How a Fair Credit Score Impacts You

What Is a Credit Score?

Your credit score is a number that reflects your creditworthiness. It’s used to help lenders and other entities determine how likely you are to pay back loans and how financially responsible you are. In the United States, there are three large entities, called credit bureaus, charged with collecting information to create your credit score. The three major credit bureaus are Experian, Equifax, and TransUnion.

The information credit bureaus collect is detailed in your credit report. These reports include any credit checks, your credit and payment history, and information related to any outstanding debt. Under the Fair Credit Reporting Act (FCRA), you have the right to obtain a free copy of your credit report every 12 months from each credit bureau. You can get your free report at AnnualCreditReport.com. You can also check your own credit score, typically through your bank, with no penalty. 

Other companies, on the other hand, need written consent to view your credit report and score unless they have a specific, legitimate purpose. No member of the general public is allowed to check your credit score.

Credit bureaus apply a scoring model to the information in your credit report to calculate your credit score. If there’s a status change in your credit report, your score will be updated accordingly. This applies whether the change is positive or negative, so your score will go up or down depending on your credit activity. Unfortunately, credit bureaus do make mistakes on credit reports. For example, closed accounts can be listed as open or your name may be incorrect. If you discover errors in your credit report, it’s important to take the steps necessary to remove incorrect information as soon as possible.

Credit-Scoring Models

As discussed above, credit bureaus will use a scoring model to calculate your credit score. FICO and VantageScore are the most frequently used credit-scoring models. Both of these scoring models use proprietary mathematical equations to calculate your trustworthiness as a borrower and your overall financial stability. Their purpose is to help lenders decide whether to lend you money and at what interest rate.

Both FICO and VantageScore use the information in your credit report to calculate your score. Important information that factors into your score includes your credit utilization ratio; your payment history; how long you’ve kept loans, credit cards, bank accounts, and other financial accounts open; and the types of accounts you have. According to Experian, one of the three large credit bureaus in the United States, the following factors make up your FICO score:

• Payment history makes up 35% of your score.

• Credit utilization ratio makes up 30% of your score.

• The length of your credit history makes up 15% of your score.

• Credit mix makes up 10% of your score.

• Recent credit applications make up 10% of your score.

• Derogatory information can impact your score, but no percentage is assigned to this category since it’s usually incorporated into your payment history.

FICO scores are between 300 and 850. Newer versions of the VantageScore model also use the same range of 300–850. Both scoring models classify consumers by their credit scores. These classifications range from “Poor” to “Exceptional.”

Factors Hurting Your Credit Score

Factors that negatively impact your credit score include making late payments, having a high credit utilization rate, having few or bad kinds of credit, canceling your credit cards, applying for too much credit at once, and taking certain actions like filing for bankruptcy. Since credit scoring models place more emphasis on some factors than others when calculating your score, certain actions will hurt your score more than others.

For example, since payment history makes up 35% of your score, missing payments will hurt your score more than applying for a new credit card, which makes up 10% of your score. Still, even the smaller actions you take can add up over time, which will eventually push your credit score down.

A Fair Credit Score

There are five credit score classifications: poor, fair, good, very good, and exceptional. Each classification represents a credit score range. Those who have a fair credit score have a FICO score between 580–669 or a VantageScore between 601–660.

What Does a Fair Credit Score Mean?

Unfortunately, if you have a fair credit score, which is the second lowest classification, you’ll be classified as a subprime borrower. Being classified as a subprime borrower has negative consequences. For example, you’ll be disqualified from certain benefits from lenders, such as the ability to obtain mainstream loans. When you’re ineligible for mainstream loans, you might be forced to apply for loans with interest rates significantly higher than optimal rates or credit cards with both higher interest rates and annual fees.

