Were you aware that there are 30 distinct levels of credit scores? Numerous individuals are not informed that searching for the best credit score on Google can result in various answers. Often this can be confusing and misleading, leading you down a troublesome path. I am Joe Mahlow, an expert in financial literacy and credit repair, with over 15 years of experience. My objective is to provide you with authentic counsel on various topics, such as credit scores. Through my career, I have aided over twenty thousand clients in enhancing their credit scores. I trust that I can offer you sufficient information to do the same. Let us jump right into it.

Contents:

Guide to Different Types of Credit Scoring Models

Guide to Understanding Credit Scores

What Credit Score Do You Need to Buy a Home?

Determining Car Loan Eligibility Based on Credit History

Ways to Improve Your Credit Score

Insights by Joe

Guide to Different Types of Credit Scoring Models

Credit scores are an essential part of a person's financial life, and there are different credit scoring models used to calculate them. In this guide, we will go through the two most crucial credit scoring models - FICO and Vantage.

FICO Credit Score

The FICO credit scoring model is widely used across the country and considered the most popular. It has eight different models, from FICO 2 to FICO 10. A different FICO model is used for different types of lenders, meaning a person may get a different credit score depending on the lender's FICO model. For example, a mortgage lender will use FICO 5, while a credit card company will primarily use FICO 8.

FICO Score Variations

Different weightage is assigned to various factors in a credit report, which affects the calculation of a FICO score based on the lender's preference. For instance, a FICO 5 report weighs heavily on previous mortgage history while a FICO 8 report weighs your previous credit card history the most.

Vantage Credit Score

The Vantage credit scoring model is a new model compared to FICO and is usually provided by credit monitoring websites. Although still less commonly used in lending, it is gaining popularity, especially in personal loans and auto lending.

Accuracy of Vantage Score

While Vantage scores are accurate, their accuracy depends on the context. Since Vantage is not as widely used in lending as FICO, it may not be the most precise measure of a person's lending score. However, it is still a good indicator of a person's overall creditworthiness.

Future of Credit Scoring Models

The FICO scoring model has a long history and is the most widely used model in lending. However, Vantage is expected to gain more popularity, especially in personal loans and auto lending, in the next 5-10 years. Ultimately, the credit reporting agencies hold the most extensive data, and whichever model they deem fit for standardization will determine the future of credit scoring models.

Guide to Understanding Credit Scores

Credit scores can range from 350 to 850 on both FICO and Vantage models. The lower the score, the worse your credit score is and the higher the score, the better it is. If you are looking to increase your credit score, it is essential to know where you stand. Here are some essential score thresholds to keep in mind:

620 or below:

This is considered bad credit. If you have a score of 620 or lower, it's likely you have some adverse credit history, high-balance credit card accounts, or no credit cards. To improve your credit scores, make timely payments, and have ten active revolving credit accounts. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can be helpful in building your credit. Once you reach 620 credit score range, you can start qualifying for an FHA home mortgage.

640-680:

This range is considered fair for good credit. If you are in this range, it usually means you have established credit, but you may have some derogatory marks, high balances on your credit cards that you need to pay down, or newly opened accounts that can temporarily drop your scores. If you recently opened a new account, don't panic, your score will come back up.

740+:

Any credit score over 740 is considered "super-prime" and gives you the best interest rates for most loans. Congratulations if you have a score over 740; you are considered part of the 20% with this score in the US. Always make timely payments and keep revolving credit card accounts in good standing to maintain your great credit score.

What Credit Score Do You Need to Buy a Home?

The credit score requirement for buying a home depends on the type of mortgage loan you intend to qualify for. The standards and regulations of most mortgage loans are similar due to federal regulations and government backing. The most common types of mortgage loans are conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans are popular and usually the best option for savings, aside from VA loans. They don't require private mortgage insurance (PMI) maintenance, which is an added cost that can increase your down payment or monthly payment. PMI is provided to cover the lender in case you stop making payments on your loan. Commonly, conventional loans might have a lower down payment requirement and better interest rates compared to other types of mortgage loans. The credit score requirement for a conventional mortgage is typically 640, and your debt-to-debt ratio should not exceed 43%.

FHA Loans

FHA loans are ideal for lower credit scores, usually ranging between 580 and 619. Remember that all loan programs are unique; If you meet the credit score criteria, survey different lenders for the best financial options for you. FHA loans require you to keep PMI for at least 11 years, which can be an additional cost to your mortgage and should be considering, especially if you're on a budget. This loan type often has higher debt-to-income limits of up to 50%, enabling you to purchase more homes than you would with a conventional loan, particularly if your income is low. Lastly, you can secure an FHA loan with a down payment as minimal as 3.5% of the cost, allowing you to get into homeownership with less cash than a conventional loan. However, expect to have a higher interest rate.

