It's a little-known fact that your credit score can actually be broken down into thirty different levels. Despite this, many people searching for the best credit score may find themselves with an overwhelming amount of information, much of which can be confusing or even misleading. As someone with over fifteen years of experience in the financial literacy and credit repair field, my name is Joe Mahlow, and I aim to provide you with straightforward advice on important topics like credit scores. Having helped over twenty thousand clients transform their credit scores, I hope to empower you with the knowledge you need to do the same. So, let's dive in.

Contents:

Types of Credit Scores Explained

Understanding Good Credit Scores

Determining the Ideal Credit Score for Buying a Home

Ideal Credit Score Range for Car Purchase

Tips on Increasing Your Credit Score

Insights from Joe

Types of Credit Scores Explained

There are two main credit scoring models that you'll need to be familiar with, namely the FICO and Vantage scoring models. Both models have their own set of calculations that shape your overall credit score.

FICO Credit Score

The FICO credit score is the most widely used credit scoring model across the lending industry. Since there are eight different FICO models available, your credit score may vary depending on the model used by the lender. For instance, a credit card company may pull your FICO 8 credit report, while a mortgage lender will most likely pull your FICO 5 report.

Why does FICO have multiple scores?

Each credit report has a different weightage, wherein factors critical to the lender will have a significant impact on your credit score. A FICO 5 mortgage report, for instance, weighs heavily on previous mortgage history, while the FICO 8 report is largely influenced by your past credit card history.

Vantage Credit Score

The Vantage scoring model, developed by Equifax, Experian, and TransUnion, was created to compete with the FICO model. While the FICO model has been around for more than 50 years, Vantage is a more recent addition to the credit-scoring industry and is gaining popularity in personal loans and auto lending sectors.

How accurate is the Vantage Score?

The Vantage score is not widely used for lending purposes, but it can still give you a general idea of your credit score. If you're unsure about your FICO score, your Vantage score can help you estimate where your overall credit score stands. While the FICO model currently dominates the lending industry, Vantage may become more widely used in the future due to its modernized scoring models.

To get a visual representation of your FICO scores, you can sign up for an account at www.myfico.com. Remember, credit reporting agencies are the largest data collection agencies outside of social media companies, making them the best source of credit data.

Understanding Good Credit Scores

Credit scores are essential to your financial life, and both the FICO and Vantage models use a range of 350 to 850. With 850 being the best and 350 being the worst, it's crucial to know what your score means. Here are some score thresholds that will aid you in your credit-building journey:

620 or below

A score below 620 is considered bad credit, indicating a history of adverse credit or little credit history. To improve your credit, ensure timely payments and have ten active revolving accounts open. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can aid you in building your credit. Once you reach a score of 620, FHA home mortgages become available.

640 to 680

A score range of 640 to 680 is considered fair for good credit and indicates that you have established credit. However, derogatory marks, high credit card balances, and newly opened accounts may lower your score temporarily.

740 or above

A super-prime score over 740 delivers the absolute best interest rates for loans. If you have a credit score over 740, congratulations! You are part of the 20% of the US population. Ensure timely payments, keep your revolving credit card accounts paid, and you'll be in great shape.

Determining the Ideal Credit Score for Buying a Home

When you're in the market for a mortgage loan, the credit score required to qualify for it depends on the loan type. Regulations and backing from the government make the requirements for most mortgage loans similar or different. The three most frequently obtained mortgage loan types are conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans are the most popular loan choice and are usually the best option for "savings" loans other than VA loans. Private mortgage insurance (PMI) is not required with conventional loans, unlike other loans, where it can increase your monthly payments or down payment. Conventional loans have lower down payment requirements and typically have better interest rates than other loans. A credit score of 640 and a debt-to-income ratio of no more than 43% are required for conventional mortgage loans.

FHA Loan

FHA loans are typically intended for those with lower credit scores, ranging from 580 to 619. Different lenders can provide varying financial options, even if you meet the credit score requirements. PMI must be maintained for at least 11 years with FHA loans, which can be an added expense that you should consider if you're on a tight budget. Compared to conventional loans, this loan type has a debt-to-income ratio limit of up to 50%, allowing you to purchase more homes if you have a lower income. The down payment requirements are as low as 3.5% of the purchase price, making it affordable to enter into a mortgage. However, generally, the interest rates are higher.

