Credit scores give lenders the ability to evaluate your spending habits so they can tell whether they want to do business with you. The most widely used credit scoring model, the FICO Score, consists of a range that is capped at 850.
With a credit score this high, you will have the most flexibility and accessibility to get the service you need from lenders. Getting a loan is almost a sure thing when your credit score is in the 800s. Conversely, a credit score on the lower end of the spectrum will make it incredibly difficult to get the financial help you need.
The lowest credit score possible is 300. In reality, though, there aren’t many people who have a score that low. More specifically, any score below 580 will be considered a bad credit score, while an average score is 704.
What Happens if You Have a Low Credit Score?
If your credit score is really low, you may have a hard time qualifying for services like credit cards and loans. If you qualify, you’ll likely have to pay a higher APR (annual percentage rate) or additional fees and charges.
When you apply for a credit card or loan, lenders need to know that you will be a responsible borrower. They want to know if you’re someone who will remain committed to making payments. By checking your credit score, lenders can get a pretty good idea if you can be trusted to repay your debts in a timely manner.
With that said, your credit score isn’t the only thing businesses look at when you apply for a credit card or loan. They also consider things like your current savings. As such, if you have respectable savings, steady income, and you don’t have a lot of debt, you could still get approved for the loan at a decent rate.
If you want to get the best loan options and rates, however, you’re going to want to be working to rebuild your low credit score. In doing so, you can effectively improve your chances of being approved by lenders and financial institutions.
And although 300 is the lowest FICO Score, you’re likely to need at least double that to get approved for many types of loans. Take Ellie Mae, for example. This mortgage data service company reported in 2018 that only 1% of borrowers who were approved for mortgages carried a FICO Score under 600.
If your credit isn’t in the best shape and you’re hoping to get approved for a mortgage, the FHA (Federal Housing Administration) is typically more lenient in its qualifying standards. That said, only 6% of borrowers of FHA mortgages in late 2018 carried a FICO Score of less than 600.
And as revealed by Experian Automotive in late 2018, less than 4% of new auto loans represented borrowers with credit scores of less than 500. Furthermore, the average credit score of borrowers receiving new car loans was 714, while the average credit score of borrowers getting used car loans was 661.
As you can see, there are very few people with low credit scores who ultimately get approved for loans. And even if you do get approved with a low credit score, there’s a very good chance that you’ll end up paying considerably more in interest throughout the course of your loan.
A good example of this is if you’re buying a car with a score in the low 600s. On a 60-month car loan, your APR is likely going to be more than twice what you would pay with a credit score of 720 or above.
As such, you should be doing all that you can to ensure your credit is in good shape. If you are struggling with a low credit score, you will do well to seek out financial counseling to help you restore your score. In doing so, you can look forward to more loan options, payment flexibility, and lower rates.
How to Improve a Low Credit Score
It’s important to understand that no one is forced to have a bad credit score. You can effectively improve it by working to better your spending habits. If you are committed and stick with it, you will see your score improve over time.
One of the best things you can start doing right away is making sure that your bills are paid on time. Even if you’re only able to pay the bare minimum that’s due, you can slowly improve your credit score. In fact, timely bill payments account for 35% of your credit score.
As such, you should set up automated payments to avoid being late. This will ensure that your bills are always paid when they’re supposed to be while helping to raise your score at the same time.
Your credit utilization ratio is also an important factor that affects your credit score. This ratio looks at how much of your total available credit you use each month. What’s more, 30% of your credit score is based on your credit utilization ratio.
To improve this ratio, you’ll need to work on paying down your debt and outstanding balances. This will play a big role in improving your credit score over time.
Use Your Resources Wisely
Many people fall into the trap of working with a credit repair company. However, this is often not worth the extra out-of-pocket cost. These companies usually charge you a fee to tell you what you can find out online for free. Moreover, your credit score won’t improve any faster by working with a credit repair company.
As we mentioned, the best thing you can do is get into the habit of paying your bills on time and working to pay down your balances. It may also prove beneficial to examine your credit report for possible mistakes.
And if there’s evidence of identity theft, it will likely cause your score to be lower than it should. Fortunately, you can check your credit report once a year without cost.
Can I Get a Loan With the Lowest Credit Score?
A credit score of 300 will likely disqualify from getting any kind of loan. But if your score is in the lower averages, you may be able to take advantage of all kinds of services – these range from loans to credit cards that are designed for people with a low score.
If you have a poor credit score, you can benefit from getting a secured credit card. You might need a co-signer, but you can start working to improve your credit score with this card. You put the money in an account, so there’s no way to overdraw on the card.
However much money you want access to is what you put into the account. Over time and with on-time payments, you will see your credit score gradually improve. It’s worth mentioning that, depending on the bank, you may not necessarily need a higher credit score to qualify for help.
Many banks look at your monthly income, job history, and other income sources to determine your eligibility. It’s understandable if your low credit score makes you feel like you’re out of options. The truth is, however, that you’re not.
Only 5% of consumers in the United States have a credit score in the 300 to 499 range, while 20% of consumers are below 599. It’s clear, then, that there are many others like you who struggle with credit issues.
Fortunately, there is some light at the end of the tunnel. Thanks to greater access to credit scores in the modern era, it’s easier than ever to start an improvement plan. The important thing to remember is that it’s going to take time.
You’re not going to turn your credit score around overnight. The key is to stay the course and remain focused and committed to improving your money management. In doing so, you will be well on your way to getting out of your credit slump.
It’s going to take practice, but it’s definitely possible. Many people have successfully turned their lives around by staying dedicated to resolving their spending issues. There’s no reason that you can’t do the same.
We hope you found this guide helpful in your quest to restore your credit score. If you are interested in learning more tips on improving your financial status, we encourage you to check out our blog page. You’ll find a wealth of useful resources that are sure to benefit you.
If you have any questions that our Seek Capital experts can help you with, please don’t hesitate to contact us. We specialize in securing loans for personal and business purposes and will be happy to see if you qualify for the funds you need to meet your goals.