Credit scores help lenders evaluate if they want to do business with you. FICO® Scores, which range from a low of 300 to a high of 850, are the most widely-used type of credit scores. However, other scoring models may also use the 300 to 850 scoring range. While 300 is the lowest credit score, 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 double that score to get approved for some types of loans.
The mortgage data service company, Ellie Mae, reports that in the spring 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 typically have more lenient qualifying standards, yet just 6% of FHA-backed mortgages in early 2018 had a FICO® Score below 600.
According to Experian Automotive, in the first 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 719, and the average score for used car loans was 655.
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 manage to 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.
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. Nor will working with a credit repair company 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. Over time, you will likely see your low scores rise.
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.