It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Many individuals are not aware of the vast range when they search for the most optimal credit score. Despite relying on internet search engines such as Google, the variety of information available online can often be overwhelming and potentially misdirect individuals from their goals. As someone who has spent more than 15 years in the financial literacy and credit repair field, my name is Joe Mahlow and my aim is to provide unfiltered advice on a plethora of subjects, one of them being credit scores. Having assisted more than 20,000 clients in elevating their credit scores, I hope to share with you enough wisdom and guidance to make a notable change in your own situation. Let’s delve into the topic and uncover important insights.

Contents:

Different Types of Credit Scores

Understanding Good Credit Score Ranges

What Is The Minimum Credit Score Required To Buy A House?

Determining Credit Score for Buying a Car

Tips for Improving Your Credit Score

Joe's Insights on Credit Score Improvement

Different Types of Credit Scores

Credit scores are crucial when it comes to securing loans and financing for major purchases such as homes, vehicles, and personal loans. There are two different credit scoring models used for borrowers: FICO and Vantage. Each model has its own unique calculation process for determining credit scores, and it's essential to understand these differences.

FICO Credit Score

The FICO scoring model is the most widely used with eight different FICO models ranging from FICO 2 to FICO 10. Depending on your credit report, you will likely receive a different credit score for each model. Various lenders will request different FICO reports based on the type of loan you are seeking. For example, a mortgage lender will most likely pull your FICO 5 credit report, while a credit card company will probably request your FICO 8 report.

Each FICO model calculates scores based on specific factors. For instance, FICO 5 mortgage reports focus more on your mortgage payment history, whereas FICO-2 reports weigh heavily on your auto loan history. These scoring models assign greater "weights" to the critical factors for each type of loan, meaning that your previous credit history in that area will have the most significant impact on your credit score.

Vantage Credit Score

Vantage is a relatively new scoring model compared to FICO, and it was developed by the three major credit reporting agencies: Equifax, Experian, and TransUnion. Though not used as widely as FICO, Vantage is gaining popularity in some sectors like personal loans and auto lending. Some credit monitoring websites offer Vantage scores for free.

While the Vantage score is accurate, it may not be as useful in determining your lending score since lenders primarily use the FICO model. However, it can be helpful in providing a general idea of your overall credit score. As the Vantage model continues to develop and become more widely used, it may become the go-to scoring model for borrowers.

In conclusion, knowing the different types of credit scores and their calculation processes can help you better understand your creditworthiness and make informed decisions when seeking loan approvals.

Understanding Good Credit Score Ranges

Credit scores, whether from the FICO or Vantage model, are rated from 350 to 850. The higher the score, the better, with 850 representing the ideal. Knowing where you stand and having score thresholds in mind is crucial when striving for the best scores. Here's what you need to keep in mind:

1. 620 or below:

Considered poor, this score range is commonly caused by an adverse credit history, high-balance credit card accounts, or a lack of credit cards. To improve scores, it is essential to make timely payments and have ten active revolving credit accounts continually. In case you need a recommendation, try out the OpenSky Credit Card or Credit Builder Card.

2. 640-680:

Ranking "fair" for good credit, this range represents an established credit history with some derogatory marks or accounts. It’s possible that your cards have high balances that you should pay down. Don’t be alarmed if your scores dropped temporarily due to recently opened accounts, as they will return to their original status.

3. 740+:

Any score above 740 is "super-prime" and offers the best interest rates on most loans. Only about 20% of U.S individuals hit this milestone, so if you have a 740 credit score or higher, kudos! Keep up the excellent work by paying your accounts on time and ensuring that you keep your revolving credit card accounts paid to stay within the ‘super-prime’ range.

What Is The Minimum Credit Score Required To Buy A House?

Before we answer this question, it is important to note that different types of mortgage loans have different requirements and guidelines due to federal regulation and government backing. However, here are some standard credit score requirements for the three most common mortgage loan types.

Conventional Loans:

These are the most popular loans and are typically the best “savings” loan option outside of VA loans. The minimum credit score required for a conventional loan is 640 with a debt-to-debt ratio limit of 43%. Conventional loans do not require you to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment.

FHA Loans:

The FHA mortgage loan is the best option for lower credit scores, typically between 580 and 619. FHA loans require you to maintain PMI for at least 11 years, which can increase your mortgage cost. The debt-to-income limit for this loan is up to 50%, allowing you to purchase more homes than with a conventional loan.

VA Loans:

There isn’t technically a credit score requirement with the VA Loan. However, they check for previous defaulted loans and any government-owed past-due debts when pre-qualifying you. 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 6 years with the National Guard, or your spouse was in the military and lost their lives during active duty. The VA loan typically has the best interest rates available, and no down payment is usually required.

Determining Credit Score for Buying a Car

When it comes to buying a car, it's important to remember that your credit history is more relevant than your credit score. Although having a higher credit score is a bonus, it has less of an impact on the interest rate you will qualify for. Lenders will examine your previous and current credit histories to assess the risk of extending credit to you. Individuals with past credit issues or late payment history will have a more challenging time obtaining loan approval. Even those with poor credit or who require special financing may still qualify for a loan, but with specific criteria that must be met such as a higher down payment or added fees. To maximize your car buying power with credit, it's advisable to have an equity or down payment.

As for the credit score range needed, a score above 680 is ideal. There is no cut and dried metric for determining approval, but a lower credit score will increase the interest rate charged and the lending risk. For instance, a borrower with a 720 or above credit score can average $5,500 in interest on a car loan while someone with a score of 580 or above will pay an average of $15,300 in interest. Clearly, the higher the credit score, the less interest will be paid, impacting the overall credit score.

Tips for Improving Your Credit Score

Improving your credit score takes time and effort, but there are several simple steps you can take right away to start seeing results. Here are three key things you can do to raise your credit score:

1. Open 3-5 revolving credit accounts (credit cards)

Revolving credit is an excellent way to build your credit score, especially if you are new to credit or trying to rebuild your credit. Start with a secured credit card that focuses on your ability to make payments on time, such as Open Sky or Credit Builder Card. Revolving credit accounts for 30-35% of your overall credit score, so paying your balance on time and limiting your purchases to small items like gas and groceries can help quickly improve your credit score.

2. Request a credit limit increase for your credit cards

If you have active revolving credit accounts, you can request a limit increase for your credit cards, which will raise your overall credit limits and lower your credit utilization percentage. Call your credit card company and ask for a "Credit Limit Increase," be prepared to provide your current income, and credit history. Most credit card companies require good to excellent payment history for the past 7-15 months before allowing an increase.

3. Pay down your balances and keep them low

Keeping your balance low and close to zero is crucial. If you currently have high balances, make a plan to pay them down with a percentage of your paycheck each month. Put a limit on your credit card usage, leaving about $1-5 balance on your credit cards. Doing this not only shows financial responsibility, but it can also save you a lot of money in interest rates.

Joe's Insights on Credit Score Improvement

Undoubtedly, having poor credit history can be discouraging. However, by devoting time and effort to rebuild your credit, significant boosts to your credit score can be achieved in a relatively short time. It is common for individuals with unfavorable credit rating to believe that having good credit is an unattainable goal. Nonetheless, building a solid credit score requires commitment and dedication, along with the implementation of effective strategies.