Credit score plays a very important role in taking out loans that have the best interest rates. Having a good credit score means you don’t have to worry much about a loan getting approved. But what if your score is far from being ‘good’, can you still get a nod from banks and businesses with a 550 credit score?
If you’ll talk about scores, Fair Isaac Corporation (FICO®) is one of the most used references by lenders if they want to see your current FICO® score. The score ranges from 300 to 850 — the latter is considered a perfect score.
In a recent report from Experian, only 1.2% of Americans have a perfect score of 850. Comparing it to past data, the number of consumers having a perfect score rose by 63% over the past decade.
Despite the increase, it is still considered small as compared to the total population of Americans.
A 550 credit score is a poor score. You may be able to secure a personal loan with a credit score of 550, but you’re more likely to get a low loan amount and pay a higher interest rate.
Fortunately, there are many ways to improve a 550 credit score. To give you a glimpse of hope, having a perfect score isn’t everything you need to get personal loans, a credit card, or any other loans. But the question is, does improving scores worth the time, effort, and penny?
Understanding Credit Score
A credit score does not only affect your ability to loan — it is also one of the factors being considered when you are renting an apartment, or even when you are applying for a job.
Your credit report will show the lender all of your bill payment history, current debt and other financial liabilities (if there’s any). Think of it as a consolidated data of your financial and credit transactions with various businesses in the past years. It is a basic data reference for lenders in determining credit scores.
Take note that the higher the score means you might have a lower interest rate when you apply for a personal loan or a credit card. For some lenders, the interest rate is a big deal.
Here are 3 ways to improve your credit report and score according to usa.gov:
- Check your credit report
- Fix errors
- Know your credit score
What Affects Your Credit Score?
If you find a strong interest in increasing your credit score, knowing your history won’t help you enough. Understanding what behavior might put credit scores to a low, will help you think of the smartest move you could do next to step up your credit score game.
1. Public Information
Credit scores can be gravely affected if derogatory public information such as bankruptcy appears on your credit report. If this is the case for you, it would be very helpful to educate yourself by familiarizing legal matters that revolve around bankruptcy issues.
Bankruptcy, as explained in Investopedia, is a legal proceeding involving a person or business that is unable to repay their outstanding debts.
“The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common.”
Truth is, there is no shortcut in removing bankruptcy in your record. It will stay for some time and you will have no choice but to face the consequences along the way.
There is no point in denying your situation. To put it simply, bankruptcy is an acknowledgment that you are financially incapable of paying your debt or personal loan.
It is wise to accept that applying for a personal loan that offers good interest rates at this point is hard and in most cases, impossible.
2. Credit Utilization Rate
Your credit utilization rate is your total debt divided by your total available credit. A lot of experts would agree that in order to avoid your credit score from having a bad record, you should not consume more than 30% of your credit.
The way people handle their credit cards will affect 30% of their FICO® score. To simply put it, if your total credit limit is around $15,000 dollars, your total revolving balance should not exceed $4,500. Knowing when to stop swiping your credit card would save you from having a bad credit score.
3. Delayed and Missed Payments
Not paying your bills on time or ahead of time, will give a bad impression on you. It’s great to have a record that would tell banks and businesses that you are a responsible borrower and that you take the deadline of payment seriously. By doing so, you can lead them to the conclusion that you are a trustworthy person. Your paying behavior will affect 35% of your total FICO® score.
4. Length of Credit History
The longer people have been active in using credit cards, the more chance they have in stepping up their credit scores. Too bad for people who just got their credit cards, this factor won’t affect their scores yet.
Depending on how you managed your personal loan or credit cards in the past years, usually the length and quality of credit history will have a 15% impact on the totality of most credit scores.
Poor decision making in credit card handling and not settling your loan on time will give you a serious headache when applying for a future loan. You will get a good credit history when you know how to manage your credit card and personal loan carefully and patiently. If done otherwise, you’ll surely be given a bad credit history.
5. Total Debt and Credit Mix
From personal loans, credit card or car loans, credit scores reflect all of the current debts and the types of credit that people have. According to Experian, the FICO® scoring system tends to favor those who have multiple credits or revolving credits. This is what we refer to as a credit mix.
But don’t get too excited to apply for multiple loans. A healthy credit mix should be handled properly. You may apply for another personal loan, a house loan, a car loan, or a student loan, only if your other credit does not exceed your credit limit.
Broadening your credit portfolio is another way to boost your credit score. But this one can get really tricky and things will go out of hand if you are not careful enough.
So think about your next move multiple times, because the last thing you want to apply for is bankruptcy.
The credit mix could affect 10% of your total credit score.
