It's not widely known, but there are actually 30 distinct levels of credit scores that consumers can have. If you've ever searched for information on the best credit score, you've probably found yourself inundated with conflicting advice from various sources online. Unfortunately, much of this information is not only convoluted, but can also be misleading - potentially sending you down a financial rabbit hole. As someone who's worked in the financial literacy and credit repair industry for over 15 years, my name is Joe Mahlow, and I aim to provide honest and straightforward guidance about credit-related subjects like this one. With experience helping more than 20,000 clients to improve their credit scores, I'm confident that I can offer you the knowledge and tools to achieve the same level of success. So, let's dive in!

Contents:

Different Credit Scoring Models Explained

Guide to Understanding Good Credit Scores

What Credit Score Do I Need to Purchase a Home?

Determining Credit Score for Car Buying

Tips for Improving Your Credit Score

Joe's Tips for Improving Your Credit Score

Different Credit Scoring Models Explained

Credit scores are crucial in determining your creditworthiness. To help you understand the differences in how these scores are calculated, it's essential to know that there are two primary credit scoring models: FICO and Vantage. In this article, we will explore the differences between these two models and their various scoring systems.

FICO Credit Score

FICO is the most widely used credit scoring model, with eight different models ranging from FICO 2 to FICO 10 in use. Each model calculates your credit score using different methodologies based on data from different credit reports. For example, if you're applying for a mortgage, your lender will likely pull your FICO 5 report, while applying for a credit card will lead to the pulling of your FICO 8 report. FICO's various models exist because they are customized to weigh different factors depending on the loan type.

Why are there so many FICO scores?

Each FICO model rates the factors of a credit report differently, based on the lending context. For instance, FICO 5 mortgage reports weigh heavily on a borrower's previous mortgage history. In contrast, FICO 8 is primarily used by credit card companies and other lenders who focus primarily on credit card repayment history. Auto lending companies primarily use FICO-2, and your previous auto history would weigh on this score the most.

If you want a visual representation of your different FICO scores, sign up for an account on www.myfico.com.

Vantage Credit Score

Unlike the decades-old FICO model, Vantage is a newer scoring model developed by Equifax, Experian, and TransUnion credit agencies to compete with FICO. It's gaining popularity for personal loans and auto lending. Although the Vantage Score isn't widely used for lending purposes, it's used frequently by credit monitoring websites to provide customers with free credit reports.

Is the Vantage Score accurate?

Although the Vantage score is accurate, its accuracy depends on the context. Since Vantage isn't widely used in lending, it's not going to be an accurate reflection of a borrower's loan score. Instead, the Vantage scoring model gives a good general idea of a borrower's overall score. It's best used to give you an idea of where your credit scores are compared to your FICO score, which is the more popular lending model.

In the next 5-10 years, lenders will likely start to utilize the Vantage scoring model more frequently. As the newer model, Vantage better aligns with today's credit practices and standards than FICO's decades-old model. It provides more accurate scoring based on the most relevant credit factors, thereby providing more accurate credit scoring models than the older FICO model.

Guide to Understanding Good Credit Scores

Credit scores are numerical representations of your creditworthiness, and both the FICO and Vantage models score between 350 and 850, with 850 being the highest and 350 being the lowest possible credit score. Achieving the highest possible score is a worthy goal, but it is also essential to know where you stand in your credit journey. Here are some critical score thresholds to keep in mind:

1. Bad Credit: 620 Or Below

   • This range suggests adverse credit history, high-balance credit card accounts, or no credit cards at all.
   • Timely payments and ten active revolving credit accounts can help improve your credit score.
   • Secured credit cards such as the Credit Builder Card and OpenSky Credit Card are recommended.
   • This range qualifies for an FHA home mortgage.

2. Good Credit: 640-680

   • Scores in this range indicate established credit but may have some derogatory marks or accounts with high balances.
   • Newly-opened accounts can also lead to a temporary score drop, but your score will likely return.

3. Super-Prime Credit: 740+

   • A score of over 740 suggests excellent creditworthiness and offers the best interest rates for most loans.
   • Only 20% of the US population has a credit score above 740.
   • Consistent timely payments and maintaining revolving credit card accounts that are paid off will maintain good credit in this range.

What Credit Score Do I Need to Purchase a Home?

