Low credit scores or those with poor credit ratings are more likely to be denied mortgages, personal loans, and car loans. 300 is the lowest possible FICO Score or VantageScore for most credit scoring models.
We’ll show you how low scores can affect your finances.
What causes a low credit score?
You can have a poor credit score due to a variety of factors, including:
- Minimum credit history. Your score may be lower if you don’t have a lengthy credit history. Experian reports that 18- to 23-year-olds, the age group with the most credit history, had the lowest credit scores as of October 2020.
- High credit utilisation. The credit utilisation rate is the ratio of your credit use to your available credit. It accounts for 30% of your credit score. Using too much credit can lead to a lower credit score.
- Late payments. Your creditor might report late payments to one of the three major credit agencies — Experian Transunion, Equifax. It is crucial that you pay on time. Payment history accounts for 35% of your credit score.
- Collections. Your original creditor can sell your debt to a collector or collection agency if you fail to pay a credit obligation. Your debt will be reported to the credit bureaus once it has been sent to collections. You may need to wait for up to seven years to have a collection removed from your credit report .
- Bankruptcy. If you see a bankruptcy on your credit report, it can have a negative impact on your credit score for as long as 10 years. The amount of time that it remains on your credit reports depends on whether you have filed for Chapter 13 bankruptcy (upto seven years) and Chapter 7 bankruptcy (10 years).
There are risks associated with having the lowest possible credit score
A low credit score can cause financial problems in many ways.
- Potential loan denials. A lender won’t approve you if you have poor credit. This will mean that your loan application with a cosigner is likely to be denied.
- Higher down payment and security deposit. If you do not meet the lender’s credit requirements, some lenders may charge you a higher amount for your down payment. If your credit score is less than 580, then you will need to pay 10% down instead of the standard 33% Federal Housing Administration (FHA), loan amount. A landlord might ask for a higher security deposit if you rent an apartment.
- Higher interest rate. To compensate for increased risk, a lender may charge you a higher rate if you are approved for a loan. This can increase borrowing costs and reduce the amount you have available for other financial goals.
- More fees. You may have to pay higher interest rates and origination fees.
How to improve your credit
These four steps will increase your chances of getting loans and secure a lower interest rate.
1. Create a Credit History
You can build credit if you have a poor credit history by getting a credit-builder loan or secured card. You will need to deposit a security deposit for both options. After repaying the loan, or cancelling the credit card, you’ll receive the deposit back.
You could also ask someone with excellent credit and a history of credit to add you as an authorised user to their credit card. Your credit score is affected by how long you have had credit history. Credit card companies may report this information to improve your score.
2. Paying your bills on time is possible
Payment history is the most important factor in credit scores. It accounts for 35%. This negative information may stay on your credit reports for as long as seven years if you default on a payment or put your debt into collections. You can avoid damaging your credit score by paying all your bills on time.
3. Repay your debt
Your credit score is 30% affected by how much debt you have. Your credit utilisation ratio can be lowered if you reduce your debt. This will improve your credit score. To achieve this goal, you can use the snowball and debt avalanche repayment options.
The debt snowball approach involves paying the least amount on your remaining debt while putting the money towards your smallest debt first. The debt avalanche approach allows you to put the most money towards your highest-interest debt and pay the least amount on your remaining debt.
Review your Credit Reports
You should check your credit reports for errors at least once per year. Your credit score could be affected if you provide incorrect or misleading information. You can correct an error on your credit report by disputing it with every credit bureau that has it.
You can view all three of your credit reports for free by visiting AnnualCreditReport.com. Covid-19 allows you to view your credit reports every week until April 20, 2022.
Common Credit Score Ranges
Although credit scores can vary widely, the most popular credit scoring models for FICO or VantageScore have scores ranging from 300 to 855. Each model has a different score, so the more you have to lower your score, the less likely you will be able to get financing. FICO has a 300- 579 credit range; VantageScore has a 300- 499 credit range.