A credit score is a number calculated from your credit report, which keeps a record of all your accounts and activities related to your loans. Lenders use different kinds of credit scores to decide if a borrower is trustworthy and worth lending money to. This is the basis upon which financial institutions determine what credit terms to offer each borrower.
Two of the most popular scoring models in the U.S. are FICO Score and VantageScore. They are scaled from 300 to 850, where 300 is the lowest credit score. However, the reality is that this rating is very rare; few borrowers have a such low scores. Lenders consider borrowers with up to 580 points unreliable, meaning they have “bad credit.”
It is essential to understand that the criteria companies use to calculate credit scores are known. As a result, if you know them, you can influence them and improve your rating quickly and effectively. The earlier you start working on your credit scores, the faster you can get better offers from lenders and save hundreds of dollars on your APR.
Lowest Credit Score Explained
The credit score is a crucial metric that lenders evaluate before they give you a loan. However, does this mean you can’t get a loan if you have a score of 300? It doesn’t.
To borrow money from most lenders, you need at least double your score, which is 600 or more. For some types of loans, this number must be another 50–100 points higher because, for example, among all borrowers approved for conventional mortgages, only 1% has a rating below 600 points.
However, at the same time, the U.S. financial market has a sufficient number of companies that work with people with bad credit. Such organizations do not conduct credit checks before lending money to a borrower but look at other indicators.
For example, suppose you have a credit score of 300 but an income above $12,000-$20,000 and are officially employed. In that case, you have a slight chance of getting a payday loan from an organization that does not report to the credit bureau.
Of course, it will be difficult for you to get a large loan amount if you have a very low score, but there is good news. Once you want to change things up and get more FICO points, you can do so very quickly, as it only takes 1-2 years of doing the right thing to raise your score from 300 to 600.
What Is The Lowest Credit Score to Buy a House?
There are several home loans, each with different requirements for borrowers, namely:
- Conventional loans require a minimum borrower score of 620. For better terms and a low interest rate, however, lenders ask that the borrower have at least a 680-720 FICO score.
- Government VA loans may be an option for veterans or service members and their families with credit scores above 580.
- Meanwhile, another program that has government support, USDA Loans, offers mortgages to people with credit scores of at least 640.
Of course, lenders sometimes make exceptions and give home loans to people with bad credit scores. The problem with this is that they can provide home loans with interest rates twice as high as those for someone with a score of 620 or higher.
What Is The Lowest Credit Score For FHA Loan?
The program, backed by the Federal Housing Administration, allows lenders to worry less about their borrowers’ defaults because it protects them against possible loss. Because of this, financial institutions have lower requirements for borrowers who want a home loan through this program and, in most cases, work with those whose score exceeds 580.
Another advantage of this option is the ability to pay a minimum down payment. It is also one of the few ways to get an excellent loan for borrowers who have bankruptcy or other negative marks on their credit reports indicating severe financial problems. However, it is essential to note that, in this case, the borrower must also pay mortgage insurance.
Generally, this option is best for people with low credit scores and little money to fall back on.
What Is The Lowest Credit Score to Buy a Car?
Many lenders provide car loans, so there is no official list of the minimum requirements for borrowers. However, they usually take into account your credit score and your official job, income, and debt-to-income ratio.
A favorable interest rate of 6% to 10% is only available to borrowers with a good credit score, which is between 661 and 780. On the other hand, if you have the lowest credit score, your loan will cost you three times as much and may require some collateral.
What Are The Causes of a Low Credit Score?
Having the lowest credit score is very expensive, as any credit or even renting a home will be more costly for you than for someone with more than 580 FICO points. A higher score will help you get the following:
- Lower interest rates. For example, personal loans for borrowers with very poor credit have rates as high as 36%, but for people with good credit (from 670 points), they are half that.
- Lower monthly payments. As you understand, the lower your interest rate, the more affordable monthly payments you will have.
- No collateral. If a borrower looks at your rating and realizes you are not trustworthy, he will ask you for collateral to guarantee his loan repayment.
- Higher chance of approval. Getting a loan with a 670+ FICO score is quick and easy, but the chance of being loaned money if your score is below 580 is lower.
If you know the reasons for your low credit score, you can fix them and improve it. Let’s discuss each of them in more detail.
Late Payments
Your payment history makes up 35% of your final score. Every late payment of more than 30, 60, or 90 days appears on your credit report and takes points off your score. Depending on how often you miss payments and by how many accounts, this mark can take 40 to 150 points off your score.
The longer you don’t pay your loans, rent, or medical bills, the worse those late payments affect your credit score. The worst thing about this situation is that lenders do not want to stop at the late payment mark; they can turn the debt over to collections, which will also show up on your credit report as a negative mark and take about 100 more points off your credit score.
One late payment can cause many problems, so set reminders on your phone for all due dates, and don’t skip loan payments.
Collection Accounts
When lenders see that borrowers are not paying their bills, they try to get at least some of the money borrowed and sell that debt to collection agencies. Therefore, having collection accounts marked on your credit report will be a red flag to creditors from whom you ask for a loan.
