Credit scores help lenders evaluate whether they want to do business with you. The FICO® Score*, which is the most widely used scoring model, falls in a range that goes up to 850. The lowest credit score in this range is 300. But the reality is that almost nobody has a score that low. For the most part, a score below 580 is considered "bad credit." The average FICO® Score in the U.S. is 704.
I Have a Low Credit Score. Why Does It Matter?
If you have a very low credit score, you may find it difficult to qualify for credit cards and loans, or you may be required to pay a higher annual percentage rate (APR) or additional fees.
When you apply for a loan or credit card, lenders want to know if you will be a responsible borrower who stays on top of payments. Credit scores are an important way businesses can get a sense of how good (or bad) you are at repaying your debts.
If I Have a Low Credit Score, Will I Automatically Be Turned down for a Loan?
A low credit score is not the only factor businesses consider when you apply for a credit card or loan. For instance, if you have a lot of savings, a stable income or don't carry a lot of existing debt, you may still be approved for the loan, even at a decent rate.
But working to improve low credit scores increases your chances of being approved. Even though the lowest FICO® Score is 300, you often need to more than double that score to get approved for some types of loans.
Mortgage data service company Ellie Mae reports that in the fall of 2018, just 1% of borrowers who were approved for conventional mortgages had a FICO® Score below 600. Mortgages insured by the Federal Housing Administration (FHA) typically have more lenient qualifying standards, yet just 6% of FHA-backed mortgages in late 2018 had a FICO® Score below 600.
According to Experian Automotive, in the third quarter of 2018, borrowers with credit scores below 500 represented less than 4% of new auto loans. The average credit score for new car loans was 714, and the average score for used car loans was 661.
Even if you are approved for a loan with a low credit score, you will likely end up paying much more in interest over the course of the loan. For example, the APR for a 60-month car loan, if your FICO® credit score is in the low 600s, will likely be more than double the APR you would be offered with a score of at least 720.
How Can I Improve My Credit Scores?
You are never stuck with a bad credit score. Work on your financial habits and you can improve your credit scores over time.
Paying your bills on time, even if you pay just the minimum amount due, accounts for 35% of your FICO® Score. Set up automated bill pay to avoid late payments.
Your credit utilization ratio is another important credit-scoring factor to be aware of. This takes into account how much of your total available credit you are using on a monthly basis. Your credit utilization ratio accounts for 30% of your FICO® Score. Focus on paying down your balances will help to lower your utilization rate.
You might also want to consider a credit-builder loan to help improve your credit.
Is Working with a Credit Repair Company a Good Way to Fix a Low Credit Score?
Working with a credit repair company may not be worth the cost. Credit repair companies typically charge you a fee to "help" you with steps you can do on your own for free. Working with a credit repair company will also not help you raise a low credit score more quickly.
If you want to raise low credit scores, make it a priority to pay your bills on time and pay down your balances. Checking your credit reports for mistakes or evidence of identity theft is also important, as they can cause your credit score to be lower than it should be. You can check your credit reports for free once a year.
Over time, paying your bills on time and monitoring your credit reports will likely help your low credit scores rise.
Want to instantly increase your credit score? Experian Boost™ helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service is completely free and can boost your credit score fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on December 21, 2018, and has been updated.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.