It's a little-known fact that there are actually 30 different levels of credit scores. Despite this, many people looking to improve their credit score can find themselves overwhelmed with conflicting information from Google. Not only can this be confusing, but it can also lead individuals astray. As someone who has worked in the financial literacy and credit repair field for over fifteen years, my aim is to provide straightforward advice on critical issues such as credit scores. With my help, over twenty thousand clients have already transformed their credit scores for the better, and I'm excited to provide you with the information you need to do the same. So without further ado, let's delve into the world of credit scores.

Contents:

Varieties of Credit Scores

Understanding Credit Scores

Credit Score Requirements for Different Mortgage Loans

Determining the Credit Score Range for Car Buying

Ways to Improve Your Credit Score

Credit Improvement: Strategies for Restoring Your Score

Varieties of Credit Scores

Credit scoring models come in different types, with two of the most common being the FICO model and the Vantage model. Familiarizing yourself with their variations is essential, as it can impact how they calculate your credit score.

FICO Credit Score

FICO, with its widely-used eight different models – from FICO 2 up to FICO 10 – determines your credit score depending on your credit report. The type of lender you use applies a specific FICO model to pull your report – mortgage lenders typically use FICO 5, while credit card issuers use FICO 8. That's similar for all other FICO models, with each carrying different weight assigned to specific factors that are vital to the lender's decision. Previous mortgage history is crucial to FICO 5 mortgage report, for example, while previous credit card history hugely affects the FICO 8 score.

Vantage Credit Score

Developed by Equifax, Experian, and TransUnion to compete with FICO, the Vantage Score is the new scoring model in the market. Credit monitoring websites in the United States provide your Vantage Score to entice users for a free credit report. Although gaining popularity in some sectors like personal loans and auto lending, FICO still dominates the lending industry.

Vantage Score Accuracy

The Vantage Score, although accurate, depends on the context of the question. It isn't widely used for lending purposes, which means that its accuracy in determining your actual lending score isn't reliable compared to FICO. Still, I look at the Vantage Score as a general idea of my FICO score and a good basis for getting your overall score. Lenders may switch to Vantage in the next few years because of the improved scoring models based on today's standards, along with the inability of FICO to give a clear representation of credit scores.

Understanding Credit Scores

Credit scores are vital for getting loans, credit cards, and other financial products. The FICO and Vantage models both have a score range of 350 to 850, with 850 being the highest score and 350 being the lowest. While building your credit, it's important to monitor your score and set achievable goals. Here are some score thresholds you should be aware of:

1. 620 or below:

This is considered bad credit, with adverse credit history, high balance credit card accounts, or no credit cards at all. To improve your score, make timely payments, and have at least ten active revolving credit accounts open. Consider using a secured credit card such as the Credit Builder Card or OpenSky Credit Card. Once you reach a credit score of 620, you can start qualifying for an FHA home mortgage.

2. 640-680:

This range is considered fair to good credit. If your score is within this range, you have established credit, but you may have derogatory marks or accounts on your credit, high balances on your credit cards, or newly opened accounts. Don't worry if your score drops temporarily due to a new account opening. Your scores will return.

3. 740+:

Any credit score over 740 is considered "super-prime" and can give you the best interest rates for most loans. Congratulations if you have over 740 because you're in the 20% of the US population with this score. To maintain your score, pay your accounts on time and keep your revolving credit card accounts paid.

Credit Score Requirements for Different Mortgage Loans

When it comes to buying a house, the credit score requirement will depend on the type of mortgage loan you are trying to qualify for. Therefore, it is important to know the requirements and guidelines of the most common mortgage loans, such as conventional loans, FHA loans, and VA loans.

1. Conventional Loans

Conventional loans are the most popular loans and are typically the best option outside of VA loans. Not requiring you to maintain private mortgage insurance (PMI) can save you an added cost that could increase your downpayment or monthly payment. In addition, conventional loans usually have lower downpayment requirements and better interest rates than other mortgage loans. They also have a typical credit score requirement of 640 and a debt-to-debt ratio no higher than 43%.

2. FHA Loan

If your credit score is lower than 620, you may consider looking into an FHA mortgage loan, which typically accepts credit scores between 580 and 619. You may need to keep PMI for at least 11 years, which should be accounted for in your budgeting. The higher debt-to-income limit of 50% is something to consider, allowing you to purchase more homes if you have a lower income. The downpayment requirements on an FHA loan are as low as 3.5% of the purchase, providing a great option for those who want to get into the mortgage with less money out of pocket. However, the interest rate is usually higher in comparison to conventional loans.

