It may surprise you to learn that there are actually 30 distinct levels of credit scores. However, many people are unaware of this fact and may become overwhelmed when attempting to determine their own credit score. The internet can often provide conflicting and even misleading information on the topic of credit scores. I am Joe Mahlow, a financial literacy and credit repair professional with over fifteen years of experience. My aim is to provide straightforward advice on various topics, including credit scores. Over the years, I have assisted more than 20,000 clients in improving their credit scores and hope to share enough knowledge with you to do the same. Join me as we delve deeper into understanding credit scores.

Contents:

An Overview of Different Types of Credit Scores

What Constitutes a Good Credit Score

Determining the Appropriate Credit Score to Qualify for a Mortgage

What is the Ideal Credit Score to Buy a Car?

Tips on Improving Your Credit Score

Joe's Tips on Improving Credit Score

An Overview of Different Types of Credit Scores

When it comes to credit scores, there are two models that are commonly used - the FICO model and the Vantage model. Both models differ in how they calculate your credit score and it is important to familiarize yourself with them.

The FICO Credit Score

The FICO credit scoring model is the most widely used scoring model with 8 different models. Depending on the type of the lender, they pull a different FICO report. For instance, mortgage lenders will pull your FICO 5 credit report while credit card companies primarily use the FICO 8 report. Different reports have different weights i.e., the credit factors that are seen as critical by lenders have a greater impact on the credit score.

Why So Many FICO Scores?

Simply put, the weight given to different credit factors varies. For example, the FICO 5 mortgage report places more weight on previous mortgage history while the FICO 8 report places greater emphasis on previous credit card history. If you want to check your different FICO scores, go to www.myfico.com and sign up for an account.

The Vantage Credit Score

The Vantage Score was developed by Equifax, Experian, and TransUnion as an alternative scoring model to compete with FICO. Although it is not widely used for lending, it is gaining popularity among some sectors such as personal loans and auto lending.

Is the Vantage Score Accurate?

The accuracy of the Vantage Score depends on the context. Since it is not widely used for lending, it may not give an accurate representation of your actual lending score. However, it is still useful to get a general idea of your FICO score. In the next 5-10 years, it is possible that the Vantage scoring model will be widely used by lenders. Credit reporting agencies have a significant amount of data, which places them in an advantageous position in providing the best scoring data.

What Constitutes a Good Credit Score

Credit scores are rated between 350 and 850, according to both the FICO and Vantage models. The best score possible is 850, and the worst score attainable is 350. During your credit score boosting journey, it is essential to be cognizant of where your score is standing. Below are some of the critical score thresholds to be mindful of.

1. 620 or below

If your score is below 620, then it is considered bad credit. A less than perfect credit history, a high balance credit card account, or the absence of credit cards altogether may be the cause. Making timely payments and having ten active revolving credit accounts can help improve your credit score. The Credit Builder Card or OpenSky Credit Card can help you achieve this. If you manage to reach a credit score of 620, you qualify for an FHA home mortgage.

2. 640-680

In this score range, credit is fair to good. Even though you have an established credit history, you may still have a negative impact on your credit rating like derogatory marks, accounts, and high balances. Note, newly opened accounts can temporarily lower your scores. Don't worry if this happens to you because your scores will bounce back.

3. 740+

Any score above 740 is considered "super-prime" and will secure the most favorable interest rates for most loans. Kudos if you have a credit score above 740 because you are part of the 20% of the population with this score. Endeavor to maintain your exceptional credit score by paying all your accounts on time, and keep your revolving credit card accounts settled.

Determining the Appropriate Credit Score to Qualify for a Mortgage

The answer to this question is reliant on the kind of mortgage loan you desire to get qualified for. Most mortgage loans must abide by the requirements and guidelines regulated by the government, but some might have certain minor differences. There are three commonly used mortgage loan types: conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans have the highest popularity and usually provides the best "savings" loan option aside from VA loan. With conventional loans, you are not mandated to secure private mortgage insurance (PMI), which is an additional cost that can cause an increase to your downpayment or monthly payment. This insurance safeguards the lender if you stop making payments on your loan. In comparison to other mortgage loans, conventional loans commonly have lower downpayment requirements and better interest rates. The required credit score for a conventional mortgage loan is typically 640, and the debt-to-income ratio should not go beyond 43%.

