In the popular credit score spectrum of 300 to 850, when does a score start breaking bad? You might read 670 or 630 or 600, but each lender makes its own evaluation of credit scores considered to be risky.
For example, you’ll usually need a credit score of at least 620 to get a conventional mortgage (one not backed by a government agency), but someone with a credit score as low as 500 to 579 may be able to qualify for an FHA or VA loan.
One thing’s for sure: A borrower with a “bad” credit score has limited choices and will likely pay substantially more over a lifetime than one with a higher score, thanks to higher interest rates charged and less favorable terms.
The Highs and Lows of Credit Scores
The most commonly used credit scores are calculated by FICO® and VantageScore®, but the two companies rank scores a little differently.
|FICO® 8||VantageScore® 3.0|
To complicate matters, lenders may choose from multiple scoring models and industry-specific scoring models, which makes it tricky to know which one you’re being evaluated on. And your credit scores vary—-yes, you have multiple scores.
A score in the 600s is typically high enough to qualify for some loans and credit cards. And generally, the best rates go to borrowers with scores in the mid-700s and above.
What’s the nationwide average? “Good.” As of this writing, Americans had an average FICO Score of 711 and VantageScore of 688.
Wait. What Exactly Is a Credit Score?
A credit score is a number that summarizes a bunch of information about your financial history in order to help lenders gauge the risk of extending you credit. The higher your credit score, the more confident they are that you’ll repay your debt, and on time.
Your credit score is based on factors like how often you pay your bills on time, how many loans and credit cards you have, your debt relative to your credit limits, and the average age of your accounts. It also considers negative financial events such as judgments, collections actions, and bankruptcies.
Three major credit reporting agencies, TransUnion, Equifax, and Experian, compile the information on your history of borrowing, and then a company like FICO or VantageScore translates that data into a number.
Your credit score is just one factor that lenders consider when evaluating your application for things like a loan, but it carries a lot of weight.
Why Is a Credit Score a Big Deal?
Your credit score not only affects your odds of approval for loans and credit cards; it plays a big role in determining the interest rate and repayment terms you’re offered.
As noted, your credit report holds information about your credit activity and current credit situation, like loan paying history and the status of your credit accounts: In short, your credit history.
Here are some of the things that take your credit history into consideration:
• Credit cards
• Car loans
• Home loans
• Personal loans
• Private student loans
• Federal PLUS loans
• Car insurance premiums (in some states)
• Homeowners insurance
In addition, your credit history may be weighed during a job or rental application.
Nonprime borrowers—generally defined as those with credit scores of 660 or under and who have negative items on their credit report—shouldn’t expect to get the lowest rates or most ideal terms when procuring a home or car loan.
For example, the interest rate on a subprime 30-year mortgage can be double or triple the average rate. A bigger down payment is usually required, and the repayment term may stretch to 40 or even 50 years, so the amount of interest paid over the life of the loan can be extraordinary.
As for auto loans, Business Insider summarized the stark differences in loan rates by credit score for new and used car purchases, according to Experian, which tracks auto finance trends each quarter.
What If I Have a Low Credit Score?
If you fall into the so-called bad credit score range, remember that it isn’t set in stone.
There are steps you can take to help build your credit. It won’t happen overnight—any promise of a quick fix could be a scam.
But with a sustained effort, you may see improvement within six months to a year, according to the Consumer Financial Protection Bureau (CFPB), a government agency. Here are some ideas.
Paying Bills on Time
An effective way to improve your creditworthiness in the eyes of lenders is to pay all your bills by the due date, every single time. If you have been late with any payments, consider getting caught up.
If you tend to forget bills, consider brushing up on how autopay works and set up payments through an app, a checking account, or the entity billing you. Putting reminders on a paper or electronic calendar can help as well.
Paying Attention to Revolving Debt
Part of your credit score depends on the amount of credit you have relative to the amount you’re using. This is known as your credit utilization ratio. (The ratio is derived by dividing your total credit card balances by your credit limits.)
It’s generally a good idea to use no more than 30% of your total available credit.
The CFPB says that paying off credit card balances in full each month helps to keep the ratio low and strengthen a credit score.
Credit utilization involves credit card and other revolving debts, not installment loans like mortgages or student loans.
Checking Credit Reports and Scores
Between identity theft on the rise and the possibility of human error, it may be worth reviewing your credit report for any unfamiliar charges or records, since the information in your credit report is used to generate your credit scores.
You can order a copy of your credit report from each of the three major reporting agencies for free at AnnualCreditReport.com. Look for mistakes in your contact details, accounts that don’t belong to you, incorrect reports of late payments, or accounts you closed being shown as open.
Credit reports do not show credit scores. How to get credit score updates then? A few options:
• Buy your FICO Score from myfico.com.
• Get your FICO Score for free from Experian.
• Look for your scores on a loan or credit card statement.
• Sign up for SoFi Relay, which provides weekly credit score updates and tracks all of your money in one place at no charge.
Many factors affect your credit score.
Check yours in the SoFi app.
Closing and Opening Credit Cards Carefully
The average age of your accounts plays a role in your credit score, so you may want to keep some of your oldest cards open, even if you don’t use them often. Remember that closing cards also reduces your available credit, affecting your credit utilization ratio.
Opening cards affects your credit score as well. Every time you apply, the credit card company runs a hard inquiry on your credit, and your score takes a slight hit. Applying for a bunch of cards in quick succession can make it look like your financial situation has taken a turn for the worse.
Building on a Limited Credit History
Millions of Americans have no credit score because they don’t have enough of a history to calculate one. If this is your situation, you have at least two options.
You may want to consider taking out a secured credit card that will allow you to access a modest line of credit by putting down a deposit.
Making on-time payments is one way to potentially build credit over time that eventually may help you qualify for unsecured credit cards or loans with more favorable terms.
Another option is a credit-builder loan, offered by some smaller financial institutions. The lender loans you a particular amount of money, which it deposits into an account it controls. You make payments on the loan, and the lender reports them to the three main credit bureaus. When the loan is paid off, the lender gives you the money.
You could also ask a friend or family member to add you as an authorized user to their credit card account. An authorized user can use the account but does not have any liability for the debt.
What is a bad credit score? That can mean a fair or poor credit score, as defined by FICO or VantageScore, which is south of the American average. It can mean loan denials and high interest rates, but with dedication the tide can be turned.
If you’re struggling to reduce high-interest credit card balances or other debt, an unsecured personal loan may come in handy. SoFi fixed-rate personal loans can be used for almost any purpose.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s