It may come as a surprise that credit scores actually have 30 different levels. Despite the multitude of resources available online, searching for the best credit score can often lead to confusion and misinformation. As someone with over fifteen years of experience in financial literacy and credit repair, I, Joe Mahlow, am passionate about providing transparent and helpful advice on important topics like credit scores. Through my work, I have assisted more than twenty thousand clients in improving their credit scores and am excited to share what I've learned with you. So, let's dive in!

Different Credit Scoring Models to Understand

Understanding credit scoring models is important, as there are two scoring models that lenders use: FICO and Vantage. Knowing the differences between the two is essential because they calculate your credit score differently.

FICO Credit Score

The FICO credit scoring model is widely used by lenders and is comprised of eight scoring ranges, from FICO 2 to FICO 10. The different FICO models depend on the type of credit sought. For instance, a mortgage application is likely to pull your FICO 5 credit report, while a credit card application would usually pull FICO 8.

Why so many FICO scores?

Different FICO models have different "weights" depending on the factors critical to the lender. A FICO 5 mortgage report, for example, is heavily influenced by previous mortgage history. Conversely, FICO 8 is heavily influenced by your credit card history. Auto lenders generally use FICO 2.

To see all of your different credit scores, sign up for an account at myfico.com.

Vantage Credit Score

The Vantage Score was developed by the three major credit reporting agencies in response to FICO. Vantage is a newer scoring model than FICO and is commonly used by credit monitoring websites. While FICO still dominates the lending sector, Vantage is seeing increasing popularity in some sectors like personal loans and auto lending.

Is the Vantage Score Accurate?

While the Vantage Score is accurate, FICO remains the most recognized model in lending, so Vantage may not accurately reflect your creditworthiness when it comes to obtaining a loan. However, Vantage provides a good general idea of your credit score in the absence of your FICO score. I believe that lenders may switch to Vantage due to its ability to provide the best scoring based on current standards. The FICO model might be outdated, so relying on data collection agencies like credit reporting agencies to give the best scoring data is key.

Understanding Good Credit Score

Both FICO and Vantage models measure credit scores that range from 350 to 850. A credit score of 350 indicates the worst while 850 denotes the best credit score possible. It is crucial to know where you stand when building your credit scores, especially if you aim to achieve the highest scores. Below are some essential score thresholds to keep in mind:

1. 620 or Below

   A credit score of 620 or below is bad credit, indicating an adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, you need to make timely payments and have ten active revolving credit accounts open. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can help you achieve this. Once your scores reach 620, you can qualify for an FHA home mortgage.

2. 640-680

   A score range of 640-680 is fair for good credit, indicating established credit. However, you may have derogatory marks or accounts on your credit or high balances on credit cards that you must pay down. Recently opened accounts can also lower scores temporarily, but they will eventually bounce back.

3. 740+

   A credit score of 740 or higher is super-prime, the "absolute best" that can get you the most attractive interest rates for loans. You belong to the US population's 20% with this score. Keep up the excellent work by always paying your accounts on time and keeping your revolving credit card accounts paid.

What is considered a good credit score for purchasing a home?

The answer to this question depends on the type of mortgage loan you plan to apply for. Federal regulations and government backing ensure that the requirements and guidelines for most mortgage loans are similar, if not different. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.

1. Conventional Loans

Conventional loans are the most popular savings loan outside of VA loans. These loans do not mandate private mortgage insurance (PMI), saving borrowers from an added cost that can increase downpayment or monthly payment. Downpayment requirements and interest rates for conventional loans are usually lower than other mortgage loans. A typical credit score requirement is 640, and the debt-to-debt ratio should be no higher than 43%.

2. FHA Loan

The FHA loan caters to low credit scores, typically between 580 and 619. Although all loan programs are different, it's best to shop for lenders with the best financial option for you if you're within the credit score limits. Keeping PMI for at least 11 years is a requirement, an added expense to bear in mind, especially for those on a budget. The debt-to-income limit for an FHA loan is higher, up to 50%, allowing you to purchase more homes with a lower income. While the downpayment as low as 3.5% is an advantage, interest rates are generally higher.

3. VA loan

Technically, there's no credit score requirement for a VA loan, but pre-qualification may take into account defaulted loans and government-owed past-due debts. Those who have served in the US military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a spouse who died during active duty are eligible for VA loans. These loans typically have the best interest rates and do not require a downpayment, making them an excellent option for veterans.

Ideal Credit Score for Car Purchase

When it comes to buying a car, your credit history plays a more significant role in determining loan eligibility than your credit score. Although having a good credit score is essential, it affects the interest rate to a lesser extent. Lenders evaluate your credit history to determine the risk involved in extending credit. Therefore, if you have issues with your credit history, such as late payments or repossession, it may be more challenging to get approved for a loan. However, bad credit or special finance lenders may still qualify you for a loan, subject to additional requirements such as a higher down payment and dealer fees to mitigate the risk. To have leverage while buying a car on credit, you need to have equity or a down payment.

Range of Credit Score for New Car

There's no fixed credit score to determine loan approval since various factors influence it. However, a credit score of 680 or above is ideal as anything lower poses a higher risk to the lender and may increase the interest rate. For instance, a person with a credit score of 720 or above will pay an average of $5,500 in interest on a loan, while someone with a credit score of 580 or above will pay an average of $15,300. Thus, a higher credit score translates to lower interest rates and ultimately affects your overall credit score.

Tips for Improving Your Credit Score

Improving your credit score takes time and effort, but there are simple steps you can take now to get started. It's important to be patient and avoid making irrational decisions that could harm your credit further. Consider the following ways you can improve your credit:

1. Open 3-5 revolving credit accounts: Revolving credit, such as credit cards, can help you maximize your credit score. It's easier to get approved for a credit card than a large loan, especially if you have limited credit or need to rebuild your credit. Look for a secured credit card, like Open Sky or Credit Builder Card, that focuses on your ability to make on-time payments rather than your credit score. Revolving credit makes up a significant portion of your credit score, so be sure to pay your balance on time and keep it low.
2. Raise your credit limits: Requesting a credit limit increase can help you lower your credit utilization rate and raise your overall credit limits. Contact your credit card company to ask for a credit limit increase and provide information about your current income. Be aware that most companies want to see a history of excellent payment before granting a limit increase.
3. Pay down your balances: Keeping your balance low and paying on time is essential for improving your credit score. Leave a small balance of $1-5 on your card each month, and avoid running up your balance again after paying it down. Make a plan to pay more than the minimum each month if you have high balances. Remember that high-interest rates can make it hard to get ahead if you don't pay down your balances regularly.

Tips from Joe on Improving Your Credit Score

We've all experienced having a less-than-impressive credit score at some point in our lives. However, if you're serious about improving your credit score, you'll need to put in the time and effort to work on yourself and your credit situation. Many people believe that having bad credit is something that will plague them for life, but that's not necessarily true. Developing a great credit score is hard work, but it's not impossible. By prioritizing your credit and focusing on your spending habits, you can see significant improvements in your credit score in a relatively short amount of time. Start by creating a budget and working to remedy any poor spending habits you may have. This will have a direct impact on your credit score. For more guidance or assistance with repairing your credit, visit my office at www.asapcreditrepairusa.com.

Key takeaways:

1. Improving your credit score requires time and effort.
2. Prioritizing your credit and focusing on your spending habits will yield results.
3. Creating a budget is a great place to start.
4. Don't hesitate to seek professional assistance with repairing your credit.