It's a common misconception that there is only one "best" credit score. In fact, there are actually thirty different levels of credit scores that you should be aware of before you dive into researching what score is right for you. Unfortunately, finding reliable and accurate information about credit scores online can be a challenge. There's a lot of confusing and sometimes even misleading information out there. That's why I, Joe Mahlow, an expert in financial literacy and credit repair for over fifteen years, am here to give you raw advice on credit scores and other topics. I've assisted over twenty thousand clients in transforming their credit scores and I aim to provide you with enough information to do the same. So let's dive in!

Contents:

Different Types of Credit Scores Explained

Understanding Good Credit Scores

The Optimal Credit Score Requirements for Mortgage Loans

What Credit Score Do I Need to Buy a Car?

Strategies to Increase Your Credit Score

Improving Your Credit Score

Different Types of Credit Scores Explained

There are two main credit scoring models to understand: the FICO model and the Vantage model. Knowing the nuances of each model is crucial for you to understand how they might calculate your credit score.

FICO Credit Score

The FICO credit scoring model is the most widely used. Consisting of eight different FICO models, from FICO 2 to FICO 10, you may receive a different credit score depending on who pulls your FICO report. This is because different types of lenders use different FICO models depending on the kind of credit you are seeking. For instance, a mortgage lender will pull your FICO 5 report, while a credit card company will typically pull your FICO 8 report.

So why do we have multiple FICO scores? Each credit report's factors are weighed differently, meaning some factors critical to the lender weigh more heavily than others. For example, previous mortgage history weighs heavily on a FICO 5 mortgage report, but credit card history most impacts your FICO 8 score. Auto lenders frequently use the Fico-2 report, and again, previous auto history is weighed most heavily. If you want to see all your different FICO scores, sign up for an account at www.myfico.com.

Vantage Credit Score

The Vantage Score, developed by the three major credit reporting agencies, was introduced as an alternative scoring model to FICO. While not widely used for lending purposes, Vantage is gaining popularity in other sectors such as personal loans and auto lending. Keep in mind that the Vantage Score is not as accurate as FICO when it comes to your lending score. Nevertheless, it is still a useful "general idea" of where your scores stand.

Overall, the credit reporting agencies will remain the most significant data collectors outside of social media companies. Because of their vast data collection abilities, it's likely that Vantage will start being used more frequently in the lending industry. The FICO model is perhaps becoming outdated and doesn't offer a clear representation of credit scores.

Understanding Good Credit Scores

Both FICO and Vantage score models range from 350 to 850, with 350 being the lowest score possible and 850 being the highest. If you aim to achieve the highest credit score possible, it is vital to know where you stand, so here are some useful score thresholds to keep in mind:

1. 620 or below:

This score range is considered bad credit, which means you may have some adverse credit history, significant credit card balances, or no credit cards at all. Building good credit takes time, and it's crucial to make timely payments and maintain ten active revolving credit accounts for a better score. Consider using secured credit cards like Credit Builder Card or OpenSky to boost your credit score; once you reach the 620 credit score range, you can qualify for an FHA home mortgage.

2. 640-680:

If your score ranges between 640 to 680, it is a fair score for good credit. While you have established credit, you may still have some derogatory marks or accounts on your credit. You may also have high balances on your credit cards that you will need to pay down. Newly opened accounts can also temporarily reduce your scores. If you're in this range, don't panic; your score will bounce back after a while.

3. 740+:

Scores over 740 are considered "super-prime" and qualify for the best interest rates for most loans. Congratulations if you have a credit score over 740 because you're among the top 20% of the US population. Continue paying your accounts on time, and keeping your revolving credit card accounts paid - you're doing great!

The Optimal Credit Score Requirements for Mortgage Loans

The credit score requirement for buying a house is determined by the type of mortgage loan that you want to qualify for. The guidelines and regulations for most mortgage loans are comparable, and this is due to government regulation and backing. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.

1. Conventional Loans

Conventional loans are the most prevalent, and they offer the best "savings" loan option apart from VA loans. They do not impose private mortgage insurance (PMI), which can be an extra expense that may inflate your monthly payment or down payment. PMI provides some protection for lenders if you default on your loan. Conventional loans usually have lower down payment requirements and better interest rates than other types of mortgage loans. You need a typical credit score of at least 640 and a debt-to-income ratio no higher than 43% to qualify for a conventional loan.

