It's surprising how many people are unaware of the fact that there are actually 30 different levels of credit scores. When searching for the best credit score, one can easily end up with a plethora of conflicting information from various sources. This can often lead to confusion and misguidance, making it difficult to know which path to take. My name is Joe Mahlow, and for over fifteen years, I have been working in the financial literacy and credit repair industry. My aim is to provide you with straightforward, honest advice on a range of subjects, starting with credit scores. Having helped over twenty thousand clients improve their credit scores, I hope to pass on enough knowledge and information to assist you in achieving the same! So, let's dive in.

Contents:

A Guide to Different Credit Scoring Models

Understanding What is Considered a Good Credit Score

Credit Score Needed to Buy a House

Understanding the Impact of Credit Scores on Car Loans

Ways to Increase Your Credit Score

Insights from Joe on Improving Your Credit Score

A Guide to Different Credit Scoring Models

Credit scores are calculated using different models. Two widely used models are the FICO and Vantage scoring models. It's important to understand how these models differ in calculating credit scores.

1. FICO Credit Score

The FICO scoring model has eight different scoring models numbered from FICO 2 to FICO 10. Lenders pull different FICO reports depending on the type of credit applied for. For example, mortgage lenders are likely to pull FICO 5 credit reports, credit card issuers FICO 8, and auto lenders FICO-2. Different reports may show different credit scores because each credit report has a different "weight" depending on the factors considered critical by the lender.

2. Vantage Credit Score

The Vantage Score is a newer scoring model created by credit reporting agencies (Equifax, Experian, and TransUnion) to compete with FICO. While it's not widely used for lending purposes, it's often used by credit monitoring websites to provide consumers a free copy of their credit reports. Vantage is gaining popularity in some sectors such as personal loans and auto lending.

The accuracy of the Vantage Score depends on the context. It gives a good "general idea" of your FICO score, which is more recognized by lenders and therefore more important when it comes to obtaining a loan. However, Vantage may become the preferred scoring model in the next 5-10 years as the lending sector evolves to accommodate new standards.

To get a better understanding of your different FICO scores, go to www.myfico.com and sign up for an account to view all your scores in one place. Remember, credit reporting agencies have access to the most significant data collection and are in the best position to provide the most accurate scoring data.

Understanding What is Considered a Good Credit Score

Credit scores are measured using both the FICO and Vantage models, which range from 350 to 850. The lowest score, 350, is considered the worst, and the best score is 850. When setting your credit score goals, it's helpful to know where you currently stand. Here are some essential score thresholds to keep in mind:

620 or below

Scores in this range are considered bad credit, indicating a history of overdue payments, high-balance credit accounts, or a general lack of credit cards. To improve your score, make timely payments and have at least ten active revolving credit accounts. You can start qualifying for an FHA home mortgage with a score of 620.

640-680

Scores in this range are considered fair for good credit. It suggests that you have established credit, but may have some derogatory marks or accounts on your record. You may also have high balances on your credit card, which should be paid down promptly. Newly opened accounts may also temporarily lower your score, so don't panic if you see a dip in your credit score.

740+

Credit scores over 740 are considered "super-prime" and provide the best interest rates for most loans. If you have a score that falls into this bracket, congratulations - you're in the top 20% of Americans. To maintain your score, always pay your accounts on time and keep your revolving credit card accounts paid.

Credit Score Needed to Buy a House

When considering the credit score needed to buy a home, it's important to know that it varies depending on the type of mortgage loan you are seeking. There are three main types of mortgage loans: conventional loans, FHA loans, and VA loans. Each has its own set of requirements and qualifications.

Conventional Loans

Conventional loans are the most common type of mortgage and are an excellent option for those looking to save money. You won't need to pay private mortgage insurance (PMI), which can be an added expense increasing your downpayment or monthly payment. Conventional loans usually have lower downpayment requirements and better interest rates than other loans. The typical credit score needed for a conventional loan is 640 and a debt-to-debt ratio no higher than 43%.