However, don’t worry and think that the problem of turning your debt over to debt collectors will ruin your life and credit rating forever. Collections are among the most popular negative marks on Americans’ credit reports since about one in three people with a credit score has at least one collection account.
You can remove them from your report by contacting a credit repair agency or the lender directly and paying off your credit. However, if you do not do this and remove the checkmark in another way, it will stay on your credit report for seven years and keep you from getting a better deal on your loan.
Bankruptcy Filing
The worst thing that can happen to your credit rating is bankruptcy. A negative mark on your report will cost you more than 300 points, and it will be almost impossible to start a new life and get at least personal credit after that.
Bankruptcy removes almost all of your debts, so it is often used by people trapped in debt who cannot pay off all their loans. However, whether or not to use this method is better to decide with a credit counselor because the consequences of using it will affect you for the next 7 or 10 years.
Lenders rarely agree to cooperate with borrowers with a bankruptcy mark on their credit report, so if you get one, you will need to prove by other methods that you are solvent. For example, you can provide the lender with your bank account statement as proof of a high income level or start building a new credit history with secured and credit-builder loans.
Charge-Offs
This is a method credit relief agencies like to use, offering you to stop paying your loans so that the lenders will write it off after 180 days. The only advantage of this method is that you can avoid paying back the borrowed money. However, at the same time, a charge-off is worth more than 100 points and is a red flag to most lenders.
Charge-offs usually stay on your credit report for seven years. In addition, the lender may sell your charge-off loan to collection agencies, and then you will have a collection accounts note on your history, which is worth more than 100 points. This means that your chances of getting a new loan are severely reduced, and if your application is approved, you will have to pay the highest interest rates.
Defaulting on Loans
Defaulting on loans is a problem that creditors try to protect you from when evaluating your credit rating and ability to pay. The term appears on your credit report when you miss more than one payment on your loan, according to your loan agreement. Usually, 2-3 months of missed payments are enough to see a “defaulted account” on your report.
Depending on the type of loan, you may have a grace period – a time when the lender will not report your late payment to the credit bureau. Usually, it’s only ten days for car loans, 30 days for credit cards, and 15 days for mortgages.
You can go to your lender and explain your situation during this period. Often it is not profitable for him to sell your credit, and he wants your money back so that he will agree to a small concession or rollover period for a small fee.
In any case, it is in your best interest to avoid defaulting at all costs because this mark is also a warning to lenders and a problem that will prevent you from getting favorable terms on new loans.
How a Low Credit Score Affects You
The lower your credit score, the harder it will be for you to live, especially in emergencies. Everyone uses this rating – not only the lenders who lend you money, your landlords, and even your employers. Low credit scores mean higher interest rates, fewer credit options, and even more expensive insurance.
Worse, it’s often the score that will determine how much of a deposit you need to leave when you move into a new rental property and whether a landlord will agree to rent to you.
Working on a credit score can be difficult, but the results are worth it. It is much easier to live with the knowledge that in any emergency, you can go to the bank and quickly get a low-interest loan than to think that you will be turned down by almost all lenders or only lend a few hundred dollars.
Higher Insurance Premiums
When you sign up for an insurance policy, you pay a certain amount called a “premium.” Its price depends on many factors, which include the type of insurance and coverage, your age, your city of residence, and…your credit rating. Few people know this, but having a credit card or loan debt can increase your insurance premium, although some states do not allow this practice.
It’s also important to know that credit scores affect insurance policies, such as renter’s and homeowner’s policies. So problems that arise for people with low credit scores are related to price and the ability to get a policy quickly and easily.
Expensive Car Loans
The lower your credit score, the higher the interest rate on your loans – that’s the rule worldwide. Sometimes the difference between the terms that borrowers with good and bad credit receive are so great that the loan cost increases several times over!
For example:
- If you have a good score of 680 and a car loan with an interest rate of $10,000 at 7% per year for five years, your monthly payment will be $225, and the loan cost will be $3,500.
- If your score is 500 and you got a loan for the same car at 27% interest for five years, your monthly payment would be $391, and the loan price would be $13,500. You will have to pay almost four times that amount!
Based on this, if your credit score is meager, you are better off spending one year improving it and getting better terms on your new loans rather than paying such high interest rates.
Higher Mortgage Rates
Like any other loan, borrowers with low credit scores get the worst terms. But if the $10,000 difference in interest rates is worth a few thousand dollars, the $300,000 difference is worth much more.
Typically, mortgage lenders will only lend to borrowers with a 620 score or higher. But you’d better know what rates people with different credit scores get so you can see why you should start improving your score now:
- Borrowers with a 620-639 score typically get this loan at 6.4% APR. For a $200,000 loan with a 30-year term, the monthly payment would be $1622, and the loan price would be $384,000.
- If a borrower obtains the same loan with 680-699 points, but at an interest rate of 5.2%, his monthly payment would be $1422, and the loan price would be $312,000.
That’s how a slight difference in your credit score helps you save $200 each month and more than $70,000 over 30 years. It is best to take out a home loan when your score is over $700 because you will get a better interest rate and a better chance of fast approval.
