Although in theory there is no credit score that is too low, the reality is that there is usually an area in the credit score spectrum that even the loosest lender won't touch. And even if you can get credit, a low score might mean your terms will be less accommodating.
The credit reporting agencies and the companies that create credit scoring algorithms have nothing to do with any lending decision, so the floor for what is too "low" for a credit score has no definite answer. One lender may refuse to approve anyone with a FICO score lower than 600, while another might find 500 acceptable. It all depends on how much risk the lending institution feels comfortable taking.
Usually, anything below a score of 500 to 550 is too low for just about any lender, according to Credit Scoring. Scores below 550 comprise only 6 percent of all borrowers with a credit score and the default on loans for these consumers tops 70 percent, according to Score Truth. Thus, interest rates would have to be astronomical to make most of these loans profitable.
Getting the Best
Lenders reserve their best rates for borrowers in the upper echelon of credit scores. In 2010, most borrowers needed a score higher than 760 to have an elite credit score. This is a significant change from before 2007, when the housing bubble burst and a 720 usually was good enough to get the lowest rate, according to Wallet Pop.
Improve your credit score before shopping for a loan; paying down debt and sending in bills on time are the best ways to raise your score. You can overcome some shortfall in your credit profile by shopping around. The FICO scoring model counts all inquiries related to a mortgage, student or auto loan within a 45-day period as a single inquiry, so it does not hurt to see what as many lenders as possible think of your credit situation.
Other Scoring Models
When you purchase your credit score make sure you buy a FICO score; that's the industry standard. Other scoring models such as the VantageScore use a different range of scores. A FICO score of 700, for example, would be a good score in the FICO system but a a very poor score under the VantageScore model.
- Credit Scoring: What is a Good Credit Score?
- Experian: Credit Score Basics
- Score Truth: Credit Score Statistical Data
- Wallet Pop: New Credit Reality: Scores Must be Higher to Get the Best Rates; Lita Epstein; 2010
- MyFICO: Credit Inquries
- MSN Money Central: What the New Credit Score Means to You; Liz Weston; 2009