- 1 What Does A Low Credit Score Mean?
- 2 How to Fix a Poor Credit Rating
- 3 Ranges of Credit Scores
- 4 A Bad FICO Score
- 5 A Bad VantageScore
- 6 What Your Credit Score Can Do to You
- 7 Why Having a High Credit Score Is Important
- 8 What are the disadvantages of having a poor credit score?
- 9 Conclusion
What Does A Low Credit Score Mean?
Getting approved for a loan may be challenging if you have a low credit score. You’ll probably pay a higher interest rate if a lender accepts your loan. What constitutes a negative credit score varies depending on the lender since they often use various credit scoring algorithms or internal standards. However, using credit score ranges from the two most well-known credit scoring models—VantageScore and FICO—we can give you a sense of how good or poor your score is. Additionally, we’ll demonstrate how to raise your credit score.
How to Fix a Poor Credit Rating
You may take action to raise your credit score if it is low. The following five steps are yours to take:
- Examine your credit history. The data in your credit report is what determines your credit score. Your credit score will suffer if it contains bad information. If there are any reporting errors, reviewing your credit report at least once a year will help you find them. Visit AnnualCreditReport.com to see your reports for free each week until April 20, 2022.
- Remit your payments on time. Payment history is a significant consideration for both credit scoring algorithms. Your credit score might increase or be built if you pay off your bill on time. But payments that are 30 days overdue might seriously harm it. Enrolling in autopay is one approach to guarantee that you pay your fees on time.
- Take into account obtaining a credit-builder loan. A credit-builder loan is intended to increase your credit score. Unlike typical loans, the lender doesn’t give you a large chunk of money. Instead, you must fund an account with regular monthly payments. On this kind of loan, lenders continue to charge interest, but you get it back in certain situations after the loan’s term is through.
- Submit a co-signer loan application. Consider applying for a loan with a co-signer if you need a standard loan. A co-signer with good credit and income might improve your chances of getting a loan approved. Your score may rise if you make on-time loan repayments.
- Sign up to use a credit card as an authorized user. Adding yourself as an authorized user on a friend’s or family member’s credit card is another activity that requires assistance from another individual. Your score may increase if the individual who adds you has a solid credit history.
Ranges of Credit Scores
Creditors impose their requirements. However, these are standard guidelines:
- Excellent credit is 720 or higher.
- Good credit is 690-719.
- Fair credit is 630-689.
- Poor credit starts at 629.
In addition to your credit score, creditors may consider your income and previous obligations.
A Bad FICO Score
The FICO scoring methodology, the FICO Score 8, ranges from 300 to 850. Lower-scoring borrowers pose a greater risk to lenders. This model states that a credit score of 669 or below is not desirable. Scores below 580 are regarded as poor or bad, while those between 580 and 669 are considered fair.
Some lenders use additional FICO scoring models for certain loan types in addition to the FICO Score 8 model. Lenders could utilize your FICO Vehicle Score, for instance, if you apply for an auto loan. Higher scores indicate lower risk; this score goes from 250 to 900.
A Bad VantageScore
The range of the VantageScore credit scoring methodology is similarly 300 to 850. A credit score below 661, however, is considered to be poor by this methodology. Fair scores are between 601 to 660. Anything less than that is regarded as poor, awful (500 to 600), or very poor (300 to 499).
What Your Credit Score Can Do to You
Having a low credit score may harm your finances in several ways, including:
- An increase in interest rates. Lenders will often charge higher interest rates to compensate for the risk if your credit score is lower. Your borrowing expenses may rise dramatically if you are granted a high-interest rate loan.
- Failing to maintain a credit score that a lender requires. You could not satisfy a lender’s minimal credit score standards if your score is too low. For instance, lenders typically won’t allow applicants with FICO scores below 580 unless a co-signer is present. Additionally, some lenders may only accept applicants with excellent credit ratings.
- Renting a residence. The landlord may need a larger deposit when you attempt to rent an apartment. Some landlords may also demand you pay the first and final months’ rent in advance.
- Making a mortgage application. Higher down payments are often required to qualify for a home loan when you have bad credit. For instance, if your credit score is at least 580, a Federal Housing Administration (FHA) loan permits you to make a 3.5 percent down payment. You may still be eligible if it falls below that mark, but your required down payment will now be 10%.
- Using for a vehicle loan. It might be challenging to get the necessary funding if you need to apply for a vehicle loan. Lenders may demand a larger down payment, similar to a mortgage. Additionally, even though specific lenders for vehicle loans may offer no-credit-check loans, we don’t advise them due to their exorbitant rates.
- Prices for auto insurance. Certain vehicle insurance companies may charge you a higher premium if you have terrible credit.
- Bills for utilities. A utility provider will examine your credit when applying for a new account. You could be required to pay a refundable deposit if you have poor credit.
Why Having a High Credit Score Is Important
You may borrow money at reduced or 0% interest rates if you have a strong credit score, which is vital. For instance, if you have good credit, you can be eligible for a credit card with a 0% APR, which provides interest-free financing for a lengthy period. By using this kind of card, you may significantly reduce your interest costs. Transferring a balance from another high-interest card may help you get out of debt more quickly.
Additionally, you may be able to avoid paying certain security deposits and qualify for loans with smaller down payments if you have a decent credit score. This may allow you to save some money for other financial objectives and obligations.
Throughout your lifetime, having a solid credit score may result in savings of thousands of dollars.
What are the disadvantages of having a poor credit score?
It’s no secret that having sound finances might be difficult if one has a poor credit score. In particular, having poor credit may lower your quality of life by making it difficult (and more costly) to get specific necessities.
1. Credit cards and loans
Lenders often do a credit check when you apply for a new credit account. If your credit is bad, they may reject your application or offer you less favorable conditions and a higher interest rate.
The following credit kinds can be challenging for you to obtain:
- Bank cards
- Car loans
- Personal loans
- Personal credit lines
- Pay-for-your-student loans
What is the needed credit score to get approved for credit?
There is no predetermined point at which your credit score becomes too low to qualify for new loans since lenders establish their standards for credit scores.
For instance, there isn’t a minimum credit score needed to qualify for a mortgage or a vehicle loan. However, if your credit score is close to the lowest score imaginable, it will be tough for you to locate a lender that would work with you.
Furthermore, even if you are approved for a loan, the likelihood is that the interest rate would be so high that it is not worthwhile. Here are some advantages of having excellent credit for loans and credit card interest rates.
Insurance firms often perform credit checks when determining how much to charge you for a policy. They can see you as a high-risk consumer if you have a poor credit score and charge you more for insurance.
This is valid for several insurance policies, including life, auto, and house insurance.
It’s essential to keep in mind, however, that the score you see may not be the same as what insurance companies will see, as they sometimes employ unique “credit-based insurance ratings” that vary somewhat from regular consumer credit scores. A consumer credit score of 300 may not always equate to a credit score for insurance 300.
3. A residence
Before agreeing to rent to a potential tenant, some landlords verify their credentials. Although there isn’t a standard for credit scores, many landlords want to see a score of at least 640. When landlords examine credit, very few of them will rent to applicants with scores close to 300.
You can still rent from your landlord if you don’t have the required credit score by locating a co-applicant or providing a more extensive security deposit.
Having a poor credit score might make it challenging to advance financially. You’ll struggle to get the financing you need since lenders see you as a danger. Your borrowing expenses may also arise due to increasing interest rates and down payments. Your cost of living may also go up on top of that. The good news is that following some of the recommendations mentioned above may raise your credit score and increase your chances of getting a loan.