6. Recent Credit Behavior
Have you heard about soft and hard inquiries? A soft inquiry typically doesn’t hurt scores. Checking your own credit score is an example of a soft inquiry.
Applying for new loans (be it a personal loan, car loan, or a house loan or a student loan) and credit cards multiple times in a short span of time could trigger an event called hard inquiries. A hard inquiry, on the other hand, can make a credit score look bad. It happens when a bank or a lender gets your credit score for the purpose of evaluating whether you are qualified for a loan or not.
Frequent events like this could hurt scores a bit. Good thing is, bad credit scores can be revamped after a few months of paying back loans diligently. This determines 10% of credit scores.
Turning Poor Credit Scores to Fair or Good Scores
Personal loans, credit cards, or any other loans that offer fair interest rates are far from being your reality if you have a bad credit reputation. Try to put yourself in the position of the lender, would you allow someone with a bad credit history to borrow money from you?
Magic does not work on bad credit scores — if you want to reach fair scores (580-689) or good scores (670-739), you have to put incredible effort and be consistent in keeping your credit far from going bad. If you are serious, get started now.
1. Pay Your Bills on Time
Ever wondered why you are seeing this phrase in any business article so often? Because really, you have to ‘pay on time’. There might be a time when you feel like you want to skip settling your monthly dues because your favorite brand just dropped their latest item and you think it’s too pretty and trendy not to purchase; well, think again.
When you are trying to save yourself from having bad credit, you should live with a goal in mind. And that is to settle your loans at the agreed time.
2. Avoid High Utilization Credit Rates
The goal is to not consume more than 30% of your credit limit across your accounts. Done otherwise, a bad credit score will be your problem in no time.
3. A Debt-management Plan May Help
If you are having trouble managing and settling your loans across multiple accounts, thinking of consulting a non-profit counsel is pretty much not a bad idea. Getting started with a debt management plan is one way you could settle your loans, one step at a time. Sometimes, trying to gain good credit means getting an expert’s advice.
It’s worth noting that if you decide to go on with a debt management plan, all your credit accounts will be closed. The goal is to get you in a pool of loans and credits to avoid further problems. This could leave you with a bad credit mark, but you are more likely to bounce back and improve your credit card easier than those who have bankruptcy records.
If you think this is too much, your last resort is to consult a credit counselor to come up with a plan to fix your credit.
4. Consider a Credit-builder Loan
If you have a bad credit score, getting a personal loan, a car loan, a student loan, or any other loans from traditional banks might be impossible. Fortunately, there are existing credit unions that are reliable enough, they can even help get better scores gradually. And the best part? Some offer a better interest rate than most of the banks and other credit bureaus.
Credit unions allow you to borrow from their funds and offer to check and saving accounts. And unlike banks, they typically give the profits to the members. If you are looking for a personal loan that has a lower interest rate and a less intimidating way to improve bad credit, this is the way to go.
You may start searching for a credit union near you through the National Credit Union Administration’s locator tool. Or, you may ask your school, your employer, or even the congregation that you are attending if there is a credit union affiliated to them.
If you think you are not earning as much interest from traditional banks, joining a credit union must be a better option. Also, borrowing from a credit union means you have a higher chance of experiencing a much lower interest rate on a credit card, house loan, or a car loan.
Note: Before applying to a credit union, make sure that they are reporting their members’ paying behavior to the three major national credit bureaus. If you can be consistent in being a good loan payer, chances are your chosen credit union will report such a good borrower’s behavior. This would mean a lot in improving your credit score.
5. Apply for a Secured Credit Card
A secured credit card means having a small borrowing limit and the goal to never drain the credit. Since you are here to improve your score, the goal should always be settling the bills on time. As you use your card while consistently and diligently paying your loan, your lender will report all your ‘good deeds’ to national bureaus, and these will be recorded to your credit history and soon will reflect in your total score.
6. Establishing a Solid Credit Mix
People with multiple loans — be it a house loan or a car loan, or a credit card — are usually seeing a huge improvement in their credit scores. Credit mix as stated above, should not be taken out of context. It’s good to have multiple credits but the main goal is to only apply for loans you can settle without hindrances.
Three Steps to Get a Free Credit Report
- Fill out a form – fill out the form and indicate whether you are requesting for one, two or three credit reports
- Pick the reports you want – request your credit report from Equifax, Experian or TransUnion
- Request and review your credit reports online – before getting your credit reports, you will have to answer more questions. The questions are supposed to be hard to keep you away from fraud.
A 550 credit score is a poor score. But, it’s a good score to start if you want to upgrade your score into the ‘fair’ or ‘good’ range. Increasing your score means unlocking more credit options for personal loans, lower interest rates, and reduced fees and terms.