High-interest rate loans have higher monthly payments. In many cases, monthly payments on subprime loans are so high that they deter borrowers from taking the loan out at all since they can’t make the larger payments. To lower the monthly payments, they have to make a larger down payment, which many people can’t do. Below are some specific consequences of having a fair credit score: 

Getting a Mortgage With Fair Credit

One of the most important loans many Americans would like to secure is a mortgage loan to buy a home. Unfortunately, most banks will likely decline your mortgage loan application if you have a fair credit score. Even though you might not be able to obtain a good mortgage from a bank, you’ll still be eligible for a U.S. government-backed mortgage, like an FHA loan, VA loan (if you’re a current or former service member), or a USDA loan.

Getting a Personal Loan With Fair Credit

Those with a fair credit rating won't qualify for the optimal personal loan offers on the market. These loan offers typically have better terms, including lower interest rates. If this is the case for you, one option you have is to seek a cosigner. A cosigner can help you get your loan application approved. If you don’t have a cosigner, there may be other options to help you get the right loan offer. To get a better idea of what your options are, contact your loan servicer.

Getting a Credit Card With Fair Credit

If you have a fair credit score, you can still qualify for a variety of credit cards, but you won’t qualify for the best credit card offers, which have good interest rates and minimal fees. Many of the credit cards offered to those with fair credit scores carry additional annual fees and higher interest rates. So, if you’re applying for a credit card, make sure to consider the annual percentage rate (APR), the extent of the annual fees, and whether it’s an unsecured or secured credit card. This is particularly important if you’re trying to pay off multiple debts.

If you get the right credit card, you can use it to improve your credit score by regularly paying off your whole balance or reducing your overall debt. For example, you can transfer credit card debt to a balance transfer card. Balance transfer cards are a type of credit card that usually have low or no interest for a limited period of time. At the same time, taking out new lines of credit like a balance transfer card will also ding your credit. Because of this, improving your credit with a new credit card will take some time and strategy.

Good Credit Score vs. Fair Credit Score

If you have a fair credit score, you’ll want to improve it to get into at least the “good” credit score classification. Having a good credit classification will provide many benefits, including more and better apartment rental options and lower interest rates on any loans you take out. It will also help with securing employment. Also, people with a good credit score get certain benefits that aren’t available to those with a fair credit score. Individuals with good credit scores are usually able to obtain normal mortgage loans and other mainstream loans, whereas those with a fair credit score cannot.

How To Improve Your Fair Credit Score

There are many steps you can take to improve your credit score with either the VantageScore or the FICO scoring model. But it’s important to remember that improving your credit score will take time.

How much time it will take will depend on what actions are harming or have harmed your credit. For example, if you filed for Chapter 7 Bankruptcy, the bankruptcy can be visible on your credit report for up to 10 years, and you’ll most likely have poor credit right after filing. This means that your bankruptcy filing can impact your credit score for 10 years. Rebuilding credit after bankruptcy will take longer than, say, if you maxed out a credit card that had a relatively low credit limit or applied for a personal loan. But it is possible.

Below are some basic tips to help you increase your credit score. These tips specifically consider how FICO scores are calculated:

Credit Utilization Ratio

Your credit utilization ratio, or utilization rate, represents what percentage of your available revolving credit you are using. It accounts for about 30% of your credit score.

Revolving credit is credit that does not have a particular date for you to pay off the entire debt. The most common kind of revolving credit is a credit card. If you own a credit card, you can charge money on the card and make payments on the card every payment period. If you don’t pay off the full amount by the end of the pay period, the credit card issuer will increase your balance according to the card’s interest rate, but you won’t be penalized as long as you make the required minimum payment.

How To Calculate Your Utilization Ratio

To calculate your utilization ratio, add up all the money that you owe on all of your revolving credit. Then, add up all your credit limits. Once you have both numbers, you’ll be able to calculate what percentage of your total credit you’re using by comparing your used credit to your available credit. For example, if you have a total credit limit of $30,000 for all of your credit cards and your credit card balances add up to a total of $10,000, then your utilization rate is 33%.

