It may come as a surprise to you, but there are actually thirty different levels of credit scores. Many people assume that finding the best credit score is a straightforward process, but the reality is much more complicated. You may encounter conflicting information and even be misled. That's where I come in. My name is Joe Mahlow, and I have spent more than fifteen years working in financial literacy and credit repair. I strive to provide straightforward advice on topics like credit scores to help people achieve their financial goals. So far, I have helped over twenty thousand clients improve their credit scores, and I'm here to share my knowledge with you. Let's dive in!

Contents:

What are the Different Credit Scoring Models, and How Do They Work?

Determining a Good Credit Score

What Credit Score is Required to Buy a Home?

Determining Credit Score Requirements for Car Loans

Tips for Boosting Your Credit Score

Key points from Joe's Advice

What are the Different Credit Scoring Models, and How Do They Work?

Credit scores are essential when it comes to making big purchases. There are two main credit scoring models that lenders use - the FICO model and the Vantage model. It's important to understand the differences between these two scoring models to comprehend the values they assign to your credit history.

FICO Credit Score

FICO is the most common credit scoring model. It comprises eight different FICO models (FICO 2 to FICO 10) that produce different scores based on your credit history. The FICO score you get depends on the credit report that lender chooses to pull. For instance, if you're applying for a mortgage, the lender will pull the FICO 5 credit report. If you're applying for a credit card, the lender will mostly pull the FICO 8 report.

Why So Many FICO Scores?

FICO scores differ because each credit report has a different weight. Different factors hold varying degrees of significance for different lenders. For example, a FICO 5 mortgage report puts more weight on your past mortgage history. Positive history translates to a better credit score than a negative or no history. The same applies to all the other FICO scoring models. Credit card companies primarily use the FICO 8 report, meaning that your previous credit card history affects this score significantly. Auto lenders go for FICO-2 reports, and your previous auto history will impact your score.

If you want to see your different FICO scores, create an account on www.myfico.com.

Vantage Credit Score

Equifax, Experian, and TransUnion created the Vantage scoring model to compete with the FICO model. It's a relatively new scoring model compared to FICO, which has been around since the seventies. Credit monitoring websites use Vantage to give consumers a free copy of their credit reports. Although FICO dominates the lending sector, the Vantage model is gaining popularity in some sectors, such as personal loans and auto lending.

Is the Vantage Score Accurate?

The Vantage Score is accurate, but its context matters. Since the Vantage score is not widely used for lending purposes, it may not provide an accurate lending score. A credit score is only relevant if you intend to get a loan, and FICO is widely recognized as the go-to scoring model for lenders. However, the Vantage model is a good "general idea" of one's FICO score. It's ideal for giving you an estimate of where your credit score stands.

Lenders may adopt the Vantage scoring model in the next 5-10 years because it provides the best-scoring models based on today's standards. The FICO scoring model may be outdated, and it may not provide a clear representation of one's credit score. Credit reporting agencies hold vast data, allowing them to provide the best scoring data.

Determining a Good Credit Score

Credit scores are essential in determining your creditworthiness for loans and other financial transactions. FICO and Vantage ranges from 350 to 850, with the lowest score being 350 and the highest 850. Here are some vital score thresholds to understand to help you achieve your highest credit score goals.

1. Scores of 620 or below

These scores are considered bad credit, indicating a history of adverse credit. If you are below this threshold, you may have high-balance credit card accounts or no credit cards. To improve your score, make timely payments and have ten active revolving credit accounts open. You may also consider a secured credit card such as the Credit Builder Card or OpenSky Credit Card. Once you achieve a 620 credit score, you can start qualifying for an FHA home mortgage.

2. Scores ranging from 640 to 680

These scores are fair for good credit. In this category, you have established credit, but you may have some derogatory marks, high account balances, or newly opened accounts, which can temporarily drop your scores.

3. Credit scores of 740+

These scores are considered "super-prime," and it puts you at the top 20% of the US population with this score. Congratulations on your excellent score! You are eligible for the absolute best interest rates for most loans. To maintain a high score, always pay your accounts on time, and keep your revolving credit card accounts paid.

What Credit Score is Required to Buy a Home?

The credit score you need to buy a home varies based on the type of mortgage loan you are applying for. Different mortgage loans have different requirements and guidelines set by the federal government or institutions backing them. The most common mortgage loan types are conventional, FHA, and VA loans. Here are the credit score requirements and other details of each:

1. Conventional Loans

   Conventional loans are the most popular because of their lower downpayment requirements and better interest rates. They require a credit score of at least 640 and a debt-to-income ratio of no higher than 43%. With this loan option, you do not need to maintain private mortgage insurance (PMI), which saves you from paying additional costs that increase your monthly payment or downpayment.

