It may come as a surprise that credit scores come in 30 different levels. Searching for the best score can often lead to conflicting answers on Google, leaving most people feeling overwhelmed and confused. Unfortunately, some of the information available online can be misleading and steer people in the wrong direction. As someone who has spent 15 years in the financial literacy and credit repair industry, my name is Joe Mahlow, and I aim to provide raw advice on various topics relating to credit, including scores. Over the years, I've helped more than 20,000 clients transform their credit scores, and my hope is that I can provide you with enough information to achieve the same level of success. So let's dive in!

Contents:

Different Types of Credit Scores: Understanding FICO and Vantage Models

Understanding what makes a good credit score

Determining the Appropriate Credit Score to Purchase a House

Determining Creditworthiness for Buying a Car

Tips to Increase Your Credit Score

Insights by Joe

Different Types of Credit Scores: Understanding FICO and Vantage Models

When it comes to credit scores, it can be confusing to understand the different models used. The two most important scoring models are the FICO and Vantage models. Both are critical to understand as they have different ways of calculating your credit score.

1. FICO Credit Score

The FICO credit scoring model is the most widely used model, with eight different versions. Each FICO model offers a different credit score depending on the credit report. For instance, lenders can pull different FICO reports based on the type of loan. A mortgage lender will most likely pull the FICO 5 report, auto lenders FICO-2, and credit card companies the FICO 8 report.

Why are there different FICO scores?

Each credit report has a different weight, meaning that certain factors are more critical than others. For example, a previous mortgage history has more impact on your score for the FICO 5 mortgage report. The FICO scoring model is commonly used in traditional lending.

2. Vantage Credit Score

The three primary credit reporting agencies (Equifax, Experian, and TransUnion) created the Vantage Score in competition with FICO. Vantage is a relatively new scoring model and is often used by credit monitoring websites. While FICO dominates in the lending sector, the Vantage model is gaining popularity in other areas, such as personal loans and auto lending.

Is the Vantage score accurate?

The Vantage Score is accurate to give you a general idea of your FICO score. But it's not always as accurate as your lending score. The Vantage score will vary from FICO, which is the most widely recognized scoring model. In the future, the Vantage model may become more widely used than FICO as it provides the best scoring models based on current standards.

In conclusion, understanding both the FICO and Vantage models is essential to know your credit worthiness. Consider getting an account at myfico.com to view all your different credit scores. Knowing your credit scores will positively impact your financial well-being in the long run.

Understanding what makes a good credit score

Both the FICO and Vantage models have a scoring range of 350 to 850, with 350 representing the worst possible credit score, and 850, the best. Knowing this will be useful as you build your credit score, so let’s look at some important score thresholds.

1. 620 or below

This range of credit score is generally considered bad. You may have a history of adverse credit events, such as high-balance credit card accounts or no credit cards in general. The best way to improve your score is by making timely payments and having ten active revolving credit accounts. One option is to use a Credit Builder Card or OpenSky Credit Card, as both are secured credit cards that can help you build your credit. When your score reaches 620, you can start qualifying for an FHA home mortgage.

2. 640-680

This range is considered fair credit. If your score falls in this range, it often means that you have established credit but may have some accounts with derogatory marks or high balances on credit cards. Newly opened accounts can also lead to a temporary drop in scores. However, this is nothing to worry about, and your scores will return to normal soon.

3. 740+

Any credit score above 740 is considered super-prime and puts you in the top 20% of the US population. If you have achieved this score, congratulations! You will be eligible for the best interest rates on most loans. To maintain your score, pay all your accounts on time and keep your revolving credit card accounts paid.

Determining the Appropriate Credit Score to Purchase a House

To know the credit score required for buying a home, one must consider the type of mortgage loan they wish to qualify for and its requirements for approval. The three most common types of mortgage loans are conventional, FHA, and VA loans.

Conventional Loans

Conventional loans are the most popular and the ideal option if one doesn't want to spend more money on PMI. This type of loan has a 640 minimum credit score requirement, with a restriction of not more than 43% of the borrower's debt-to-income ratio. Besides, conventional loans offer lower interest rates and down payment requirements, making them a perfect choice for many home buyers.

FHA Loan

The credit scores allowed for FHA loans are usually lower, between 580 and 619. However, such a loan often requires you to purchase PMI for 11 years, resulting in increased expenses that one needs to keep in mind. The debt-to-income ratio limit is 50%, making it easier for people to purchase their homes with a lower income. With a down payment requirement of just 3.5%, obtaining an FHA loan often requires less initial cash. The downside is a higher interest rate.

