It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? This information may not be common knowledge to most, as the quest for the perfect credit score can often lead to a confusing and overwhelming onslaught of information from various sources. As a financial literacy and credit repair expert with over fifteen years of experience, my name is Joe Mahlow, and I aim to provide straightforward guidance on topics like credit scores. Having assisted over twenty thousand clients in boosting their credit scores, I am here to offer advice to help you achieve the same success. Let's delve right in!

Contents:

Different Kinds of Credit Scores Explained

Understanding Good Credit Scores

What Credit Score Do You Need to Buy a House?

Determining Your Qualification for a Car Loan

Ways to Enhance Your Credit Score

Joe's Insights on Improving Your Credit Score

Different Kinds of Credit Scores Explained

Understanding the difference between credit scoring models is crucial when trying to assess your creditworthiness. There are two popular credit scoring models; the FICO and the Vantage models. They both have their uniqueness in how they evaluate your credit score.

FICO Credit Score

The FICO credit scoring model is the most common model used by lenders. It has eight different models which are dependent on your credit report. Depending on the kind of lender you are dealing with, they may pull a different FICO report. For example, a credit card company is more likely to use the FICO 8 report when assessing your credit history, while a mortgage lender will pull the FICO 5.

Why so many FICO scores?

Each credit report has a different weight, meaning some factors are more important than others. For instance, a previous mortgage history is more crucial on an FICO 5 mortgage report when compared to credit card history, which has a greater impact on the FICO 8 report, mainly because credit card companies typically use this report.

If you want an overview of the different types of FICO scores available, sign up for an account on www.myfico.com.

Vantage Credit Score

To compete with the FICO scoring model, the three top credit reporting agencies in the United States (Equifax, Experian, and TransUnion) created the Vantage Score scoring model. Although it is gaining popularity in some sectors such as personal loans and auto lending, FICO remains the dominant scoring model in the lending sector.

Is the Vantage Score accurate?

The accuracy of the Vantage Score depends on the context of the question asked. Since it is not commonly used for lending purposes, it may differ from your actual lending score; hence it is not as reliable as the FICO score. However, it is a good indication of your overall credit score.

In conclusion, the FICO scoring model is outdated and does not give a clear picture of your credit scores. It is only a matter of time before the Vantage scoring model takes over as it provides the latest scoring models based on current standards. As the most significant data collection agencies outside of social media companies, credit reporting agencies have all the data, providing the best scoring data for the user.

Understanding Good Credit Scores

Both FICO and Vantage scoring models use a scale of 350 to 850 to determine credit scores. The worst credit score is 350, and the best is 850. To achieve the highest scores, it's crucial to know where you stand during your journey to improve your credit scores. Here are some critical score thresholds that you should know about:

620 or below:

If your score falls below this threshold, you are considered to have bad credit, which could be due to adverse credit history, high-balance credit card accounts, or no credit card at all. To improve your credit scores, make timely payments and open ten active revolving credit accounts. You can also use secured credit cards such as Credit Builder Card or OpenSky Credit Card to build your credit. Once you reach a credit score of 620, you can qualify for an FHA home mortgage.

640-680:

Scores within this range are considered fair for good credit. It indicates that you have established credit but may have some derogatory marks or accounts on your credit report. Newly opened accounts can temporarily drop your scores, so don't panic. If you have balances on your credit cards, it's best to pay them down.

740+:

Scores over 740 are "super-prime," and you will get the best interest rates on most loans. Congratulations if you have a credit score of over 740 because you belong to the top 20% of the US population. Keep making timely payments and paying your revolving credit card accounts on time. It will keep your credit score in excellent shape.

What Credit Score Do You Need to Buy a House?

The credit score you need to buy a house depends on the type of mortgage loan you are applying for. Mortgage loans have different requirements and guidelines, which can be affected by government regulations and backing. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans are the most popular type of mortgage loan. They usually have lower downpayment requirements and better interest rates than other types of loans. Additionally, conventional loans don't require you to have private mortgage insurance (PMI), which can translate into lower downpayments or monthly payments. Conventional loans have a credit score requirement of at least 640 and a debt-to-debt ratio of no higher than 43%.