FHA Loan

FHA mortgage loans are intended for people with lower credit scores, usually ranging between 580 and 619. Keep in mind that loan programs may differ. Thus it would be highly beneficial to shop around for various lenders who can provide the best financial option for you if you fall within the credit score limits. FHA loans necessitate you to secure PMI for at least 11 years, which can cause some added cost to your mortgage and, more importantly, something to consider if you are on a budget. The debt-to-income limit for this type of loan is higher and can reach up to 50%, enabling you to buy more homes compared to a conventional loan if you earn a lower income. Lastly, FHA loans have lower downpayment requirements than conventional loans, and it starts as low as 3.5% of the purchase price, enabling you to get a mortgage with less money out of your pocket. Still, typically with a higher interest rate.

VA Loan

Technically speaking, there is no required credit score for the VA Loan. However, they will take into account previous defaulted loans and any government-owned past-due debts when assessing your pre-qualification. To qualify for this loan, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse was in the military and lost their life while active in duty. The VA loan usually has the best available interest rates, and they do not typically require a downpayment. I particularly like this VA loan because it provides excellent benefits to our veterans.

What is the Ideal Credit Score to Buy a Car?

When it comes to buying a car, having a good credit score is important but not the only determining factor. Your credit history is also essential in deciding your eligibility for a car loan and the interest rate you qualify for. Lenders review your previous and current credit histories to assess the risk involved in extending credit. Therefore, if you have a history of late payments, repossession, or outstanding auto loans, it may be difficult to get approved for a car loan.

However, the worst credit or special finance lenders still qualify almost anyone for a car loan, even with a previous vehicle repossession. They often impose specific approval criteria, such as a higher down payment and additional fees charged to the dealer who extends credit to you, to manage the risk of non-payment. Therefore, having some equity or a down payment would be advantageous when buying a car on credit.

Regarding credit scores, it's hard to determine the exact score you need to get approved for a car loan. Still, a score over 680 is generally considered ideal. If your score is lower, the lender may increase the amount of interest you pay as an added layer of protection against the risk of missed payments.

As an example, consider the difference a credit score can make in the amount of interest you pay. Someone with a 720 credit score will likely pay $5,500 on a loan, while someone with a score lower at 580 may pay $15,300 - a significant difference. Therefore, maintaining or increasing your credit score before applying for a car loan could help you obtain a better interest rate.

Tips on Improving Your Credit Score

Building a good credit score takes time and effort, and it's not a process that happens overnight. Therefore, it's crucial to exercise patience and make rational decisions with your credit to avoid further problems. To help you improve your credit score, here are some things you can do:

1. Open 3-5 revolving credit accounts

Revolving credit, such as credit cards, is an excellent way to improve your credit score. For those with limited credit or looking to rebuild their credit, it's easier to obtain approval for revolving credit than a large loan. Secured credit cards like Open Sky or Credit Builder Card are ideal for those with limited credit as they focus more on your ability to pay on time than your credit score. Revolving credit constitutes 30-35% of your overall credit score, and paying balances on time and keeping them at $5-10 each time can help improve your score.

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. Most credit card companies allow you to do it online, or you can call them and ask for a “Credit Limit Increase." Good payment history of 7-15 months is usually required before getting approval for a limit increase.

3. Pay down your balances

Paying down your balances and keeping them low is critical. Use your credit cards for small purchases and leave about $1-5 balance on them when paying. A game plan is necessary to pay off high balances, and limiting credit card usage is advised to avoid running up balances and paying interest. Your credit card spending habits significantly affect your credit score, so it's important to keep your usage in check.

Joe's Tips on Improving Credit Score

We've all been in a situation where our credit score was less than perfect. However, if you take your credit situation seriously and put in the effort to work on improving it, you can see significant changes in a short time. Most people with bad credit get caught in a lifelong cycle of credit issues, feeling like it's impossible to have great credit again. Improving credit takes time and commitment, but those who prioritize their credit and their spending habits will be successful. To start, make a budget and focus on fixing any negative spending habits; this will have a direct impact on your credit score. This article provides insight into understanding credit. If you require assistance with raising your credit score or need credit repair, contact my office today at www.asapcreditrepairusa.com.

Key Points:

• Taking credit situation seriously and working on it yields great results.
• Don't get trapped in the cycle of bad credit; prioritize credit and spending habits.
• Develop a budget and fix negative spending habits to improve credit score.
• Seek guidance for credit repair and score improvement from Joe's office.