Editor’s Note: Forbes Advisor may earn a commission on sales made through affiliate links on this page, but this does not affect the opinions or ratings of our editors.
Applicants with the lowest creditworthiness – or ratings that fall into the bad credit realm – typically struggle to qualify for mortgage, personal loan, and auto loan without a co-signer. The lowest FICO score and VantageScore anyone can have for the most common versions of these credit scoring models is 300.
Below we explain how a low score can affect your finances, and we show you ways you can improve your score.
What Causes a Low Credit Score?
There are several negative factors that can cause you to a bad creditincluding:
- Minimum credit history. If you don’t have a long credit history, your score may be below average. According to an Experian report, 18-23 year olds – the age group most likely to have minimal credit history – had the lowest average credit scores in October 2020.
- High credit utilization. Your Credit utilization rate measures the percentage of credit you have used compared to your available credit. Because it accounts for 30% of your creditworthinessUsing too much of your available credit can degrade your credit score.
- Late payments. If you fail to pay your bills on time and they are 30 days overdue, your creditor may default one of the to three major credit bureaus– Experian, Transunion or Equifax. Your payment history makes up 35% of your creditworthiness, so making payments on time is important.
- Collections. If you fail to meet a loan obligation, your original creditor can sell your claim to a debt collection or collection agency. After your Debts are sent to debt collection, it is usually reported to the credit bureaus. A recovery can cause a significant decrease in your credit score and you may have to wait up to seven years for it to complete removed from your report.
- bankruptcy. If Your credit report lists a bankruptcy, it can negatively affect your creditworthiness for up to 10 years. How long it stays on your credit report depends on whether you filed for Chapter 13 bankruptcy (up to seven years) or Chapter 7 (up to 10 years).
Lowest possible credit risk
Having a low credit score can harm your finances in a number of ways, including:
- Potential denial of credit. If you have poor credit, you likely won’t meet the minimum credit requirements for a lender. This means your loan is likely to be rejected unless you are apply with a co-signer.
- Higher deposit and security deposit requirements. Some lenders will charge you a higher down payment if you fail to meet creditworthiness requirements. For example, if you have a score less than 580, you must pay a 10% down payment instead of the usual 3% on a Federal Housing Administration (FHA) loan. In addition, a landlord can ask for a higher deposit when renting an apartment.
- Higher Interest. If you are approved for a loan, a lender will likely charge you a higher interest rate to offset the increased risk. This can significantly increase your borrowing costs and reduce the amount of money you need to spend on other financial goals.
- Higher fees. In addition to higher interest rates, you can also pay higher fees when taking out a loan, such as: B. Award Fees.
How to improve your credit
If you want to increase your chances of qualifying for loans and getting a lower interest rate, follow these four steps to get started Improve Your Credit Score.
1. Create a credit history
If you have a minimal credit history, you can Build up credit by a. takes out Credit Builder Loans or secured credit card. With both options you have to leave a deposit – you will get the deposit back after repayment of the loan or cancellation of the credit card.
Alternatively, you can ask someone with excellent creditworthiness and long credit history to be you authorized user on their credit card. Since the length of your credit history is 15% of your credit score, if the credit card company reports the information on your credit report, your score may improve.
2. Pay your bills on time
The most important factor in creditworthiness is payment history – it makes up 35% of your creditworthiness. If you make a late payment or go into debt collection, this negative information can remain on your credit report for up to seven years. If you pay all of your bills on time, you can avoid damaging your credit score.
3. Pay off debts
The amount of debt you owe makes up 30% of your creditworthiness. Paying off your debts can lower your credit utilization and improve your score. You can use the … Debt snowball or avalanche of debt Repayment methods to achieve this goal.
With the debt snowball method, most of the money is put into your smallest debt first, while the minimum balance is paid on your remaining debt. With the debt avalanche method, you put most of the money into your highest-interest debt and at the same time pay the minimum balance on your remaining debt.
4. Check your credit reports
Monitor your credit reports for errors at least once a year. Any false or inaccurate negative information can affect your creditworthiness. To fix a bug is listed on your report, dispute it with any credit bureau that lists it.
You can view all three of your credit reports for free by visiting AnnualCreditReport.com. Due to Covid-19, you can view your credit reports weekly until April 20, 2022.
Common creditworthiness areas
Although the credit rating ranges vary, the two most common credit rating models are for FICO and VantageScore have values between 300 and 850. The lower your score on each model, the more difficult it will be for you to qualify for funding. For FICO, the lowest credit score range is between 300 and 579; the lowest credit score range for VantageScore is between 300 and 499.
If you have the lowest credit score, or even a score that falls into the lowest point range, you risk that Credit denied or pay higher interest and fees. You will likely pay thousands of dollars more than a Borrowers with good credit in the course of your life. The good news, however, is: your creditworthiness is not permanent. By taking some of the steps mentioned here to improve your creditworthiness, you will increase your qualification chances and save on fees.