It might surprise you to learn that there are actually 30 different levels of credit scores. Despite this fact, many people search for "the best credit score" without realizing how complex the systems really are. Unfortunately, the information available online can be confusing and even misleading. My name is Joe Mahlow and I have spent the last fifteen years working in financial literacy and credit repair. My objective is to provide you with honest advice on various money matters, starting with credit scores. So far, I have successfully helped over twenty thousand clients improve their credit rating and I hope that I can use my experience to offer you relevant insights as well. Let's dive in!

Contents:

Different Types of Credit Scores

Understanding Good Credit Scores

What Credit Score is Needed to Secure a Mortgage?

Determining Your Credit Score Range for Car Purchase

Tips to Improve Your Credit Score

Tips from Joe for Improving Your Credit Score

Different Types of Credit Scores

Credit scoring models are used by lenders to assess the creditworthiness of potential borrowers. The two main models that lenders use are the FICO model and Vantage model. Both scoring models are crucial to understand when it comes to calculating your credit score.

FICO Credit Score

One of the most popular and widely used credit scoring models is the FICO credit scoring model. With eight different FICO models ranging from FICO 2 to FICO 10, your credit score will generally vary depending on your credit report. The differences in the models result from the critical factors that are given more weight according to a lender's history.

For instance, when applying for a mortgage, mortgage lenders usually pull your FICO 5 credit report, whereas credit card companies primarily use the FICO 8 credit report. The different FICO models cater to lenders' preferences, as each credit report has different weight assigned to it.

Vantage Credit Score

The Vantage Score scoring model is relatively new compared to FICO. The three major credit reporting agencies (Equifax, Experian, and TransUnion) developed the Vantage Score to compete with the FICO score. Although FICO dominates, Vantage is increasingly being used in new credit sectors like personal loans and auto lending.

The Vantage score is accurate, but it depends on the context within which it's used. Since the Vantage score is not widely used for lending purposes, it may not be accurate when it comes to your actual lending score. Instead, it can provide a general idea of your FICO score. To gain a better understanding of all your different credit scores, you can sign up for an account with myfico.com.

It’s worth noting that Vantage's accuracy may vary as FICO is the most recognized scoring model. However, I believe that the Vantage scoring model will be widely used by lenders in the next 5-10 years as it provides the best scoring models according to current standards. In contrast, I believe that the FICO scoring model is outdated and doesn’t provide a clear representation of an individual's credit score.

Remember that credit reporting agencies are the most significant data collection agencies outside social media companies. Thus, if they have the data, they have the upper hand in providing the most effective scoring data.

Understanding Good Credit Scores

Credit scores for both FICO and Vantage models range from 350 to 850, with 350 being the weakest score, and 850 being the strongest. To reach your desired score, it's essential to be familiar with the essential score thresholds. Here's what you need to know:

1. 620 or below:

If your score is below 620, this is regarded as bad credit. It could mean that you have some negative credit history, high-balance credit card accounts, or no credit cards at all. To enhance your score, you must ensure you make timely payments and have ten active revolving credit accounts. You're advised to opt for a Credit Builder Card or OpenSky Credit Card as they can help you establish credit. Once you reach the 620 credit score range, you will qualify for an FHA home mortgage.

2. 640–680:

A score within this range is considered as fair for good credit. It implies you have established credit but may have derogatory marks or accounts on your credit, high balances on your credit cards that you need to pay down, or newly opened accounts that temporarily drop your scores.

3. 740+:

Any credit score above 740 is considered "super-prime" and offers the best interest rates for most loans. If you have a score higher than 740, congratulations you are part of the 20% of the US population with such a score. Ensure you continue to make timely payments and keep your revolving credit card accounts paid.

What Credit Score is Needed to Secure a Mortgage?

The credit score needed to buy a house depends on the type of mortgage loan you're applying for. Federal regulation and government backing result in similar, if not different requirements and guidelines for most mortgage loans. The three most common types are conventional loans, FHA loans, and VA loans.

1. Conventional Loans

Conventional loans are the preferred option for most and typically offer the best savings outside of the VA option. These do not require you to maintain private mortgage insurance (PMI), which can be costly. This loan has lower downpayment requirements and better interest rates than other mortgage loans. A credit score of 640 is required, and the debt-to-debt ratio should be no higher than 43%.

