FICO score is one of the essential numbers that can determine your financial situation for years to come. It is utilized by lenders to measure your creditworthiness and the interest rate to be charged on loans and credit cards. Thus, what is considered to be a low FICO score that will likely hinder financing approval or the optimal leverage? Below are the FICO score ranges and the description of poor or bad scores.
What is the FICO Score? A FICO score is a numerical representation that ranges between 300 and 850 compiled from your credit report data. FICO scores are on a scale of 300 to 850. The results in the table show that the lower the score, the higher the perceived credit risk and vice versa. FICO scores are derived from the credit report that is maintained by three different credit reporting agencies, namely Experian, Equifax, and TransUnion.
The five main factors that determine your FICO score include: The five main factors that determine your FICO score include:
- Account management history – Records how you have been repaying the loans and credits you have been issued. Makes up 35% of your score.
- Credit utilization – Determines the proportion of credit card balances relative to the credit card limits. Makes up 30 percent.
- Credit history length – measures the number of years on which your credits have been active. The oldest is better and accounts for 15%.
- Credit type variety – Determines whether you have handled credit cards, loans, and mortgages among other credit facilities. 10 percent of the score.
- New credit applications - Look at the number of new credit accounts, that have been recently established. However, in the case of the FICO score, it is charged 10 percent on the total score.
FICO score ranges define bad credit or excellent credit. Here is how the score ranges generally break down: Here is how the score ranges generally break down:
740-800 – Superb, superior credit status 740-799 - Very good 670-739 - Good 580-669 - Fair 300-579 - Very poor
What FICO score is considered bad?
Concisely, FICO scores below 580 are regarded as very bad and as an indicator of bad credit management. The lower the score the higher risk you appear to the lenders. If your FICO score is within the very poor range, there is a likelihood that you will be denied credit or offered credit at high interest rates.
Here is a more detailed breakdown of bad credit FICO scores:
300-549 - Bad to very bad scores. You will likely fall outside of most loan or credit card ranges or be approved for a card but receive high interest rates. Down payments that will be required will also be very high.
500-549 -Poor score range. Some lenders will consider applications with scores in this area and reject them without looking at other factors. Those who do approve will set higher rates and fees to compensate for risk.
550-599 - Still considered very risky and subprime. You might be able to secure approval for the secured credit cards to begin improving your score. Personal loans and auto loans will attract interest rates above 10 percent. Usually not high enough to grant a mortgage.
It becomes all the more positive as soon as one can take the score beyond 600. But anything below 580 is considered a real credit problem when it comes to late payments, severe delinquencies, collections, and public records. Length of credit history and adverse credit information can also contribute to lower scores.
Why FICO Scores Below 580 Are Bad
- Higher interest rates – When you have a low credit score, you are likely to be charged a higher interest rate for the credit cards, auto loans, mortgages, and personal loans that you take, which are very expensive in the long run in terms of the total amount of interest that you pay throughout the repayment period.
- Fewer opportunities for approval – Some loan companies reject applications from individuals with bad credit ratings, which means that the applicant has FICO scores below 550 or 600. Your odds are significantly cut down.
- Tightening of loan conditions – There will be a need to pay a higher down payment to buy assets such as a home or a car. The scores may also be reduced to match the proposed income requirements in a bid to offset the potential low scores.
- Inability to make timely payments, having collection accounts, and public records such as bankruptcies also bring credit scores below 580. Large-scale financial crises also have ripple effects on credit standards and interest rates.
- Expenses are higher – Since credit is bad, it costs a lot of money to secure utilities, phone services, and rental houses in case the defaulting individual cannot pay as expected. Security deposits typically sum up to two month’s rent.
Poor FICO Score: How to Make It Better The good news however is that it is possible to build a bad FICO score all over and this however requires a lot of hard work and paying bills on time each month. Services such as credit counseling or debt management can also assist with the structure of the finances and the interest rates. Lastly, one must ensure that balances are kept very low below the 30 percent credit limit on any credit card. It is recommended not to start new applications when your score has not started to increase.
In conclusion, credit scores below 580 indicate poor credit standing and limited credit facilities. However, the use of responsible habits and waiting for the credit to repair is the key to improving one’s credit rating and getting better rates. Be patient, keep on trying, and always look for constructive behaviors that you can observe.
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