It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? A lot of people might not be aware of this, and may end up searching endlessly for the "best" credit score, only to find varying and confusing information online. As someone who has been heavily involved in financial literacy and credit repair for over 15 years, I have seen firsthand how misleading information on this topic can be, and I would like to offer up some raw and honest advice. My name is Joe Mahlow, and having helped over 20,000 clients turn their credit scores around, I hope to equip you with the information and tools necessary to do the same. So, without further ado, let's dive into the world of credit scores.

Contents:

Exploring Different Credit Score Models

Understanding Good Credit Scores

What Credit Score is Needed to Secure a Mortgage Loan?

Credit Score and Auto Loans

Tips for Boosting Your Credit Score

Joe's Perspective on Improving Credit Scores

Exploring Different Credit Score Models

Understanding different credit score models is important as it affects how your credit score is calculated. There are two primary models that you should be familiar with, the FICO model and the Vantage model. In this article, we will explore each model in detail and explain why there are multiple FICO scores.

FICO Credit Score

The FICO model is the most widely used scoring model that comes in eight different models, with FICO 2 to FICO 10. The variations among the scores are due to the different factors that are important to various lenders. For example, if you apply for a mortgage loan, the lender will request the FICO 5 credit report, whereas if you apply for a credit card, the lender will run a credit check on FICO 8. The weight given to the credit score depends on the lending criteria.

Vantage Credit Score

The Vantage model is a new scoring model, developed by Equifax, Experian, and TransUnion, that competes with the FICO model. While FICO dominates the lending sector, Vantage is gaining popularity for non-lending areas, including personal loans and auto lending. Credit monitoring websites frequently provide free Vantage scores to give customers a general idea of their FICO score.

Accuracy of Credit Scores

While Vantage is a good indication of your overall credit score, FICO is still the most widely recognized scoring model by lenders. However, in the next five to ten years, it is likely that Vantage will be used more widely by lenders due to its superior methodology of scoring based on current credit score standards. It is essential to keep track of your credit scores by signing up for a MyFICO account to monitor different FICO scores.

Understanding Good Credit Scores

Credit scores are determined by both the FICO and Vantage models, with a range from 350 to 850. A score of 350 is the lowest, while 850 is considered the highest and you should aim for this when setting your goals to have the highest score. It's critical to have an understanding of the score thresholds, so we've broken them down for you below.

1. 620 or below:

A score below 620 indicates poor credit, likely due to a history of adverse credit or high-balance credit card accounts, or simply having no credit cards at all. Improvements can be made by having ten active revolving credit accounts open and making timely payments. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can be good options to help build credit. At 620, you may qualify for an FHA home mortgage.

2. 640-680:

This range is considered fair for good credit. Scores in this range indicate established credit, but there may be some derogatory marks or accounts on your credit report, and high balances on credit cards should be paid down. Newly opened accounts can drop your score temporarily, but they will return.

3. 740+:

Any score over 740 is considered "super prime" and puts you in the top 20% of the US population. This score will give you the best interest rates for most loans. Always make timely payments and keep your revolving credit card accounts paid to preserve this score. Congratulations!

What Credit Score is Needed to Secure a Mortgage Loan?

When it comes to purchasing a home, the necessary credit score varies based on the type of mortgage loan desired. Mortgage loan requirements and guidelines tend to vary based on federal regulation and government backing. The most common types of mortgage loans are conventional, FHA, and VA loans.

Conventional Loans

Conventional loans are the most popular loans and represent the optimal "savings" loan option for homebuyers. Conventional loans typically have more lenient downpayment requirements and lower interest rates. They do not require private mortgage insurance (PMI) which lowers monthly payments. These loans generally require a credit score of 640 or higher, and a debt-to-debt ratio that does not exceed 43%.

FHA Loans

The FHA mortgage loan is a good option for those with a lower credit score, typically ranging from 580 to 619. Prospective borrowers should note that different loan programs have varying qualification standards. PMI must be kept for at least 11 years under an FHA loan. This loan offers a higher debt-to-income ratio limit of up to 50% and requires a smaller downpayment of just 3.5% to qualify, but generally carries a higher interest rate.

