It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? Many individuals are unaware of this fact, causing them to seek out the "best credit score" through a simple Google search. However, the vast amount of information available on this topic can often be confusing and, at times, even misleading – leading individuals down a dark rabbit hole. My name is Joe Mahlow and I have spent over fifteen years within the financial literacy and credit repair industry. My goal is to provide you with honest advice on a variety of topics, including credit scores. With a track record of helping over twenty thousand clients improve their credit scores, it is my sincere hope that I can provide you with enough insight to do the same. So, without further ado, let's dive into the world of credit scores.

Contents:

Different Credit Scoring Models: FICO and Vantage

Qualifying for a Good Credit Score

Credit Score Requirements for Home Loans

Determining Your Eligibility to Buy a Car with Good Credit

Tips for Improving Your Credit Score

Thoughts from Joe

Different Credit Scoring Models: FICO and Vantage

There are two main types of credit scoring models - the FICO model and the Vantage model. Although both are essential to understand, the differences in calculating credit scores should be noted.

FICO Credit Score

The FICO model is the primary credit scoring model used in the United States. With eight FICO models from FICO 2 to FICO 10, credit reports' types will often differ. The primary reason for this is because different lenders use different FICO reports for their specific needs. For example, a mortgage lender will most likely pull a FICO 5 credit report, while credit card companies primarily use the FICO 8 report.

Why so many FICO scores?

The factors that are critical to each lender will have a more significant impact on a credit score than the less important ones. For instance, mortgage lenders use FICO 5, with previous mortgage history having the most significant impact on the score. Meanwhile, previous credit card history has the most significant impact on FICO 8, with credit card companies as the primary users.

To have a better understanding of your different FICO scores, you can sign up for an account at www.myfico.com.

Vantage Credit Score

Equifax, Experian, and TransUnion developed the Vantage Score model to compete with the well-established FICO scoring model. Although the FICO model dominates the lending sector, Vantage's popularity is rising, especially in sectors such as personal loans and auto lending.

Is the Vantage Score accurate?

The Vantage Score is accurate, but it depends on the context. As the Vantage score is not widely used for lending purposes, the accuracy of your actual lending score can vary. However, it provides an excellent general idea of your FICO score.

Overall, credit reporting agencies are the most significant data collection agencies outside social media companies. They have the upper hand in providing the best scoring data that meets modern standards. The FICO scoring model is outdated and doesn't provide a clear representation of credit scores. Lenders nationwide may start to widely use the Vantage scoring model instead of FICO within the next 5-10 years.

Qualifying for a Good Credit Score

Credit scores range from 350 to 850 for both the FICO and Vantage models. The lowest possible score is 350, while the highest possible score is 850. It is vital to know where you're starting from and to set goals as you move towards set credit score landmarks. The following are some essential credit score thresholds:

620 or below

A score below 620 is indicative of bad credit, probably due to high-balance credit card accounts, adverse credit history, or no credit cards at all. Timely payments and having ten active revolving credit accounts open can help you improve your score. You can also consider secured credit cards like Credit Builder Card or OpenSky Credit Card. A credit score range of 620 qualifies you for an FHA home mortgage.

640-680

A credit score range of 640-680 is considered fair for good credit. It shows that you have established credit even though you may have some derogatory marks or accounts on your credit, along with high balances on your credit cards that need payment. You may also have recently opened an account, causing a temporary drop in your credit score. There's no reason to panic since your score will bounce back.

740+

Any credit score higher than 740 is considered "super-prime" and will attract the best possible interest rates for most loans. A credit score of 740 or more means that you are part of the 20% of the US population with this score. Keep paying your accounts on time, and maintain your revolving credit card accounts paid. You are in an excellent position! Congratulations!

Credit Score Requirements for Home Loans

Determining the ideal credit score for purchasing a home varies based on the type of mortgage loan you are seeking. Mortgage lenders have federal regulations and government-backed guidelines they follow regarding credit scores for loan approval. The three common mortgage loan types available are conventional loans, FHA loans, and VA loans.

