De-coding Credit Scores – What your Score Really Means

By March 6, 2013Credit Scores

what-your-credit-score-meansYour credit score – that three-digit number on your credit report – has significant implications on your ability to borrow money and how much interest you pay. But, do you know what your credit score means? What is considered good or bad?


The 400 and Under Credit Score

A score this low is nearly impossible to accomplish. But, maxing out a bunch of credit cards immediately after receiving them and then filing for bankruptcy might do the trick. Unfortunately, most lenders can’t do anything for you, with a score this low. But, some car dealerships may be able to give you a car loan at an insanely high interest rate.


The 500 Credit Score

You might fall into this scoring range if you defaulted on some credit cards, have significant late payment history and/or have a high debt-to-limit ratio. A common misconception is that credit reports reflect your debt-to-income ratio; however, your income has no bearing on your credit. How much you owe vs. how much your credit limits are play a large part in your report.

If you’re in the 500 range, getting credit from traditional lenders will be tough, so you may want to opt for a pre-paid credit card. These cards require cash up-front to establish the credit limit (a $500 payment gets you a $500 credit limit). While technically you are borrowing your own money, using the card and making on-time payments will help you build your score. Also, some lenders specialize in finding credit for low scores, but the interest rates are very high.


The 600 Credit Score

While you have more lending options available to you than someone with a 500 score, you are still considered a somewhat risky borrower. That means that banks will be reluctant to lend money to you and if they do you will have to pay higher interest rates. The goal with this score is to try and improve. Perhaps consolidating some student loans could do the trick, lowering the balances on your credit cards, or simply setting-up some calendar reminders to ensure on-time payments. Aim for a score in the high 600s or 700s.


The 700 Credit Score

This is the above average category and borrowing at decent interest rates should not be a problem. However, keep in mind that the best interest rates are reserved for scores above 740 – depending on your exact score you may have some work to do to reach the preferred rates. Take a look at your credit utilization ratio on your credit cards – this ratio accounts for 30% of your score. Lowering your credit card balances might be all you need to push upwards to 800 or beyond.


How to Buy with a Bad Credit Score

If you found yourself in the 500 or below categories, you probably already know how difficult it can be to secure lending. But, there are still some options for buying what you want. The first option is to pay cash. Learning to save and wait are budget skills that will help you maintain a higher credit score once you achieve it. Credit card-debit cards (like Visa-debit or MasterCard-debit) allow you do make purchases that are usually reserved for credit card holders, but the purchase is made with cash from your checking account. This includes shopping on-line, airline tickets, hotel rooms and car rentals.

As mentioned above, there are some lenders who are willing to take a risk on borrowers with low scores – but you have to be willing to pay the price. Interest rates can be as much as 6% higher (meaning a higher monthly payment) and the down-payment required on a car loan or mortgage may be as high as 35%.

No matter what your credit score is, you probably have some room to make it better. The factors that contribute to your FICO score are: payment history, amount of total debt, how long you’ve had credit (the longer the better), how often do you apply for new credit and the types of credit you use (mortgages, car loans, credit cards etc.) The past has already happened; look forward to your future and your new and improved credit score.


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