VA Loans

Technically, VA loans have no specific credit score requirement, but they examine your previous defaulted loans and any government-owed, past-due debts when pre-qualifying you. To be eligible, you must have served in the United States Military for at least 181 days, 90 consecutive days during wartime, served for six years with the National Guard, or your spouse died while on active duty. VA loans often come with competitive interest rates and usually don't require a down payment. VA loans benefit veterans, and helping them is rewarding.

Determining Car Loan Eligibility Based on Credit History

When you apply for a car loan, your credit history holds more weight than your credit score. While a high credit score is advantageous, the interest rate you qualify for is primarily based on your credit track record. Financiers assess your past and present credit histories to determine the risk you pose before extending credit. Late payments, repossession, or defaulting on previous auto loans can make securing a car loan a challenge. Special finance lenders are more lenient, but they set minimum criteria, such as a higher down payment and additional dealer fees, to offset the risk. Even dealerships pay fees to lenders to lower the risk of defaulting on loans, which is why they may limit the car options you can choose. Moreover, to improve your bargaining power, it's always better to make a down payment or have equity.

Ideal Credit Score and Interest Rate Range for a New Car

A credit score of over 680 is ideal when applying for a car loan, keeping in mind the other factors influencing loan eligibility. Scores lower than 680 can increase interest rates since they make you a riskier borrower. As shown below, the difference a credit score can make to the interest you pay is significant.

Interest rates based on credit score:

• A credit score over 720 pays an average of $5,500 in interest on a loan
• A credit score over 680 pays an average of $6,600 in interest on a loan
• A credit score over 650 pays an average of $8,100 in interest on a loan
• A credit score over 615 pays an average of $10,200 in interest on a loan
• A credit score over 580 pays an average of $13,900 in interest on a loan

This data clearly indicates that a higher credit score can significantly reduce the interest you pay, influencing your overall credit score.

Ways to Improve Your Credit Score

Achieving a good credit score is a gradual process that requires patience and effort. There are several actions you can take right now to improve your credit score effortlessly. Keep in mind that building a good credit score takes time, so it's essential to stay patient. Rushing into quick decisions regarding credit can lead to irrational and unwise decisions that exacerbate the problem.

Here are a few things you can do right away to improve your credit:

1. Open 3-5 revolving credit accounts:

   Revolving credit is an excellent way to maximize your overall credit scores. This option is especially useful for individuals with limited credit or those hoping to rebuild their credit score. Starting with a secured credit card that focuses on your ability to pay on time and has no bankruptcy history in the last two years and a source of income is a good idea. This approach makes up 30-35% of your overall credit score and is the best way to increase your credit score quickly. Be sure to pay off your balance on time while also keeping it between $5-$10, and limit the use of your card to less significant purchases.

2. Request a credit limit increase:

   Active revolving credit card holders can easily request a credit limit increase for their credit cards. This action can lead to increased overall credit limits that will help lower your credit utilization percentage. Most people tend to use their credit cards excessively, and one of the biggest reasons for issues is exceeding the 30% of the overall limits- a high utilization percentage. Increase your credit card limit to lower your utilization percentage.

   How can you do this? Each credit card company has different processes, but you could request a "Credit Limit Increase" through either an online portal or by making a call. They will usually ask you to provide your current income, and it will be sent to their credit team, where they will make the decision on what's best. Credit card companies mainly prefer to see seven to fifteen months of excellent payment history on the account before agreeing to credit limit increases.

3. Pay down your balances:

   Keeping your credit balance low is essential in improving your credit score. You do not have to use your credit card every month. Instead, it would be best if you used it to buy small things. You could then pay your bill monthly, ensuring that you keep a $1-$5 balance on your credit card. If you currently have high balances and are unable to pay, establish a plan where you set aside a percentage of your income each month to pay them down and stop using them completely. Remember, your credit card usage habit plays a crucial role in determining your credit score and keeping credit card usage to a minimum is optimal.

Insights by Joe

Let's be honest, most of us have faced the consequences of poor credit at some point. However, if you are serious about improving your credit status, allocating adequate time and putting in effort is crucial. Contrary to popular belief, one can overcome bad credit and restore their creditworthiness through persistence and determination. Many individuals with poor credit continually struggle to break free from this pattern, believing good credit is out of reach. Building an impressive credit score requires hard work and commitment, and prioritizing credit management and evaluating your spending behavior is vital. As an initial step, devise a budget and focus on rectifying unfavorable spending habits, resulting in a positive impact on your credit status. This article endeavors to provide you with an in-depth understanding of credit management. If you require professional assistance in repairing or enhancing your credit score, please contact my office at www.asapcreditrepairusa.com.