According to Experian, a good credit utilization rate is generally below 30%. So, if you had a 33% utilization rate, this would be considered slightly high, and it would negatively impact your credit score. If you discover your utilization rate is above 30%, prioritize lowering your utilization rate because it accounts for a large portion of your credit score.

Make On-Time Payments

One of the most important factors used to determine your credit score is your payment history. In fact, it makes up 35% of your credit score. Having a long history of on-time payments can help you achieve an excellent credit score. On the other hand, missing payments or making late payments will negatively impact your score, particularly if your late payments result in mortgage foreclosure or transfers of debt to collection agencies.

Because payment history makes up such a significant portion of your credit score, it’s important to prioritize payments, even if it means that you need to apply for a new loan to help you reduce the amount of the monthly payment.

Dispute Credit Report Inaccuracies

Another factor that can have a negative impact on your credit score is inaccurate negative information in your credit report. Inaccurate information is typically the result of mistakes, many of which are quite common in credit reports. These mistakes might include listing open accounts that have actually been paid off and closed, payments that were marked late when they were not late, or duplicative accounts that don’t actually exist. Although less common, you might discover mistakes in your credit report that are the result of identity theft.

Removing these mistakes from your credit report as soon as you discover them can help you improve your credit score significantly. Fortunately, the FCRA provides consumers with certain rights, including the right to request that mistakes be removed from their credit reports. You can dispute any item in your credit report directly on each credit bureau’s website, or you can dispute the debt by mail. Both the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) have resources available to help you dispute any mistakes in your report.

Because mistakes are common, it's good to check your credit report periodically to make sure it’s accurate, particularly if you’re trying to improve your credit. When you’re checking your credit reports, remember that different credit bureaus may have different information about your credit.

Limit How Often You Apply for New Accounts

Applying for new accounts can lower your credit score. This accounts for about 10% of your credit score. This is because when you apply for a new account, like a new personal loan or a new credit card, the credit card company will conduct a hard inquiry. Hard inquiries are inquiries made by lenders that show up on your credit report. Through these inquiries, lenders are given access to your whole credit file so that they can calculate the credit risk of lending you money.

Hard inquiries will remain on your credit report for two years and often temporarily ding your credit score. In some cases, it’s worth allowing a hard inquiry to get a loan or a balance transfer credit card to lower your monthly payments.

Keep Your Credit Accounts Open

You may be considering closing a bank account or a credit card that you’ve had for many years. Before you do that, consider how it will impact your credit score. Keeping accounts open helps you establish a long credit history, which will distinguish you as a reliable and responsible borrower. The length of your credit history accounts for about 15% of your credit score.

Improve Your Credit Mix

Credit mix represents the different types of credit lines you have. Your credit mix makes up about 10% of your credit score. There are two large categories of credit: revolving credit and installment credit. Revolving credit, which doesn’t have a specific pay-off date, includes credit cards from banks and retail credit cards that you can get from a store. An installment credit line is a credit line that does have a specific pay-off date. Common types of installment credit include mortgage loans or personal loans.

Having more of a mix of different kinds of credit will improve your credit score. For example, a person who has a mortgage, an auto loan, and a bank credit card will likely have a better credit score than someone who has no mortgage and three store credit cards.

Let's Summarize...

Nobody wants to have bad credit, but things happen, and you might find yourself with a less than perfect credit score. Improving your score, at least beyond the fair classification, can help you qualify for important benefits. Some basic benefits include obtaining mainstream loans, lower interest rates, and the best credit cards to help you maintain a good credit mix and payment history.

There are many things you can do to start improving your score. Remember that because of how your credit score is calculated, certain efforts will have a bigger impact than others. You can use the guidance we’ve provided above to help you decide how to best tackle your own credit score. If you’re not sure where to start or how to best build credit, you can also contact a professional credit counselor. Credit counselors are trained financial professionals who help people pay off debt and improve their credit scores.