Conventional Loans

The most popular and cost-saving loan option outside of a VA loan are conventional loans. These types of loans generally have better interest rates and lower downpayment requirements than other loans. Conventional loans do not require private mortgage insurance (PMI), which safeguards lenders in case of payment default by borrowers. To qualify for a conventional loan, you typically need a credit score of 640 or higher and a debt-to-debt ratio of no more than 43%.

FHA Loan

An FHA mortgage loan is often considered ideal for those with low credit scores. The minimum required credit score is between 580 and 619; however, requirements vary by lender. The downside to an FHA loan is that you are required to maintain PMI for at least 11 years, which is an added cost to your monthly payments. FHA loans usually require a debt-to-income limit of 50% and a low 3.5% downpayment. However, the interest rates are typically higher than those of conventional loans.

VA Loan

For individuals who have served in any military branch or have a spouse that was killed while in active duty, the VA loan is available. The VA loan does not have a specific credit score requirement, but lenders will evaluate your delinquent loans and past-due debts. VA loans have the best interest rates, and you do not usually need to make a downpayment.

Determining Your Eligibility to Buy a Car with Good Credit

While having a higher credit score is important when seeking a car loan, it is not the only factor that determines whether you qualify or not. Your credit history, current and past, is more crucial in assessing your creditworthiness. Past issues such as late payments, repossessions, and defaults on previous loans can make it more challenging to get approved for a loan. Some lenders, especially those who specialize in special finance, will qualify almost anyone for a loan, but with higher interest rates, additional fees, and a higher down payment to offset the risk. Dealerships sometimes charge a fee to approve a loan for people with bad credit and may select cars with a higher markup to cover the fee. Additionally, to have more bargaining power, it's advantageous to have equity or a down payment.

Credit Score Range for Buying a New Car

Although there is no magic number to ensure approval, a credit score over 680 is the ideal range to aim for when seeking a car loan. Anything below 680 could result in higher interest rates. The interest you pay on a loan is directly proportional to your credit score, as seen with the following example:

Interest rates based on credit score:

1. A person with a credit score of 720 or above will pay an average of $5,500 in interest.
2. A person with a credit score of 680 or above will pay an average of $6,600 in interest.
3. A person with a credit score of 650 or above will pay an average of $8,100 in interest.
4. A person with a credit score of 615 or above will pay an average of $10,200 in interest.
5. A person with a credit score of 580 or above will pay an average of $13,900 in interest.
6. Anyone with a credit score of 580 or below will pay an average of $15,300 in interest on a loan.

As evident from the data above, a higher credit score means lower interest rates, and hence, it affects your overall credit score in a positive way.

Tips for Improving Your Credit Score

Increasing your credit score is a process that requires time and patience. However, taking some simple steps now can help improve your score over time. Here are some things you can do to increase your credit score:

1. Open 3-5 revolving credit accounts:

Revolving credit accounts, such as credit cards, can help you build your credit score quickly. For those with limited credit history, a secured credit card is a good option. You can apply for one from Open Sky or Credit Builder Card. Keep the balance at $5-$10 and make sure to pay your bills on time.

2. Raise your limits:

Increasing your credit limit can help lower your credit utilization percentage, which is one of the factors that can hurt your credit score. Each credit card company has different processes. You can request a credit limit increase online or by calling them.

3. Pay down your balances:

Keeping your balance low and close to zero is critical. If you have high balances, create a payment plan to pay your credit card down. Limit your credit card usage and avoid running up your balance.

Remember, taking the time to build a good credit score is vital. With these tips, you can improve your score and enjoy the benefits of good credit.

Thoughts from Joe

Insights from Joe regarding Credit Improvement

Undeniably, many people have experienced having below-average credit. Nevertheless, if you genuinely consider your credit status and invest ample effort and time into improving it, you can expect enormous improvements in your credit score in no time. Unfortunately, countless individuals with poor credit ratings fall victim to a never-ending cycle, thinking that attaining good credit is impossible. It requires hard work and dedication to achieve an outstanding credit score. Those who prioritize their creditworthiness and focus on how they manage their expenses will undoubtedly succeed. Begin by outlining a budget and take steps to fix any negative spending patterns you might have; this will directly impact your credit score. This article offers a better understanding of credit. In case you need guidance and assistance in improving your credit score or require credit repair services, please don't hesitate to contact my office immediately through www.asapcreditrepairusa.com.