2. FHA Loan

FHA mortgages are for lower credit scores, typically between 580 and 619. However, each loan program has unique characteristics, so shop around for different lenders that offer the best options within the credit score limits. FHA loans require PMI for at least 11 years, with a debt-to-income limit of up to 50%. The downpayment requirement is as low as 3.5%, so there is less money out of pocket, but the interest rate is usually higher.

3. VA Loan

While there isn't technically a credit score requirement with the VA Loan, lenders will check for previous defaulted loans and past-due government debts when pre-qualifying you. This loan is available to individuals who 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 was in the military and lost their lives during active duty. The VA loan offers the best interest rates, with no downpayment requirement. It is considered a great option for veterans.

Determining Your Credit Score Range for Car Purchase

When it comes to buying a car, your credit history is a more crucial factor in securing a loan than just your credit score. Of course, having a higher credit score carries importance, but it is not the sole factor in determining your interest rate eligibility. When obtaining a car loan, lenders scrutinize your credit histories, both past and current, to assess the credit risk. Consequently, individuals with a prior history of late payments, repossession, or current loans encounter greater difficulty in getting their loan approved than those without such issues. Remarkably, even lenders that specialize in bad credit financing will qualify any applicant for a car loan but will impose specific approval criteria, such as more substantial down payments and additional fees paid by the dealership to approve the loan. Here, you should know that dealerships may sometimes charge a fee to cover the risk of default and approve your loan if you have a bad credit history. Subsequently, you may have experienced the dealership choosing the car model that you could purchase due to the higher markup on the vehicle. Last but not least, having equity or a down payment gives you leverage when buying a car with credit.

The Ideal Credit Score Range for New Car Purchase

The credit score requirement for approval is not specific since it has many determinants, as highlighted above. However, in general, a credit score above 680 is the ideal score range, since anything lesser than 680 signals a higher risk to the lenders. Here's how different credit score ranges affect the interest payable on loans:

Credit score above 720: pays around $5,500 in interest on loans

Credit score between 680 and 719: pays around $6,600 in interest on loans

Credit score between 650 and 679: pays around $8,100 in interest on loans

Credit score between 615 and 649: pays around $10,200 in interest on loans

Credit score between 580 and 614: pays around $13,900 in interest on loans

Credit Score below 580: pays around $15,300 in interest on loans

From this data, it is evident that the higher your credit score, the lower the interest rate payable on your loan, which, in turn, affects your overall credit score.

Tips to Improve Your Credit Score

Improving your credit score requires patience and dedication. It is not a quick process but taking some immediate steps can help boost your credit score over time. It is essential to make conscious decisions and avoid irrational decisions that may impact your credit score negatively. Below are some things you can do to improve your credit:

1. Open Revolving Credit Accounts

   Having 3-5 revolving credit accounts such as credit cards is an easy way to start improving your credit score. Secured credit cards like Open Sky or Credit Builder Card are great options to start with, especially for those with limited credit. Remember that revolving credit accounts for 30-35% of your overall credit score, so make sure to keep your balances at $5-10 each time you make a payment.

2. Raise Your Limits

   Requesting a credit limit increase on your existing credit cards can increase your overall credit limit and reduce your credit utilization percentage. Call your credit card company and request a "Credit Limit Increase" and fill out your current income and credit history information. This credit limit increase process is typically achievable after 7-15 months of excellent credit payment history.

3. Pay Your Balances Down

   Keeping your credit balance low is critical to improve your credit score. Ensure that you limit your usage of credit cards for small purchases and pay your bill with a balance of $1-5. If you currently have high balances, make a plan to pay your credit card down based on your budget. Avoid spending excessively on your credit card, as credit card debt can spiral out of control quickly due to high-interest rates.

Improving your credit score takes time and effort but following these steps can help you move towards a better credit score.

Tips from Joe for Improving Your Credit Score

It's not uncommon to have a less than ideal credit score, but it is important to take it seriously and work on improving it. Many people with poor credit feel stuck in a cycle of credit issues and don't believe they can ever have good credit again. However, by prioritizing your credit and making changes in your spending habits, you can see significant improvements in your credit score. Here are some tips to get started:

1. Develop a budget: Creating a budget and sticking to it is the first step in improving your credit score.
2. Address bad spending habits: Take a hard look at your spending habits and identify areas where you can cut back to reduce your debt and improve your credit score.

Remember, improving your credit score takes time and effort, but it is worth it in the end. If you need guidance or help with credit repair, reach out to my office at www.asapcreditrepairusa.com. This article provides valuable information to better understand credit.