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What is a Low Credit Score?

No one wants to have a low credit score. Having a low credit score impacts the kind of credit you can get. In addition, it impacts financial considerations such as mortgage rates and credit card interest rates. Your credit score is made up of the following factors:

  • Debts/money owed: 30%
  • Payment history: 35%
  • Length of credit history, type of credit in use and new credit received: 15% each

As can be seen, the most important factors are your ability to pay your debts and in essence properly manage your credit. Most lenders will use the credit scores available from Fair Isaac Corporation (FICO). FICO’s medium credit score in the USA is about 720. This means that more than half the population’s credit rating is lower than this figure.

What is referred to as a low credit score varies depending on which agency you use to judge your score. In general, a low credit score refers to any score that falls between 620 to 680. Persons with scores within this range are referred to as being sub-prime borrowers. If you score below this then you have moved from a low credit score to a bad score.

What Your Low Credit Scores Mean

The impact of low credit score becomes evident when one is seeking a mortgage, a car loan or other high cost loans. It can even impact getting a home to rent in some cases. The lower your credit score, the greater the risk lenders associate with giving you credit.

Persons in the subprime group will still get loans. Unfortunately, the interest rates and terms will be much higher than those for someone with a good credit score. As such, a low credit score not only makes getting credit or loans difficult, it makes paying for them costly.

These days especially your low credit score can even impact your employability. Many employers are checking the credit scores of prospective employees. It is believed that a good credit score indicates a person who has the qualities of a good employee.

A low credit score impacts other areas of your life such as the rate you pay for auto insurance. It is believed that those with low scores tend to make far more accident claims. As such, insurance companies factor this in when calculating premiums.

Tips for Improving a Low Credit Score

There are a number of ways to help improve your low credit score. Some surefire ways to do this include:

  • Paying your bills on time
  • Paying up all balances on credit cards when they become due
  • Avoiding acquiring new credit such as a new credit card unless it is absolutely necessary

It is advised that when credit scores move pass the subprime level and dip below 500, it is best to forgo even trying to obtain credit. With a score at this level, credit repair should be the primary focus.

The ultimate aim is to get a credit score of 700 or higher. The largest percentage of factors that affect your credit score are your payment history and your outstanding debts. It therefore makes sense that these should be handled first.

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