It may surprise you to learn that there are actually 30 distinct credit score levels. When scouring the web for advice on achieving the best possible credit score, the flood of varying responses can be overwhelming and muddled. Unfortunately, many sources are not entirely trustworthy and can steer you in the wrong direction. My name is Joe Mahlow, and I have dedicated over 15 years to the field of financial literacy and credit repair. My objective is to provide you with candid guidance on a range of pertinent topics, such as credit scores. I have aided more than 20,000 clients in elevating their credit scores and strive to furnish you with the tools to do the same. Let's delve into the complexities of credit scores.

Contents:

Different Types of Credit Scores Explained

Understanding a Good Credit Score

What Credit Score Do You Need to Buy a House?

Determining the Appropriate Credit Score to Secure an Auto Loan

Effective Ways to Increase Your Credit Score

Advice from Joe

Different Types of Credit Scores Explained

Understanding the different types of credit scores is critical for anyone looking to improve their creditworthiness. Two models of credit scores dominate the industry - the FICO model and the Vantage model. Although both models assess credit risk, they differ in how they calculate their scores.

FICO Credit Score

The FICO credit scoring model is the most widespread credit scoring model. Consisting of eight different models from FICO 2 to FICO 10, your FICO score is subject to variations, depending on the credit report pulled by the lender. Each model assigns a weight to various factors culled from your credit report, and some models may prioritize certain factors over others. For example, when you apply for a home loan, lenders will assess your Fico 5 credit report, while credit card companies will likely use your Fico 8 credit report.

Variance in FICO Scores

Different FICO models exist because credit reports carry different weights. Therefore, the critical factors for a specific loan will influence its credit score more significantly. For example, if you have an excellent repayment history on a previous mortgage, it will positively impact your score on a FICO 5 mortgage report. Credit card companies that use FICO 8 will give precedence to your previous credit card history. Meanwhile, auto dealers will use the Fico-2 report, and your previous auto history will weigh heavily on your score.

To access your different FICO scores, sign up for an account at www.myfico.com.

Vantage Credit Score

The Vantage Score scoring model competes with the FICO scoring model and is developed by the three major credit reporting agencies - Equifax, Experian, and TransUnion. The Vantage Score is not as widely used as the FICO model. However, credit monitoring websites frequently use Vantage to give free credit reports. While FICO has been in use since the seventies, Vantage is a newer model gaining popularity in some sectors, such as personal loans and car lending.

Accuracy of Vantage Score

The Vantage Score can be accurate depending on the context. Since it is less commonly used for lending purposes compared to FICO, it may not be sufficient to calculate your actual lending score. A credit score's accuracy is only relevant to your ability to obtain a loan, and FICO is the most widely recognized credit scoring model. However, the Vantage Score is a good general gauge of your creditworthiness, especially since FICO scores come with a price tag or require lenders to pull your credit reports.

It is highly likely that in the next 5-10 years, many lenders across the country will adopt the Vantage scoring model, given its ability to provide the best scoring models based on today's standards. The FICO scoring model, on the other hand, may be outdated and may not give the user a clear representation of their credit scores. Credit reporting agencies have vast data collection capabilities, and they can provide the best scoring models when required.

Understanding a Good Credit Score

Both FICO and Vantage models range from 350 to 850, with 850 being the best, and 350 the worst score possible. It is crucial to know where you stand when working to achieve the highest scores. The following score thresholds provide valuable insight into your progress:

1. Bad Credit: 620 or below

If your score is below 620, it is considered bad credit. With no or little credit history or high-balance credit card accounts, building your credit score involves making timely payments on ten active revolving credit accounts. The Credit Builder Card or OpenSky Credit Card can assist you in building a good credit score. Upon reaching the 620 credit score range, you may qualify for an FHA home mortgage.

2. Fair Credit: 640-680

Scores in this range indicate established credit but may contain derogatory marks or accounts and high balances on credit cards that need paying down. Newly opened accounts may also temporarily drop scores. However, don’t panic as the scores will eventually return.

3. Super-prime Credit: 740+

An excellent credit score, 740+, is considered "super-prime," with the best interest rates for loans. Congratulations if your score is over 740, as you are among the 20% of the US population in this category. Making timely payments and keeping revolving credit card accounts paid will keep you in great shape.

What Credit Score Do You Need to Buy a House?

The required credit score for buying a house is dependent on the type of mortgage loan you would like to apply for. Mortgage lenders have different eligibility standards, but most adhere to similar requirements and criteria. The three common mortgage loan types are conventional loans, FHA loans, and VA loans.

Conventional Loans

Conventional loans are the most popular loans, similar to VA loans, that offer lower interest rates and no need for private mortgage insurance (PMI). The debt-to-debt ratio should not be more than 43% and credit score requirements for this type of loan is approximately 640.

