Few numbers are as important today as your credit score. Lenders, whether they're approving mortgage, auto, personal or business loans, rely on this score to determine not only if you qualify for a loan, but also what interest rates you'll pay. A low credit score means that you'll pay higher interest rates. Knowing the basics about what makes a bad credit score can help you decide when to apply for a loan and when to wait.
A Bad Credit Score Can Hurt
A credit score is a numerical representation of how well you've managed your money. A low score--and most lenders consider anything under 620 to be a low or "bad" score--means that you'll have to pay higher interest rates. Borrowers with a credit score of 520 will pay an interest rate that is 3.45 percentage points higher than a borrower with a credit score of 720, according to Fair Isaac Corp., the company that developed the credit score.
What Is Considered a Safe Number?
Lenders consider any score above 620 to be a safe credit score, according to financial Web site Bankrate.com. But "safe" is not the same as "excellent." Most lenders want to see even higher scores, according to Bankrate.com. Fair Isaac Corp. reports that scores of 720 or higher nab the best interest rates.
Most Have Safe Scores
The good news is that most borrowers do have scores of at least 620, the threshold that separates "safe" borrowers from "risky" ones in the eyes of mortgage lenders. Bankrate.com writes that 11 percent of U.S. residents have credit scores between 600 and 649, 16 percent from 650 to 699, 20 percent from 700 to 749 and 29 percent from 749 to 799.
Scores Can Rise
If your credit score is not considered "safe" by lenders, you can take steps to improve it. Start paying all your bills on time. Close some of your open credit card accounts. Cut your revolving debt. Do all this on a consistent basis, and your scores will gradually rise.
No Quick Fix
Unfortunately, there is no quick fix for repairing a low credit score. Boosting a score takes time. It might make more financial sense to wait to apply for that car or mortgage loan until you've increased your credit score into the "safe" zone.
- myFico: Credit score basics
- Bankrate.com: Credit score information
- myFICO. “What's in my FICO® Scores?” Accessed May 12, 2020.
- Federal Reserve Bank of St. Louis. “Did Credit Scores Predict the Subprime Crisis?” Accessed May 12, 2020.
- Experian. “What Credit Score Do I Need to Get a Mortgage?” Accessed May 12, 2020.
- myFICO. “What is a Credit Score?” Accessed May 12, 2020.
- U.S. Department of Housing and Urban Development. “THE FEDERAL HOUSING ADMINISTRATION (FHA).” Accessed May 12, 2020.
- Universal Credit Services. “Tri-Merge Credit Reports.” Accessed May 12, 2020.
- Newcastle Loans. “How credit scores affect your mortgage rate and approval.” Accessed May 12, 2020.
- United States Federal Trade Commission. “Free Credit Reports.” Accessed May 12, 2020.
- Bank of America. “Get your FICO® Score for free in Online and Mobile Banking.” Accessed May 12, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.