2. FHA Loans

   FHA loans are for people with lower credit scores. The ideal score ranges from 580 to 619, but it's still crucial to shop around for lenders that offer the best financial options for you. Although an FHA loan allows you to pay a low downpayment that's only 3.5% of the purchase, you will have to manage PMI costs longer, which can be up to 11 years. The loan allows up to 50% debt-to-income ratio, making it possible to buy more homes if you have a lower income.

3. VA Loans

   There isn't a credit score requirement for VA loans, but they will look into your past liabilities and any government-owed past-due debts to pre-qualify you. You must be a member of the U.S. Military, National Guard, or your spouse must have died during active service. The VA loan has the best interest rates and doesn't require a downpayment. As a result, they are a great option for veterans who served in the military or armed forces for over six years.

Determining Credit Score Requirements for Car Loans

When applying for a car loan, your credit history carries more weight than your credit score in determining your eligibility. Your credit score, while still important, has less of an impact on the interest rate you qualify for, compared to your past and current credit histories. When reviewing your application, lenders will assess the risk involved with granting you credit based on your credit records. Late payments or repossession of previous auto loans can make it more challenging to get approved, whereas a better credit history can increase your likelihood of being approved. Some lenders may have less stringent requirements and may approve applicants with a poor credit history, but that typically involves higher down payments and additional fees. Dealerships may also charge additional fees to cover the risk of your loan default. When financing a vehicle, having equity or a down payment can provide you more leverage.

Ideal Credit Score Range for Purchasing a Car

There isn't one specific credit score that will guarantee you an approval. Nonetheless, a credit score of 680 or higher is ideal since scores below that mark pose a higher default risk to the lenders. As credit scores decrease, so do the chances of approval, and the interest rate gets higher. The figures below illustrate the impact of credit scores on loan interest rates:

For someone with a credit score of 720 or more, the average interest paid on a loan is $5,500.

For someone with a credit score of 680 to 719, the average interest paid on a loan is $6,600.

For someone with a credit score of 650 to 679, the average interest paid on a loan is $8,100.

For someone with a credit score of 615 to 649, the average interest paid on a loan is $10,200.

For someone with a credit score of 580 to 614, the average interest paid on a loan is $13,900.

For someone with a credit score below 580, the average interest paid on a loan is $15,300.

This data highlights the significant role credit scores play in the interest rates applicants are charged. Thus, having a good credit score will impact the likelihood of approval and reduce the borrower's overall cost.

Tips for Boosting Your Credit Score

Improving your credit score requires some effort, but there are several things you can do right now that can help. It's important to keep in mind that building good credit takes time and patience. Rushing to improve your score can lead to bad decisions that end up making things worse. Here are three things you can start doing today to improve your credit:

1. Open 3-5 revolving credit accounts

Opening revolving credit accounts, such as credit cards, is an effective way to improve your credit score. Secured credit cards like Open Sky or Credit Builder Card are good options for those with limited credit or who are rebuilding their credit. Revolving credit makes up 30-35% of your credit score, and using your credit card for small purchases and paying off the balance on time can help improve your score.

2. Request a credit limit increase

Increasing your credit limit can help lower your credit utilization percentage, which is a key factor in calculating your credit score. To request a credit limit increase, contact your credit card company and provide your current income information. It's important to have a few months of good payment history before requesting an increase.

3. Keep your balances low and pay down debt

To maintain a good credit score, it's important to keep your credit card balances low and pay down your debt. Ideally, you should leave a small balance on your credit card each month and pay it off on time. If you have high balances, come up with a plan to pay down your debt gradually. Avoid running up your credit card balances after paying them down as this will negate any progress made.

By following these tips, you can improve your credit score over time. Remember, building good credit takes patience and perseverance.

Key points from Joe's Advice

We have all experienced less than ideal credit, yet with a commitment to personally evolve and place importance on our credit, marked changes can occur fairly quickly. It's all too common for individuals with poor credit to despair that their credit score will never improve, and as a result, get trapped in a cycle of credit issues. However, it takes effort and dedication to establish a solid credit score; prioritizing one's credit and spending habits is key to success. A budget can be an excellent tool for eliminating negative spending habits and bolstering credit. For more insights on credit, refer to this article. If you are in need of expert guidance or credit repair, turn to our services at www.asapcreditrepairusa.com.