FHA Loan

For an FHA mortgage loan, a credit score of 580 to 619 is acceptable. Remember that all lenders are different, so if you have a credit score within these limits, you should find lenders with the best financial options for you. Do keep in mind that PMI is required for at least 11 years, so it is an additional cost to consider. However, FHA loans offer lower down payment requirements (as low as 3.5% of the purchase price) with a higher debt-to-income limit of up to 50% than a conventional loan.

VA Loan

For the VA loan, there is no minimum credit score requirement, but typical eligibility criteria include checking for any prior default loans, government-owed past-due debts, and military service. The VA loan offers low interest rates and usually does not require a down payment. It is an ideal option for veterans to take advantage of.

Determining the Appropriate Credit Score to Secure an Auto Loan

When purchasing a car, it's crucial to keep in mind that your credit history, rather than your credit score, plays a more significant role in determining your eligibility. While a better credit score is essential, the interest rate you qualify for is more influenced by your current and past credit behaviors. Creditors assess the risk of extending credit by scrutinizing your credit history when you apply for a car loan. Therefore, a person with a current or previous auto loan history that includes late payments or repossession will find it more challenging to be approved for a loan than someone who doesn't. Though some lenders, especially bad credit or special finance lenders, qualify virtually anyone with a poor repayment history for a car loan, they impose special conditions like charging an extra dealership fee or requiring a higher down payment. Consequently, the dealership will select the car you can afford since they have a higher markup for that car to cover the fee. In light of this, having equity or a down payment is crucial when purchasing a car on credit.

Credit Score Requirements for Auto Financing

Since there isn't an exact credit score that guarantees approval due to numerous other qualifying factors, such as those mentioned above, an ideal credit score of above 680 increases your chances. Any credit score below this can potentially lead to higher interest rates since you pose a higher risk to the lender. Based on the current example below, we can see how credit scores affect the interest rates charged:

1. A person with a credit score of 720 or higher pays an average interest rate of $5,500 on a loan.

2. A person with a credit score of 680 or higher pays an average interest rate of $6,600 on a loan.

3. A person with a credit score of 650 or higher pays an average interest rate of $8,100 on a loan.

4. A person with a credit score of 615 or higher pays an average interest rate of $10,200 on a loan.

5. A person with a credit score of 580 or higher pays an average interest rate of $13,900 on a loan.

6. A person with a credit score of 580 or higher pays an average interest rate of $15,300 on a loan.

Based on this data, it's clear that the lower your credit score, the higher the interest rate you will pay, which will ultimately impact your credit score.

Effective Ways to Increase Your Credit Score

To improve your credit score, you need to be patient because it takes time and effort. Resist the temptation to make poor decisions that can worsen your credit score. Here are some actionable tips to build your credit score:

1. Open 3-5 revolving credit accounts:

Revolving credit is a great option to maximize your credit scores. If you have limited credit or want to rebuild it, building credit by getting a large loan takes a lot of effort. Therefore, secured credit cards like Open Sky and Credit Builder Card are recommended as they focus more on your ability to pay the card on time, rather than your credit score. Revolving credit makes up 30-35% of your overall credit score, so this is the best option to help build credit scores quickly. To ensure increase of your credit score, pay your balance on time and keep it at $5-10, and limit the card use to small purchases like gas or groceries.

2. Raise your limits:

Requesting a credit limit increase for your credit cards can quickly help increase your overall credit limits and lower your credit utilization percentage, which commonly hurts your credit score. To request an increase, you can do it online through your online portal or contact your credit card company and request a "Credit Limit Increase." It is important to note that credit card companies usually approve a credit limit increase after seeing 7-15 months of excellent payment history on a credit card.

3. Pay down your balances:

Keeping your balance low and close to zero is critical, as high balances and credit cards that are maxed out can negatively affect your overall credit score. To avoid this, only use your credit cards for small purchases and leave about a $1-5 balance on your credit cards when you pay your bill each month. If you currently have high balances, have a game plan to take an “x” percentage of your paycheck each month to pay the credit card down. Remember, your credit card spending habits significantly affect your overall credit score, so limit the use of your credit cards and try to pay off your balances on time to increase your credit score.

Advice from Joe

It's common for people to experience credit difficulties at some point in their lives. However, it's important to take your credit situation seriously and dedicate time and effort to improving it. Unfortunately, many people with bad credit get trapped in a cycle of credit problems that never seem to end, making it seem impossible to rebuild their credit. Building a great credit score requires hard work, but those who prioritize their credit and spending habits will ultimately succeed. One way to start is by creating a budget and working on any bad spending habits, as this will positively impact your credit score. If you need guidance or assistance with your credit score, including credit repair, feel free to contact my office at www.asapcreditrepairusa.com.

Key Points:

• Poor credit situations are common and can be improved with time and effort.
• It's easy to feel stuck in a cycle of bad credit, but it's important to prioritize your credit and spending habits.
• Creating a budget and addressing any bad spending habits is a good starting point.
• Contact www.asapcreditrepairusa.com for assistance with your credit score or credit repair.