FHA Loans

The FHA loan is a mortgage loan designed for lower credit scores. Borrowers with credit scores between 580 and 619 are typically eligible for this type of loan. However, keep in mind that loan programs may vary from lender to lender. You will have to pay PMI for at least 11 years with FHA loans, which may increase your mortgage cost. The debt-to-income limit of an FHA loan can be up to 50%, accommodating lower-income borrowers and enabling them to buy more expensive houses. The downpayment requirement for an FHA loan is as low as 3.5%, which can be helpful for those on a budget.

VA Loan

The VA loan is a special type of loan designed for veterans or their spouses. While there is no specific credit score requirement, lenders will check to see if you have defaulted loans or past-due government debts. To qualify, you must have served in the U.S Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or your spouse must have died in active duty. VA loans usually have the best interest rates, and they don't require a downpayment. This loan is a great option for our veterans as it shows appreciation for their service.

Determining Your Qualification for a Car Loan

When it comes to buying a car, your credit history plays a more significant role in determining your eligibility for a loan than your credit score. Although a good credit score is important, it is not the only criterion considered when assessing the risk of extending credit. To determine the likelihood of defaulting on a car loan, lenders review your current and previous credit histories, particularly for any late payments and defaults on auto loans.

Individuals with a poor credit rating, which may include past repossessions, may find it challenging to obtain a car loan. Nevertheless, some lenders specializing in bad credit or special financing will qualify virtually anyone but may require a higher down payment or additional fees to mitigate the risk. These lenders may also limit the loan amount for which you qualify based on the value of the car. Dealerships also charge fees to help you secure a loan for a vehicle, which may result in interest rates being higher.

When it comes to determining the perfect credit score for a car loan, several factors come into play. However, a credit score of over 680 is deemed ideal, and anything below might lead to higher interest rates. A credit score scale can indicate how much interest you are likely to pay based on your score, as shown in the table below:

Based on these findings, there is a correlation between a good credit score and lower interest rates, which can help you make significant savings on a car loan. Additionally, having equity or a down-payment can improve your chances of qualifying for a vehicle on credit.

Ways to Enhance Your Credit Score

Improving your credit score is a gradual process, and it requires patience. Hasty decisions can lead to further damage, so it is crucial to take careful steps. Here are some things you can do to boost your credit score:

1. Open Closed-End Credit Accounts

   In order to increase your credit score, it is best to have Revolving Credit, which is a type of credit that provides more flexibility. However, acquiring a significant loan can take considerable effort, primarily if you have limited credit or are rebuilding it. It is best to start with secured credit cards like Open Sky or Credit Builder Card that focus more on your ability to pay the dues on time and less on your credit score. Revolving Credit contributes 30-35% to your overall credit score and helps improve it quickly. It takes about 2-4 months to show significant improvements, and it is vital to ensure you pay your balance on time and keep it between $5-10 when you make a payment. It is best to limit your usage to small purchases like gas or groceries.

2. Increase Your Credit Limit

   Your credit card balance should never exceed 30% of your overall limit to avoid any adverse impact on your credit score. One way to avoid this is to request an increase in your credit limit. Different companies have varying processes, but it is best to call the company and ask for a “Credit Limit Increase.” You will be required to fill out some information, typically your current income. The credit team will then decide whether to approve your request. Usually, a company wants to see 7-15 months of excellent payment history before they allow an increase.

3. Pay off Your Debts

   It is crucial to keep your balance low and close to zero. Although you are not obligated to use your credit cards every month, it is best to use them for small purchases. When making payments, leave a balance of about $1-5 on your credit card. If you have a high balance and cannot afford to pay it off, create a plan to pay a percentage of your paycheck each month. It is essential to limit your credit card usage and ultimately stop using them. High-interest rates on credit cards will result in most of your payments going towards interest and little towards principal.

Joe's Insights on Improving Your Credit Score

No one has a perfect credit score, and there are times when we all struggle with a less than stellar credit situation. However, it is essential to take this matter seriously and work towards improving both yourself and your credit history. By dedicating your time and effort to this task, you can witness significant changes in your score quickly. Many consumers assume that they are destined to have bad credit their whole life. But, this is not the case, as it takes effort to establish excellent credit. Prioritizing your credit and analyzing your spending habits are crucial steps towards enhancing your credit score. Creating a budget and addressing any negative habits can also improve your score directly. If you require assistance with your credit score or need credit repair, consider contacting our office at www.asapcreditrepairusa.com.