3. VA Loan

VA loans are exclusively for active or retired members of the military or their spouses. You have to meet specific criteria to qualify for this loan, such as serving in the military for at least 181 days, among others. The VA loan usually has the best interest rates available, and they do not require a down payment. Though it is not mandatory, checking previous defaulted loans and past-due government debts is considered for qualification. The VA loan is a great benefit for the hard work and dedication of our veterans.

Determining the Credit Score Range for Car Buying

When planning to purchase a car, it's important to note that your credit history, not just your credit score, is the primary factor in what you qualify for. While a higher credit score is still important, it's relatively less significant towards the interest rate you'll be eligible for. In evaluating your loan application, creditors will examine your credit history to determine the likelihood of extending credit. Those with late payments or previous instances of repossession will have a tougher time securing a loan approval compared to those with favorable credit history. In addition, lenders with weak credit criteria may still grant your loan application, but with conditions such as additional fees and higher down payments. Interestingly, dealerships pay the added fee charged to the customer to manage the risk of loan default and ensure the approval of the loan. Often, you may have noticed that a dealership has pre-selected the car you are eligible for based on the markup of the vehicle, especially if you have poor credit. Lastly, while prepping to buy a car on credit, it's recommended to have either down payment or equity for the leverage required.

Credit Score Standards for New Car Purchases

The approval or interest rate charged for your car loan depends on several factors, making it challenging to have an exact credit score that will guarantee approval; however, a credit score above 680 is preferable. Credit scores below this range tend to result in higher interest rates because of the risk the borrower poses to the lender. To provide an example of how one's credit score can influence the cost of interest, this is the average interest rate for loans based on credit scores:

1. Over 720 credit score: $5,500 interest rate on average

2. Over 680 credit score: $6,600 interest rate on average

3. Over 650 credit score: $8,100 interest rate on average

4. Over 615 credit score: $10,200 interest rate on average

5. Over 580 credit score: $13,900 interest rate on average

6. Credit score of 580 or less: $15,300 interest rate on average

This data demonstrates that having a higher credit score will result in lower interest rates, which will inevitably contribute to an overall better credit score.

Ways to Improve Your Credit Score

There are several steps you can take to increase your credit score, but it requires patience and time. Rushing the process can cause irrational and poor credit decisions, leading to bigger problems. The following tips can help you improve your score:

1. Open 3-5 revolving credit accounts

Revolve credit is a great option, especially for those with poor or limited credit history. Secured credit cards, such as Open Sky and Credit Builder Card, are ideal since they focus on payment abilities rather than credit scores. Revolving credit accounts contribute 30-35% towards your overall credit score. It's essential to maintain a balance of $5-10 and pay off the card promptly. It may take two to four months to reflect the score increase.

2. Raise your credit limits

Credit utilization is one of the significant contributing factors to lower credit scores. A quick way to increase your overall credit limits and lower credit utilization percentage is to ask for a credit limit increase on your current credit cards. Contact your credit card company through their portal or via phone call.

3. Pay Down Your Balances

Keeping a balance close to zero or paying off your monthly bills can go a long way to improve your credit scores. Incurring high balances and not having the financial capacity to repay them immediately can lead to poor credit scores. It's best to make a plan and pay off credit card bills in percentages using your paycheck, not maxing them out completely. This way, your credit card usage is limited, and you'll avoid high-interest rates that come with missed payments.

Advice from Joe

We've all experienced having less than satisfactory credit. However, it is essential to take your current credit situation seriously and devote time and effort to improve it, as doing so can result in significant changes to your credit score promptly. Many individuals with poor credit fall victim to the cycle of having credit problems throughout their lives, believing that restoring good credit is unattainable. Achieving an excellent credit score requires hard work, but by prioritizing your credit and concentrating on your spending habits, success is within reach. A useful starting point is to create a budget and tackle any negative spending patterns; your credit score will reflect the positive changes. This article offers insights into understanding credit. Suppose you're searching for support and assistance with credit scoring or require credit repair services. In that case, please contact my office immediately at www.asapcreditrepairusa.com.