VA Loan

A credit score requirement is not technically stipulated with VA loans, but they will pre-qualify you by checking for previous defaulted loans and any government-owed past-due debts. The loan is available to those who served at least 181 days in the U.S. military, served 90 consecutive days during war, served six years with the National Guard, or had a spouse in the military who lost their life during active duty. Because there is usually no requirement to make a down payment, the VA loan commonly offers the most favorable interest rates on the market. As it gives back to our veterans appropriately, the VA loan is an excellent option.

Ideal Credit Score Range for Car Purchase

When you plan to buy a car, your credit history takes precedence over your credit score in determining what you qualify for. Though a higher credit score is vital, it does not significantly determine the interest rate you can get.

When you apply for a car loan with a problematic credit score, the lender studies your past and current credit history to assess the risk involved in extending credit to you. For instance, people with previous late auto loan payments or repossession may face considerable challenges in loan approval compared to those with the opposite status. While bad credit or special finance lenders qualify anyone for a car loan, recipients must meet specific criteria as assigned by the dealership. The criteria include higher down payment and extra fees paid to the dealer to mitigate the default risk. A fee is paid to the dealership to lessen risk, and to approve you for the loan, you may have to choose from the dealer's selection with a higher markup on the car. Lastly, you must have equity or a down payment to amplify your bargaining power when buying a vehicle on credit.

Credit Score Range to Buy a New Vehicle

There is no exact credit score that guarantees you approval because several factors influence the decision, including those enumerated above. However, if your credit score is above 680, you are ideally placed. Scores below 680 may increase the interest rate charged as you pose more risk to the lender.

Consider the examples below to understand how your credit score impacts your interest rate burden:

• A credit score of 720 and above attracts an average interest of $5,500 on a loan.
• A credit score of 680 and above attracts an average interest of $6,600 on a loan.
• A credit score of 650 and above attracts an average interest of $8,100 on a loan.
• A credit score of 615 and above attracts an average interest of $10,200 on a loan.
• A credit score of 580 and above attracts an average interest of $13,900 on a loan.
• A credit score of 580 and above attracts an average interest of $15,300 on a loan.

This data shows that the higher your credit score, the less interest rate you pay, which positively affects your overall credit score.

Tips on Increasing Your Credit Score

Improving your credit score can be achieved through small but significant steps that require little effort. It's essential to note that building excellent credit takes time and patience. Making impulsive and irrational decisions may negatively impact your credit score, and therefore patience is key. Here are some of the things you can do to improve your credit:

Open 3-5 revolving credit accounts

Revolving credit, particularly credit cards, is a great avenue for improving your credit score. Start by opening a secured credit card like Open Sky or Credit Builder Card. They focus more on your ability to pay on time by verifying your income and bankruptcy history. Ideally, ensure you limit card usage to small payments like gas and simple groceries, and pay on time to raise your credit score.

Request for a credit limit increase

Active revolving credit card accounts can benefit from a credit limit increase. This action can increase your overall credit limits and reduce your credit utilization percentage, which may negatively affect your credit scores. To request an increase, contact your credit card company, fill in the necessary information, such as your income, and wait for their credit team to approve.

Pay down your balances

To keep your credit scores high, keeping your balance low and close to zero is critical. Consider using your credit cards for small purchases and leave a $1-$5 balance on the card when paying. If you already have high balances, make a plan and dedicate a percentage of your paycheck every month towards paying down your credit card debt. This strategy will ultimately improve your credit score. Remember, maintaining low credit utilization and payment history is crucial for building excellent credit.

Insights from Joe

We've all experienced times when our credit scores were lacking. However, if you're serious about improving your credit, putting in some time and effort to better yourself and your finances will yield impressive results in a short period of time. Many individuals with poor credit remain stuck in a perpetual cycle of financial instability, believing that it's impossible to restore their creditworthiness. Nonetheless, establishing a solid credit score requires hard work, and those who prioritize their finances and curb any unnecessary expenses will reap the benefits. Start by devising a budget and identifying any damaging spending habits, as these actions can have a direct impact on your credit score. This write-up aims to enhance your understanding of how credit works. If you require guidance or credit repair assistance, feel free to reach out to our office today at www.asapcreditrepairusa.com.