FHA Loan

The FHA mortgage loan has a lower credit score requirement than conventional loans; typically, between 580 and 619. Holding a lower credit score; shop around to find lenders offering the best financial option for you. FHA loans require you to keep PMI for at least 11 years. It also has a higher debt-to-income limit of up to 50%, permitting you to purchase more homes than with a conventional loan. Lastly, the downpayment for an FHA loan requirements can be as low as 3.5% of the purchase price. However, it usually carries a higher interest rate.

VA loan

The VA loan does not have a specific credit score requirement but any default on previous loans or outstanding government debts will be considered during the qualification process. It is available to veterans who have served a minimum of 181 days in the military, 90 consecutive days during wartime, or six years with the National Guard. It is also available to spouses of veterans who have lost their lives during active duty. VA loans typically offer the best interest rates and do not require a down payment. As a result, it is an excellent program that provides well-earned assistance to our veterans.

Understanding the Impact of Credit Scores on Car Loans

When applying for a car loan, your credit history holds more weight than your credit score. Though having a higher credit score is important, it's not the only factor used by lenders to determine your loan qualifications. To assess your creditworthiness, lenders scrutinize your previous and current credit histories. Late payments, repossession, or prior credit issues make it hard to get loan approval, while having a good credit history puts you in a favorable position. In some cases, people with bad credit can still get approved, but loan criteria such as higher down payments and additional fees may be attached. Such fees are paid to the dealership to mitigate the risk of default. When buying a car on credit, having equity or a down payment and a good credit history increases your chances of approval.

While there's no specific credit score that guarantees loan approval, having a score over 680 gives you the best chance. A credit score below this figure attracts a higher interest rate due to higher risk. The impact of credit score on loan interest is considerable, as exemplified by these figures:

Credit Score and Average Interest Charge

1. A credit score of 720 or above attracts an average interest charge of $5,500.
2. A credit score between 680 and 719 attracts an average interest charge of $6,600.
3. A credit score between 650 and 679 attracts an average interest charge of $8,100.
4. A credit score between 615 and 649 attracts an average interest charge of $10,200.
5. A credit score between 580 and 614 attracts an average interest charge of $13,900.
6. Any credit score below 580 attracts an average interest charge of $15,300.

This data shows that your credit score significantly impacts the interest charged on loans you acquire, ultimately affecting your credit score.

Ways to Increase Your Credit Score

To enhance your credit score, try taking various essential measures that can be done with minimal effort. Remember that developing a good credit score is a gradual process that necessitates patience, or else you are prone to making impulsive financial decisions that could worsen your problems. Some measures you can take to improve your credit score are:

1. Open 3-5 revolving credit accounts (credit cards) as they are one of the best options to increase your credit score quickly. Start with secured credit cards like Open Sky or Credit Builder Card that focuses more on your ability to pay on time with little emphasis on your credit score. Revolving credit takes up 30-35% of your credit score, so keep a balance of $5-10 and pay it on time regularly. Using your card only for small purchases is recommendable.
2. Requesting a credit limit increase for your credit cards is another way to increase your overall credit limits and lower your credit utilization percentage. Most credit card companies allow you to do it online or by calling their service center to fill out some information, including your current income. However, to be eligible for a credit limit increase, you'll need to have a good credit card payment history of 7-15 months.
3. Keeping your balance low and close to zero is vital. If you can't pay off high balances at once, devise a game plan to take a specific percentage of your paycheck each month to pay the credit cards down and ultimately stop using them. The worst decision would be to spend time paying a credit card only to let it increase again. Besides, the rates on a credit card are incredibly high and tend to go towards interest and not principal.

Insights from Joe on Improving Your Credit Score

Having a poor credit score is not an uncommon experience. However, if you approach it with a serious mindset and dedicate time and effort towards improving it, you can witness significant positive changes in a short while. Many individuals, faced with bad credit, give up and assume that it's a lifelong struggle. Nonetheless, generating a great credit score demands considerable hard work, and those who prioritize their credit and spending habits win the game. Start by establishing a budget and addressing problem spending behaviors; this will directly impact your credit score. This article also enlightens you about credit and its workings. If you need guidance or assistance with your credit score, or perhaps require credit repair, don't hesitate to reach out to my office at www.asapcreditrepairusa.com.