Getting a good credit score is essential in applying for a loan as it helps prove your creditworthiness to lenders. Different types of loans also require you to have a minimum score to be eligible for application. If you have a low credit score, it sends warning signs to lenders that you’re a high-risk borrower.
The following information will guide you on what is considered a low score and how to raise it to help you with your financial plans.
What is Considered a Low Score?
Credit scoring models categorize your credit score in ranges. Lenders refer to these score categories to determine what type of financing program best fits your credit capacity.
Here is a general parameter on how credit scores are categorized and how potential lenders view them.
|Perfect Credit Score||850||Applicants with this score can expect the best loan packages from lenders|
|Excellent Score||760 – 840||Applicants with this score are likely to be offered better than average rates|
|Good Credit Score||700 – 759||About 8% in this score range are likely to become delinquent in their credit in the future|
|Fair Score||650 – 699||Lenders view applicants in this score range as subprime borrowers|
|Low Score||649 and below||If applicants on this score range are approved of a loan at all, they may be required to pay a fee or deposit|
While different types of loans require different minimum scores to even qualify for application, lenders will generally consider a score of 600 or higher for high-value loans such as a mortgage.
What Impacts Your Credit Score?
Knowing how these 5 important factors impact your credit score will help you to fix and raise it in the quickest time possible.
Your payment history has the most influence on how your credit score is calculated that even one missed payment will hurt your score significantly.
This factor describes how much of your available credit you are utilizing. A high credit utilization ratio that is over 30% indicates that you are highly reliant on non-cash funds and sends a warning signal to lenders.
Credit History Length
Your credit history is an important factor in determining your credit score because it shows a lot about how you manage your finances across multiple credit accounts. Ideally, the longer your credit history, the higher your credit scores.
Credit scoring models give merit to your score when you carry a variety of credit account such as, but not limited to, an auto loan, student loan, credit card, and mortgage. This factor accounts for 10% of your credit score.
When you’re in a habit of making hard inquiries or opening one credit account after another, know that it could drag your score and may take a while for your score to bounce back.
How Long Does it Take to Raise Your Score?
The length of time it takes to raise your credit score will depend on a variety of things. Your credit habits, the cause of your low score, and your current credit status all play a part in your score’s recovery time.
|Event||Ave. Recovery Time|
|Applying for a new credit card||3 months|
|Maxed credit card account||3 months|
|Closing credit card account||3 months|
|Late mortgage payments (30 – 90 days)||9 months|
|Missed / default payments||18 months|
|Home foreclosure||3 years|
It is also important to keep in mind how some financial issues can damage your credit history and linger for a long time, making it a bit of a challenge to fix. Knowing how they impact your credit record will make you avoid committing them in the first place.
There are some outlying circumstances, but for the most part, you can expect late payments and unpaid balances to stay on your credit report for 7 years.
Best Strategies to Raise Your Credit Score
If you need to raise your credit score in the short-term, use these time-tested strategies financial planners recommend.
Pay Your Bills on Time
This may be a struggle to some, but keeping this goal at the top of your priority list will significantly impact your credit score in a positive way.
Improve Your Credit Utilization Ratio
The sooner you pay off some of your debts, the more revolving credit will open up in your account improving your credit utilization ratio.
Avoid Making Hard Inquiries
Every time you make hard inquiries, your prospective lender makes a hard pull on your credit report, temporarily dragging your score by at least 5 points.
Avoid Applying for Multiple Credits at the Same Time
Multiple new accounts indicate that you are a borrower with high credit risk, thus causes your score to remain on the low side.
Dispute Inaccurate Reports on Your Credit
Always keep a copy of your payments and other important documents that you can refer to later on when you need to dispute inaccurate information on your credit report.
You should always aim to improve your credit score regardless of where your score falls in the score category chart. Having a good credit score opens up a lot of financial opportunities for you — competitive rates, better terms, rewards, and perks — that translates to savings and less challenging debt management.