The credit score required to purchase a home depends on the type of mortgage loan you want to qualify for. Mortgage loan requirements vary based on federal regulation and government backing. Typically, there are three most common mortgage loan types: conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans are the most popular loans and usually the best option for savings outside of the VA loan. These loans do not require you to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment. Conventional loans usually have lower downpayment requirements and better interest rates. The typical credit score requirement for conventional mortgage loans is 640, and the debt-to-debt ratio should not be higher than 43%.

FHA Loan

The FHA mortgage loan is designed for lower credit scores of around 580 to 619. However, loan programs may vary, so if you have a credit score within the limits, look for different lenders to find the best financial option for you. FHA loans typically require you to keep PMI for at least 11 years, which can be an added cost to your mortgage. The debt-to-income limit for this loan is typically up to 50%, making it a better option than a conventional loan for those with lower income. Although the downpayment requirement on an FHA loan is as low as 3.5% of the purchase price, the interest rate is usually higher.

VA Loan

The VA loan does not technically require a credit score, but lenders check for previous defaulted loans and government-owed past-due debts when pre-qualifying you. To be eligible 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 lost a military spouse during active duty. The VA loan typically has the best interest rates and does not require a down payment. It is a great option to give back to our veterans.

Determining Credit Score for Car Buying

In the process of purchasing a car, your estimated qualification level depends more on your credit history than the credit score you have. Even though having a higher credit score is essential, it has a minimal effect on the interest rate you are charged. The lender assesses your credit history to identify the risk of extending credit, especially if you have credit problems when applying for a car loan. Whether you have a late repayment history or repossession issues, having a good credit history is the key to getting approval. With poor credit, the best you can get is a loan from high-risk lenders, who will likely subject you to some harsh approval criteria such as higher down payments, additional dealer fees, and higher interest rates. Such dealerships may even select the more expensive cars for you that have a higher markup to deal with the fee. Lastly, to have leverage when buying a car on credit, ensure you have some equity or downpayment.

The Ideal Credit Score Range for Purchasing a New Car

Although there is no single credit score level that guarantees loan approval, it’s generally easier to get loan approval if you have a score of over 680. In case your score is below this, be prepared to pay a high-interest rate because the lender may perceive you as a risk. Here is an example of how different credit scores affect the interest you pay:

1. A person with a score of 720 or above typically pays $5,500 in interest per loan.
2. The person whose score ranges from 680-719 is likely to pay an interest of $6,600 on average.
3. Another person with a credit score of 650-679 is likely to pay $8,100 in interest on average.
4. Those with scores ranging between 615-649 may end up paying an interest of up to $10,200.
5. While a score between 580- 614 may require $13,900 interest on average.
6. A score of up to 579 will need to pay a staggering $15,300 in interest.

The above chart shows that a higher credit score attracts significantly less interest and positively influences the credit score of the borrower.

Tips for Improving Your Credit Score

Improving your credit score takes time and effort, and requires patience to make rational decisions with your credit. Here are some steps you can take right now to help improve your credit score:

1. Open 3-5 revolving credit accounts such as credit cards.

This option is easier to obtain and maximize credit scores for individuals with limited credit or rebuilding their credit. A secured credit card like Open Sky or Credit Builder Card is recommended, as they focus more on your ability to pay the card on time.

2. Request a credit limit increase for your credit cards.

This will increase your overall credit limits and lower your credit utilization percentage, which can negatively impact your credit score.

3. Paying down your balances and keeping them low is critical.

Small purchases are recommended, and leaving a $1-$5 balance on your credit cards when paying the bill each month is a good practice. If you have high balances, creating a game plan to pay them off is advised.

By limiting your credit card usage, you can positively impact your credit score. Remember, patience is key in building a good credit score.

Joe's Tips for Improving Your Credit Score

Whether due to past mistakes or current circumstances, having a less than stellar credit score is a common issue. However, those who are willing to commit time and effort to improving their credit will quickly see significant changes. Unfortunately, many people become trapped in a cycle of bad credit, feeling like it's impossible to recover. The truth is, building a great credit score takes work, but those who prioritize their credit and adjust their spending habits will succeed. To start, create a budget and focus on reducing any bad spending habits that may be impacting your credit. This article provides guidance on understanding credit, but if you need additional help or guidance with your credit score or repair, please reach out to my office today at www.asapcreditrepairusa.com.