds valid for all the different FICO models. Credit card companies mostly use FICO 8, so previous credit card history will have the most impact on this score. Auto lenders usually pull FICO-2 reports, and your previous auto history heavily impacts your score.

If you want to view all of your different FICO scores, sign up for an account on www.myfico.com.

Vantage Credit Score

The Vantage Score scoring model was recently developed by three major credit reporting agencies – Equifax, Experian, and TransUnion, as competition to the FICO model. While FICO has been used since the seventies, Vantage is relatively new. Credit monitoring websites in the United States often use Vantage to offer a free credit report. Although FICO is currently the most recognized scoring model in the lending sector, Vantage is gaining ground in some sectors, such as personal loans and auto lending.

Is the Vantage Score Accurate?

Whether the Vantage Score is accurate or not depends on the specific context of the question. Since the Vantage score is not widely used for lending purposes, it will not give you an accurate lending score. A credit score is only accurate if you can get a loan, and since FICO is the most recognized scoring model, the accuracy of Vantage varies. However, the Vantage scoring model can give you a good "general idea" of your FICO score. Use your Vantage score to get an idea of where your overall scores are, as you might never know your FICO score without paying for it or having a lender pull your credit report.

In the next 5–10 years, the Vantage scoring model will likely be widely used by lenders across the US since it provides the best scoring models based on current standards. The FICO scoring model is outdated and doesn't give a clear representation of credit scores. Finally, remember that credit reporting agencies are the largest data collection agencies outside social media companies. If they have the data, they have the upper hand in providing the best scoring data, period.

Understanding What Constitutes a Good Credit Score

Both the FICO and Vantage models rate credit scores on a scale of 350 to 850, with a score of 350 being the lowest and a score of 850 being the highest possible. If you strive to attain the highest score possible, you must be aware of your current ranking along the way. To help with this, here are some critical score thresholds:

1. 620 or Below:

A score in this range is indicative of bad credit, often resulting from an adverse credit history, high-balance credit card accounts, or a lack of credit cards altogether. The best way to improve your score is to have ten active revolving credit accounts, make timely payments, and use a secured credit card, such as the Credit Builder Card or OpenSky Credit Card. Once you reach a score of 620, you will be eligible for an FHA home loan.

2. 640–680:

A score in this range is fair for good credit. If your score falls within this range, it implies that you have established credit, but you may also have derogatory marks or accounts on your credit report. You may also have some high balances on your credit cards that require payment. Newly opened accounts can also temporarily lower your score. However, don't worry if there has been a drop in your score due to a newly opened account; it's only temporary and your score will improve.

3. 740+:

A credit score of 740 or higher is considered "super-prime" and typically qualifies you for the best interest rates on most loans. Congratulations if you have a score of over 740 as it puts you in the top 20% of all Americans. To maintain your score, always pay your accounts on time, and avoid revolving credit card debt. Keep up the good work and stay vigilant in maintaining your score!

Finding the Right Credit Score to Qualify for a Mortgage Loan

Determining the ideal credit score for buying a house relies on the type of mortgage loan you want to qualify for. While each mortgage loan may have unique requirements and guidelines, they usually adhere to federal regulations and government support. The most common mortgage types available are conventional loans, FHA loans, and VA loans.

1. Conventional Loans

Among the most favored loans by borrowers, conventional loans offer the most inexpensive savings opportunities after VA loans. With conventional loans, one can avoid any additional cost incurred in paying for private mortgage insurance (PMI). This insurance protects the lender if you fail to make payments on your loan. Conventional loans' credit score requirement averages at 640, and the borrower's debt-to-income ratio cannot exceed 43%. Better interest rates and lower down payment requirements make it an attractive loan option.

2. FHA Loan

If your credit scores range between 580 and 619, the Federal Housing Administration (FHA) mortgage loan can get you started on homeownership. FHA loans may need you to maintain PMI for 11 years or more, which is an extra cost to consider. While the down payment for FHA loans starts at 3.5%, borrowers can carry a higher debt-to-income ratio of up to 50%. The tradeoff for having a lower income is that you can buy more homes with an FHA loan.

3. VA Loan

The VA loan does not adhere to a strict credit score requirement, but you must not have defaulted on previous loans, and state your past-due debts to be considered. Eligibility requirements for the VA loan include serving in the United States Military for at least 181 days, serving 90 consecutive days during wartime, or 6 years in the National Guard. For those who qualify, the VA loan has excellent interest rates and seldom requires a down payment. VA loans cater to veterans and their families and are a great way to give back to this noble group.

Determining Credit Score Range for Purchasing a Car

Your credit history plays a more significant role than your credit score when applying for a car loan. While a higher credit score is important, it carries a lesser weight in determining the interest rate you qualify for. Lenders assess your credit history to gauge the risk involved in extending credit. If you have previous or current credit issues like late payments, auto loan defaults, or repossession, obtaining approval for a car loan may be challenging. Conversely, individuals with an opposite credit history are better placed to obtain approval. Special finance lenders can qualify almost anybody, including people with prior repossessions. However, to reduce risk, they may require specific criteria to be met, like higher down payments or additional fees to the dealer. The dealer may also charge a fee to cover the risk, which they may compensate by marking up the car to determine the vehicle that you can afford. Having equity or a down payment is the best negotiating leverage to obtain credit for buying a car.

Credit Score Range for Purchasing a New Vehicle

While there isn't an exact credit score threshold for car loan approval, a credit score of 680 and above is ideal. Lower credit scores increase the interest rate charged to compensate for the risk posed to the lender. The rate of interest you qualify for when purchasing a car directly correlates to your credit score. For instance, someone with a 720 credit score or above pays an average of $5,500 in interest charges, compared to someone with a 615 credit score, who pays an average of $10,200 on the same loan. The higher your credit score, the less interest you pay, ultimately affecting your credit score in the long-term.

Tips for Building Your Credit Score

Improving your credit score isn't an overnight process, but there are simple steps you can take to build and maintain good credit. Here's what you can do right now to help raise your credit score:

Open several revolving credit accounts

Revolving credit, such as credit cards, can help maximize your credit scores. For those with limited credit or looking to rebuild their credit, opening a secured credit card is a great way to get started. Look for options that focus less on credit scores and more on timely payments and current income. Revolving credit makes up a significant portion of your overall credit score, so use it wisely and make sure to pay your balance on time.

Request a credit limit increase

Raising your credit limits can help lower your credit utilization percentage and improve your overall credit score. Check with your credit card company to see if you can request a credit limit increase. They may require information about your income and payment history before granting the increase.

Keep your balances low

Avoid carrying a high balance on your credit cards, and limit your usage to small purchases like gas or groceries. If you do have high balances, create a plan to pay them down over time. Keep in mind that high interest rates can make it challenging to pay down the principal, so it's best to limit your credit usage as much as possible.

Remember, patience is key when building credit. With time and thoughtful management, you can increase your credit score and achieve your financial goals.

Insights by Joe

It's a common experience to have a bad credit score, but it's crucial to acknowledge this reality and make an effort to improve it. If you dedicate some time and energy to fixing your credit score, you'll see substantial changes rather quickly. Generally, people with bad credit remain trapped in a cycle of financial problems and feel hopeless about improving their credit status. But, developing a good credit score requires considerable work, and those who prioritize their credit score and spending habits will succeed in the long run. To begin with, create a budget and work on rectifying any undesirable spending behavior; this will have a direct impact on your credit score. This write-up is designed to help you understand the dynamics of credit. If you need assistance with your credit score or credit repair, reach out to my office today at www.asapcreditrepairusa.com.