2. FHA Loans

FHA loans are designed for people with lower credit scores, typically between 580 and 619. It's important to shop around for different lenders because all loan programs are different. FHA loans require you to keep PMI for at least 11 years, which is something to consider, particularly if you're working with a limited budget. The debt-to-income limit of FHA loans can go up to 50%. This means that if you have a lower income, you can purchase more homes than you would with a conventional loan. You can also secure an FHA loan with a down payment requirement as low as 3.5%, allowing you to get a mortgage with less money out of the pocket. But, you will typically have a higher interest rate.

3. VA Loans

The VA loan doesn’t technically have a credit score requirement. However, they look at your past loan defaults and any government-owed debts when pre-qualifying you. You must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or have a spouse who died in active military duty. The VA loan typically has the best interest rates available, and they do not usually require a down payment. The VA loan is perfect for veterans, and it's a great way to give back to those who served in the military.

What Credit Score Do I Need to Buy a Car?

When it comes to purchasing a car, your credit history is more important than your credit score. While a good credit score is beneficial, it has less of an impact on the interest rate you qualify for. A lender will evaluate your credit history to assess the risk associated with loaning you the money. Late payments on car loans or repossession in the past can make it harder to get approved for a loan. Poor credit lenders are willing to approve almost anyone for a car loan but with additional criteria such as a higher down payment and extra fees. The dealership may have to pay a fee to offset the risk and secure the loan, and you may end up having less choice over the vehicle. A down payment or equity provides greater leverage when negotiating a car loan.

Credit Score Range for a New Vehicle

While no exact credit score ensures an approval, a score above 680 is ideal to ensure that you get a reasonable interest rate and term. Scores below 680 increase the interest rate and leads to a higher amount paid over the loan period. As an example, someone with a credit score of 720 or higher pays an average of $5,500 in interest on a loan, while someone with a 580 credit score or above pays an average of $15,300 in interest. Clearly, the higher the credit score, the less one pays in interest, which affects the overall credit score.

Strategies to Increase Your Credit Score

Improving your credit score is a gradual process that requires persistence and patience. Rushing the process can lead to impulsive decisions that worsen your financial situation. In this article, we will discuss practical actions you can take to improve your credit score.

Here are three effective ways to boost your credit score:

1. Open 3-5 Revolving Credit Accounts

Revolving credit accounts, such as credit cards, can help maximize your credit score. For those with limited credit history or seeking to rebuild their credit, obtaining a large loan is challenging. Therefore, we recommend opening a secured credit card, such as Open Sky or Credit Builder Card, which focus on your ability to pay rather than your credit score. Revolving credit makes up 30-35% of your credit score and is the fastest way to improve it. However, it's crucial to pay your balance on time and limit your expenses to small purchases.

2. Request a Credit Limit Increase

Requesting a credit limit increase for your credit cards can lower your credit utilization percentage and increase your overall credit limits. This is essential because exceeding 30% of your limits can significantly hurt your credit score. Each card company has specific procedures for credit limit increases, and you need to contact them to initiate the process. A good payment history of 7-15 months on a credit card is preferable.

3. Reduce Your Balance

Keeping your credit card balance low and close to zero is crucial to improve your credit score. Use your credit card only for small purchases and leave a $1-5 balance when paying your bill each month. If you have high balances, create a repayment plan to pay down the outstanding balance gradually and ultimately stop using your credit card. High credit card usage can damage your credit score, and we advise reducing how much you use them.

In conclusion, improving your credit score takes time, discipline, and prudent usage of your credit accounts. By applying these practical strategies, you will soon be on your way to attaining a good credit score.

Insights by Joe

It's not uncommon to face credit challenges at some point in life. However, taking your credit situation seriously and putting in time and effort to improve it can yield massive and prompt benefits to your credit score. Many consumers with poor credit tend to think that having good credit again is unachievable. But, developing an impressive credit score requires dedication and prioritizing credit goals while also paying attention to spending habits. Start by creating a budget and addressing any problematic spending behaviors, and you will see a direct improvement in your credit score. This article intends to enhance your credit awareness. If you need help with your credit score or credit repair, feel free to contact us.