VA Loan

The VA loan doesn't have a definite credit score requirement, but borrowers must not have any defaulted loans or overdue government debts from the past. Furthermore, borrowers must be current or former members of the military, serving a specific duration, or the spouse of a veteran who was killed while on duty. The VA loan often has the lowest interest rates and doesn't require any down payments, making it an excellent option for veterans.

Determining Creditworthiness for Buying a Car

When it comes to buying a car, your credit history is the most critical factor in determining your eligibility, rather than just your credit score. While having a good credit score is important, it somewhat contributes less towards the interest rate you qualify for when applying for a car loan. Your credit history is checked to assess the level of risk of extending credit to you; this includes your past and existing loans. Someone with a current or previous delinquent account, such as late payments or repossession, is less risk-worthy than someone with a spotless record. Nevertheless, you can still get a car loan from bad credit or special finance lenders, even with previous repossessions. However, such lenders may add specific criteria to your loan terms, including extra fees and a higher down payment. In some cases, the dealership may pay a fee to help reduce the risk of default on the loan. Therefore, to increase your leverage when buying a vehicle on credit, it is best to have equity or a down payment.

Credit Score Requirement for a New Car

There is no set credit score to determine approval for a car loan, as other factors like credit history are taken into account. However, a credit score above 680 is generally preferable to minimize the risk to the lender. Borrowers with scores less than 680 may face higher interest rates. The table below highlights the estimated interest rate for different credit score ranges when obtaining a loan.

• 720 and higher: $5,500 in interest on average.
• 680 to 719: $6,600 in interest on average.
• 650 to 679: $8,100 in interest on average.
• 615 to 649: $10,200 in interest on average.
• 580 to 614: $13,900 in interest on average.
• Below 580: $15,300 in interest on average.

Conclusively, the interest rate charged on a loan increases as the credit score falls, making it crucial to have a good credit score to get better loan terms for buying a car.

Tips to Increase Your Credit Score

Improving your credit score is crucial, and accomplishing this goal involves several actions that require little effort. Keep in mind that improving your credit takes time, and it is not a quick-fix solution. Rather, it is a process that requires patience and careful consideration to make rational financial decisions. Here are some tips that can help you improve your credit score:

1. Open 3-5 Revolving Credit Accounts (Credit Cards)

Revolving credit, such as credit cards, is an excellent option for those looking to rebuild their credit or those with limited credit history. It can be challenging to build credit through obtaining a large loan, but credit cards offer the best opportunity for approval. Secured credit cards, such as Open Sky or Credit Builder Card, focus on your ability to pay on time rather than your credit score. Revolving credit accounts for 30-35% of your overall credit score, making it the quickest option to improve credit scores. Ensure you pay the balance on time while keeping it between $5-$10 each time you make a payment.

2. Raise Your Limits

Requesting a credit limit increase on your active revolving credit card accounts can help to increase your overall credit limits and lower credit utilization percentages. The higher your utilization percentage, the more damage it can cause to your credit score. To avoid this problem, contact your credit card company and request a credit limit increase. You will need to provide information about your current income, with 7-15 months of excellent payment history on a credit card before they agree to an increase.

3. Pay Down Your Balances

Keeping your balance low is critical. Avoid using your credit cards unnecessarily. Use credit cards for small purchases, and when making payments each month, leave a balance of $1-$5. If you have high balances and cannot afford to pay them off, create a plan to pay your credit cards monthly. Avoid using them after paying off the balance. Limiting your credit card usage is critical since your credit card spending habits will play a significant role in your overall credit score. Notably, credit card interest rates are high, and most payments go towards interest and not principal.

Insights by Joe

It's not uncommon to have a less than perfect credit score at some point in life. However, taking your credit seriously and devoting time and effort to improve it can result in significant changes to your score in a short time. Unfortunately, many people with poor credit fall into a vicious cycle of credit troubles that seems never-ending, making it seem impossible to improve their score. Building good credit requires commitment and focus on spending habits. A budget is an excellent place to start to eliminate bad spending habits and positively impact your credit score. This article aimed to enhance your knowledge on credit. If you are looking for further help, including credit repair, do not hesitate to contact my office today at www.asapcreditrepairusa.com.