Higher Apartment Competition
Your credit score will affect your living situation even when you rent a house instead of buying one. Landlords are just as worried as lenders about whether you’ll be able to pay your monthly payments on time, so that they may ask for access to your credit report.
Accordingly, the lower your score, the less chance you have of living in your dream home. Then, some lenders will agree to sign a lease with you, but only if you provide them with a higher security deposit than is typically required.
Security Deposits for Utilities
The same situation as renting is when you want to rent a utility. Few people know, but one of the few who can access your credit report is your cell phone or internet provider. They do a soft credit check to determine that you can pay for their services on time and in full.
If your rating is meager, the company may ask you to leave a deposit, which will act as insurance if you do not pay your bills.
Problems with Job Applications
A very poor credit, to many people, is an indicator of your insolvency. Your future employer would like to see on your report that you know how to manage your finances, don’t live on credit, and only buy things you have the funds for. No one wants to keep someone who has financial problems at work because it affects that employee’s stress level and productivity. You may have trouble getting a job with a low credit score.
Of course, not all employers do a credit check before hiring a new person – according to 2016 data, only 29% do. However, it’s important to note that this is usually the case for managers at top companies that offer good salaries to their employees. So you should improve your ranking even if you don’t want to take new loans to have a better chance of getting hired.
Difficulty Starting a Business
Many borrowers think the hardest thing to do is get a home loan because the amount is enormous. However, getting a loan to start or grow a business is more challenging. Lenders often provide stricter requirements for borrowers who ask to borrow money for business purposes, and even more, most financial companies don’t even offer this service.
The problem is that virtually all businesses are unprofitable, and 90% close within the first five years of existence. Also, statistically, it is the business owners who usually declare bankruptcy and don’t pay all their debts.
Therefore, if you want to get a loan to start or grow a business, you will need to work very hard on your rating, provide your credentials, and preferably have 3-5 years of experience in this field.
How to Improve a Low Credit Score
No matter how low your score is, you can constantly improve it and make your life easier. For example, you can follow this simple plan:
- Review your credit reports.
Ask any (or all three) credit bureaus for your reports and check them for negative marks. Then, decide how you will clean them up. You may need help from a counselor or credit repair agency, but try to figure it out yourself first since most information about the marks is freely available on the credit bureau website.
- Get a handle on bill payments.
As you remember, 35% of your score is payment history, so you must make all your payments on time. Make a plan for paying off your loans, and write down the basic terms for each one and the amounts you can spend to pay off your debts.
For example, if you have $300 more than you have to pay each month on all of your loans, you can close some of your debts early to get rid of them faster. It’s best to start closing loans early with the highest APR.
- Use 30% or less of your available credit.
You can pay off some or all of your loans to improve your credit score. This way, you lower the percentage of your available credit funds. Another option is to open a new credit card with a limit you will not use. But remember that this method will only help you improve your credit score if you do not spend any money on the card.
- Limit requests for new credit.
Try to avoid taking out new loans for at least 6-12 months to show creditors that you can live without loans. Each new request to the financial institution on your part can take away your FICO points, so try to limit them and take out a new loan no more than once every six months.
- Pad out a thin credit file.
Lenders consider borrowers with a thin credit file – that is, fewer than 4-5 open credit accounts – more reliable. It’s also important that these accounts are others than just credit cards. Try to use different types of loans, such as adding installment loans, to get extra points for the credit mix.
- Keep your old accounts open and deal with delinquencies.
If you have old accounts with delinquencies, contact those lenders and negotiate some way to pay them off and only then close them. For example, in FICO 9, accounts that have been turned over to collectors do not hurt your rating if they are paid in full.
- Consider consolidating your debt.
Consider debt consolidation if you don’t have the extra money to pay off your loans as quickly as possible. This name refers to the process of taking one large loan used to pay off all the old ones with higher interest rates.
As a result, instead of 3 different loans with different APRs, you can have one with a lower rate, which will help you pay off all your debt more steadily and quickly.
- Track your progress with credit monitoring.
Tracking even small changes in your score is essential to stay motivated and know if you’re doing everything right. You can find companies or non-profit organizations that provide credit monitoring services and check how your credit score changes each time you do the following action in your plan to improve it.
10 States With the Lowest Credit Score
The average FICO score in the United States is considered 700-710, depending on the year in which the survey was conducted. However, a few states have a lower score, namely:
- Mississippi – 662.
- Louisiana – 667.
- Alabama – 670.
- Arkansas – 671.
- Oklahoma – 671.
- Texas – 673.
- Georgia – 675.
- West Virginia – 675.
- Kentucky – 676.
- South Carolina – 693.
However, just because these states have the lowest credit scores does not mean that the least wealthy people live there. For example, Mississippi is considered one of the most affordable states to live in, Louisiana homes are less expensive than in other parts of the country, and Texas has a higher median income than many other states.
Also, a low average rating does not mean that people in these regions are insolvent and unreliable borrowers. But according to studies, they have lower FICO scores because of lower-ranked educational systems, greater dependence on government aid, and higher bankruptcy filing rates.
