It's quite surprising that there are actually 30 different levels of credit scores. It's a bit confusing for most people when they look for the best credit score since Google gives diverse answers. More often than not, the information provided can be misleading and may lead you to a confusing result. I'm Joe Mahlow, in the financial literacy, and credit repair space for more than fifteen years. I aim to provide you with straightforward advice on various topics such as credit scores. Over the years, I have helped more than twenty thousand clients enhance their credit scores, and I'm hoping to give you enough information to do the same. Let's dive into it.

Contents:

Understanding Different Credit Scores

Understanding Good Credit Scores

What Credit Score Do You Need to Buy a House?

Ideal Credit Score for Buying a Car

Tips to Improve Your Credit Score

Joe's Insight on Credit Improvement

Understanding Different Credit Scores

Credit scores can significantly affect your ability to get loans or credit, making it essential to understand the different types of credit scoring models. Here, we will go through the two major models's differences and how each one calculates your credit score.

1. FICO Credit Score

The FICO credit scoring model is the most widely used and popular model with 8 different scoring models available (FICO 2 to FICO 10). Although it may seem confusing, each model is used by lenders depending on the type of credit you are applying for. For example, if you apply for a home mortgage, your lender may pull your FICO 5 credit report, while for a credit card application, they would pull your FICO 8 credit report.

Why so many FICO scores? Each credit report carries different weightages, emphasizing factors such as mortgage or credit card payment history relevant to the lender. Your previous credit history weighs more heavily on scores, like FICO 2 being primarily used by auto lenders.

To better understand your FICO scores, you can visit www.myfico.com for a complete breakdown.

2. Vantage Credit Score

Developed by three major credit reporting agencies (Equifax, Experian, and TransUnion), the Vantage Score model was created to compete with FICO but is newer. Even though Vantage is becoming popular as a scoring model for some lending sectors like personal loans and auto lending, FICO remains the industry standard.

The Vantage Score is accurate, but has limited usage as not many lenders use it as a scoring model yet. However, it can provide a rough estimate of your scores if used as a general idea of your FICO score.

The Vantage scoring model might become more widely used in the next 5–10 years as it continues to gather more data, thus improving accuracy. FICO is seen as outdated by some, and the Vantage Score is considered to give a clearer representation of credit scores for users.

Remember, credit reporting agencies have the most extensive data collection outside of social media companies, so they do have an upper hand in providing the best scoring data.

Understanding Good Credit Scores

Credit scores, measured by the FICO and Vantage models, range from 350 to 850, where 350 is the worst and 850 is the best. To set your goal of having high scores, you must know where you stand in your journey. Here are some vital score thresholds to understand:

1. 620 or below:

This is considered bad credit. If you fall in this range, you may have an adverse credit history or high-balance credit card accounts or no credit cards at all. To improve your credit scores, make timely payments and have ten active revolving credit accounts. Secured credit cards like Credit Builder Card and OpenSky Credit Card can assist in establishing your credit. With a 620 credit score range, you can qualify for an FHA home mortgage.

2. 640-680:

Credit scores in this range are considered fair for good credit. If your credit score falls in this range, you have established credit, but some derogatory marks, high balances on your credit cards, or newly opened accounts on your credit might drag down your scores temporarily.

3. 740+:

A credit score over 740 is considered "super-prime" and will give you the best interest rates for most loans. You are among the 20% of the US population with this score, so keep up the excellent work, always pay your accounts on time, and keep your revolving credit card accounts paid, and you'll be in great shape!

What Credit Score Do You Need to Buy a House?

The credit score required to buy a house depends on the type of mortgage loan you want to get. Federal regulations and government backing ensure that each mortgage loan has similar, if not different, requirements and guidelines. There are three common types of mortgage loans: conventional loans, FHA loans, and VA loans.

1. Conventional Loans

Conventional loans are popular and usually the best "savings" loan option outside of the VA loan. Private mortgage insurance (PMI) is not required for conventional loans, which can increase your downpayment or monthly payment. PMI is a protection for the lender in case you stop making payments on your loan. Conventional loans typically require a credit score of 640 and a debt-to-debt ratio no higher than 43%. These loans have good interest rates and lower downpayment requirements than other mortgage loans.

2. FHA Loan

FHA mortgage loans are for lower credit scores, usually between 580 and 619. Different lenders have various financial options, so if you are within the credit score limits, it’s best to shop around. FHA loans have a debt-to-income limit of up to 50% and typically require PMI for at least 11 years, which may add to your mortgage cost. A downpayment of 3.5 percent is required, enabling individuals to get into mortgages with less money.