VA Loans

Qualification for a VA loan is not based on a particular credit score requirement. While credit scores will be taken into account, previous defaulted loans and government-owed past-due debts carry more weight. Eligibility for VA loans requires a military service background or history, which includes serving in the military for a minimum of 181 days, serving for 90 consecutive days during wartime, or serving six years with the National Guard. Additionally, eligibility can be granted to a spouse of a military member who lost their life during active duty. VA loans typically have the most affordable interest rates and do not require a down payment making buying a home more achievable in the long term.

Credit Score and Auto Loans

When it comes to getting approved for an auto loan, your credit history is the most critical factor to consider. Although having a high credit score is beneficial, it is not the only determinant of the interest rate you will qualify for. For instance, lenders will assess your previous and current credit history to understand the level of risk associated with lending you money. Having a problematic credit history such as late payments or repossession can make it more difficult for approval compared to someone with a clean credit slate. Even with bad credit, some lenders may still qualify you for a car loan, but they will require you to meet specific criteria, such as a higher down payment and dealership fees. The dealer will charge a fee to cover the risk associated with approving you for the loan, and they may select the vehicle you are approved to buy because of the increased mark-up on the car.

While there is no set credit score that guarantees approval for a car loan, having a score above 680 is considered ideal. A lower credit score may increase your interest rate and pose a greater risk to the lender. As can be seen from recent statistics, those with higher credit scores tend to pay less interest overall than those with lower credit scores. For example, someone with a credit score of 720 or above would pay an average of $5,500 in interest on a loan, while someone with a credit score of 580 or above would pay $15,300. It's essential to have equity or a downpayment when buying a car on credit to have the leverage you need to negotiate for lower rates.

Tips for Boosting Your Credit Score

Improving your credit score does not happen overnight, but with some effort and patience, you can do it. Here are some steps that you can take to achieve a higher credit score:

1. Open 3-5 revolving credit accounts

Revolving credit, such as credit cards, can help maximize your credit scores quickly. If you have limited credit, starting with a secured credit card like Open Sky or Credit Builder Card would be a good option for a higher chance of approval. Revolving credit accounts make up 30-35% of your overall credit score. Keeping your balance at $5-$10 per payment and limiting the use of your card to small purchases such as gas or groceries are some ways to improve your score.

2. Raise your limits

Requesting a credit limit increase can increase your overall credit limits and lower your credit utilization percentage. Call your credit card company and request a “Credit Limit Increase.” They will usually require you to fill out some information, including your current income, and review your payment history before making a decision.

3. Pay down your balances

Paying down your balances and keeping them low is crucial to improving your credit score. Leave about a $1-$5 balance on your credit cards when you pay your bill each month. If you have high balances, make a plan to pay an “x” percentage of your paycheck each month to pay down your credit cards. Limiting your credit card usage and avoiding running up the balance can help improve your score.

Remember, building a good credit score takes time, effort, and consistency. Don’t make irrational or bad decisions with your credit; instead, take the time to adopt healthy financial habits that can strengthen your creditworthiness.

Joe's Perspective on Improving Credit Scores

We've all experienced a less than ideal credit history, but if you commit to improving your finances and credit situation, you can quickly see significant improvements in your credit score. Unfortunately, most individuals burdened with bad credit assume that they are destined to struggle with this issue their entire life. However, developing a fantastic credit score takes effort; those who dedicate time to prioritize and mend their credit score and spending habits will eventually succeed. Your journey to achieving a better credit score should begin with creating a budget and changing any detrimental spending habits you have. By doing so, you can directly impact your credit score positively. For further insight into credit, please read this article, and for guidance and help with your credit score or credit repair, please reach out to my office today at www.asapcreditrepairusa.com.

Key Points:

- Commit to improving your finances and credit situation to see significant improvements in your credit score.

- Dedicate time to prioritize and mend your credit scores and spending habits.

- Begin your journey with creating a budget and changing any bad spending habits.

- Seek guidance and help with your credit score or credit repair through Joe's office at www.asapcreditrepairusa.com.