3. VA loan

The VA loan doesn’t have a specific credit score requirement, but it evaluates applicants' prior defaulted loans and any owed debts to the government when pre-qualifying borrowers. To qualify, you must have finished at least 181 days of military service, served 90 consecutive days during wartime, served six years with the National Guard, or lost your spouse to military service. The VA loan is facilitated by the government and typically has the best interest rates, and it typically has no down payment requirements. It's an excellent mortgage loan program for veterans.

Ideal Credit Score for Buying a Car

When it comes to purchasing a car, rather than solely focusing on your credit score, your credit history is the crucial factor in determining your eligibility for a car loan. Higher credit scores, while important, have less impact on the applicable interest rate.

In order to assess the risk associated with extending credit, financial institutions evaluate your previous and current credit histories in case of credit issues during your loan application process. For example, if you have had late payments on previous or current auto loans, or if you have ever had a vehicle repossessed, obtaining a loan can become more challenging. However, among the worst credit or special finance lenders, almost anyone can qualify for a car loan, despite previous repossessions. Nevertheless, there are special requirements that must be met by the borrower, such as higher down payments and additional fees charged by the dealership to lessen the possibility of defaulting on the loan.

If you have bad credit and have gone to a dealership, it is possible that you have had an experience where the dealer selects the vehicle for you, because they have a higher margin on that specific vehicle to cover their fee. It is essential to have equity or a down payment while purchasing a vehicle on credit, for maximum leverage.

New Vehicle Credit Score Range

Despite the numerous additional factors that determine eligibility, a credit score above 680 is ideal. A score below this number increases the interest rate that is charged by the lender, as you pose increased risk.

Below is an example of how interest rates increase relative to your credit score:

Interest Rates:

• 720 credit score or above typically pay $5,500 interest on a loan.
• 680 credit score or above typically pay $6,600 interest on a loan.
• 650 credit score or above typically pay $8,100 interest on a loan.
• 615 credit score or above typically pay $10,200 interest on a loan.
• 580 credit score or above typically pay $13,900 interest on a loan.
• 580 credit score or above typically pay $15,300 interest on a loan.

Thus, it is evident from this data that the higher your credit score, the less interest you will pay, which can have a positive effect on your overall credit score.

Tips to Improve Your Credit Score

Improving your credit score requires effort and patience as it takes time to build a good credit history. Without patience, people may make hasty decisions that can lead to further credit problems. Below are some things you can do right now to improve your credit:

1. Open 3-5 revolving credit accounts (credit cards)

Revolving credit is an excellent option to improve your credit score, especially for those with limited credit or looking to rebuild their credit. Revolving credit makes up 30-35% of your overall credit score and helps to build credit scores quickly. You can start by opening a secured credit card like Open Sky or Credit Builder Card, which focuses more on your ability to pay the card on time. It takes 2-4 months to show the increase in your credit scores. Make sure you pay your balance on time and keep it at $5-10 each time you make a payment.

2. Increase your credit limits

You can request a credit limit increase for your credit cards to help lower your credit utilization percentage. Most credit card companies allow you to do it online through your portal or by calling customer service. You must have an excellent payment history of 7-15 months on a credit card before they agree to give you a credit limit increase.

3. Pay down your balances

Keep your balance low and close to zero, and limit the use of your credit cards. Try to use them for small purchases and ensure you pay your bill each month, leaving about a $1-5 balance on your credit cards. If you have high balances, make a game plan to pay them down by taking a percentage of your paycheck each month. It's crucial to limit your credit card usage as spending habits play a massive role in your overall credit score.

Remember, building a good credit score is a process that requires patience, persistence, and discipline.

Joe's Insight on Credit Improvement

We all can relate to having credit issues at some point in our lives. However, taking your current credit situation seriously and committing yourself to working on your credit can bring about huge changes to your credit score in a relatively short period. Many people struggle with bad credit throughout their lives and often consider good credit to be an unattainable goal. Developing an excellent credit score requires diligence and prioritization towards your credit and spending habits. Creating a budget and fixing any bad spending habits is an ideal place to start as it has a direct impact on your credit score. This article provides invaluable insight into credit and if you require guidance in improving your credit score or need credit repair services, please contact my office today at www.asapcreditrepairusa.com.