What is the Lowest Credit Score?
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FICO, the model used by the majority of lenders, generates credit scores using the FICO® Score 8 version with a range beginning at 300 up to an 850 maximum score. However, certain industry-specific FICO credit score versions use a 250 to 900 range.
Given that, 300 is often the lowest credit score. People just starting to build credit don’t have a credit score at all. There is no “0” credit score.
Using FICO Score 8, lenders generally view applicants for new credit with scores below 579 as having poor credit. People with bad credit scores will typically not qualify for the best credit cards, preferred car loans, or other low-interest rate credit accounts.
Reasons Why Your Credit Score is Low
High Credit Utilization
A credit utilization rate or credit utilization ratio involves making a calculation expressed as a percentage between your amount of current debt and your overall credit limit.
Credit Utilization Rate % = Total Current Credit Card Balances / Total Maximum Credit Card Limits
Utilization rates involve revolving credit accounts, typically credit cards, as illustrated in the following example:
A consumer has two credit cards, both with a maximum credit limit of $5,000. The current balance on Card A is $1,000 and Card B is $2,000.
$3,000 / $10,000 = .30 = 30%
A good rule of thumb is maintaining a rate of less than 30%, as lenders know that maxed out credit card accounts might indicate possible financial distress.
Minimal Credit History
Consumers with a limited credit or payment history face similar challenges as those in low credit score ranges. Establishing a documented payment history on your credit report represents the first step toward achieving an average credit score.
Consumers often endure frustration from this catch-22 situation, as lenders are often hesitant in approving loans or credit card applications when potential borrowers lack credit history.
Here, efforts to improve your credit score remain stymied without actually obtaining a loan, credit card, or another opportunity for establishing a payment history on your credit report.
Bankruptcy
Borrowers who accrue substantial debt may find themselves insolvent and incapable of repaying their existing obligations. Bankruptcy is a legal process handled by the federal courts that allows relief for debtors by discharging most debts and prohibiting further collection efforts.
Consumers generally enter the bankruptcy process seeking a fresh start or opportunity for rebuilding their financial situation. While debtors typically emerge from bankruptcy free of burdensome debt, they will have bad credit, often near the lowest credit score range.
Personal consumer bankruptcies are categorized as either Chapter 7 or Chapter 13. Chapter 7 remains on your credit history for 10 years and Chapter 13 remains for 7 years; however, many people restore their bad credit to at least an average credit score within a couple of years.
Collections
Once a credit card, personal loan, student loan, or other debt remains unpaid for a period, such as 120 days, a creditor will initiate formal collection efforts.
While creditors generally report late payments to the credit bureaus in intervals of 30, 60, and 90 days, the collections process will further harm your credit score and likely result in phone calls and letters from debt collectors.
Collections result in an adverse credit entry that remains on your credit report for 7 years.
Late Payments
Late payments will likely appear on your credit report within 30 days after missing the due date and adversely impact your score. Further, the creditor will likely impose late fees.
How severely a single late payment impacts your credit score varies based on several factors. The following table shows some estimates.
How Late Payments Affect Credit Scores
| Type of Loan or Account (30 days) | Possible Impact on Credit Scores |
| Mortgage Loan | 60 to 80 point drop |
| Credit Card | 25 to 85 point drop |
| Car Loan | 25 to 85 point drop |
| Student Loan | 90 to 110 point drop |
Source: Money.com
Downsides of Having Low Credit Scores
High Loan Denial Rate
Those struggling with poor to minimum credit scores will face a much higher likelihood of experiencing a denial when applying for loans, credit cards, home loans, and more.
According to the Consumer Financial Protection Bureau (CFPB), lenders that deny you credit must provide you with documentation explaining the reason(s) for their decision or at least details regarding where access to this information is available.
When a lender cites your credit as the basis for a denial, they must provide you with the following:
- The numerical credit score they used
- Information regarding the source(s) of your credit information
- A written statement of your right to a free copy of your credit report
Higher Fees
In many cases, those with below-average credit scores will face annual fees or initial opening deposit requirements when obtaining a credit card.
However, many applicants with poor credit or limited credit history will find card options without annual fees, but these accounts might come with higher interest rates.
Many sources of credit score statistics show that drivers with poor credit will usually pay higher premiums for car insurance in most states, often with the policy prices being substantially higher.
Higher Interest Rates
Data suggests that consumers must have a minimum credit score of 720 for the best auto loan rates and 750 for the best mortgage rates. Based on the generally longer terms associated with mortgage loans, even a slightly higher rate might really add up.
For example, assume a mortgage applicant is seeking a $300,000 home loan with a 30-year term. With a 620-credit score, the APR is 4.8% or with a 720-credit score, the rate is only 3.2%.
Using this example, although a 1.6% discrepancy seems minimal, a difference of roughly $275 exists per month. Over 30 years, the borrower will pay approximately $99,000 more.
Higher Security Deposit
Consumers with poor credit will more likely face deposit requirements when establishing an account for utilities such as electricity or gas service. This may also apply to consumers entering agreements with mobile phone carriers.
Similarly, landlords are often significantly more reluctant to lease an apartment to applicants with poor credit, particularly in strong rental markets. Here, a landlord might approve the rental application if the prospective lessee pays a higher upfront security deposit.
How to Improve Your Credit Score
Get a Credit Builder Loan
Consider a credit builder loan from CreditStrong, a division of an FDIC-insured community bank based in Texas.
A credit builder loan is a type of installment loan that differs from a traditional loan where the borrower initially receives the loan funds. Instead, all loan funds are deposited into a secured savings account where they remain throughout the term of the loan.
Each month, the borrower makes a fixed payment toward the loan balance, which is promptly reported to all three major credit bureaus. Over the course of the loan, you may build a consistent credit history that helps with achieving a good credit score.
The loan funds deposited in the savings account become available at the end of the term after completing all the loan payments.
Pay Bills on Time
The basis for FICO score calculation involves five primary factors as follows: payment history, amounts owed, length of credit history, new credit, and credit mix. Among these five, the largest single factor is payment history—weighted at 35%.
Paying all credit accounts in a timely manner is critical, as even a single late payment may adversely impact your credit score.
Consider setting up automated reminders in advance of payment due dates or utilizing automatic electronic payment options linked with your checking account to avoid late payments.
Build Credit History
While making timely payments on all credit accounts is critically important, demonstrating this positive pattern over a span of months or years will translate to higher credit scores.
FICO scores consider factors such as the age of your oldest and newest account, and will calculate the average across all accounts. Those with excellent credit scores usually demonstrate consistency over a multi-year period.
Keep this in mind when closing an old credit card account that you no longer use—particularly, if the majority of your credit history involves recently opened accounts.
Pay Your Debt
While lenders might view having an overall large amount of debt critically, other metrics more accurately identify higher-risk borrowers. The first involves the aforementioned credit utilization rate or your ratio of credit card debt compared to your overall credit limit.
Another reason for paying down debt is for improving your debt-to-income ratio (DTI), which is the percentage of your monthly income allocated for paying debts. For example, if your monthly debt payments are $2,500 and the gross income is $5,000, the DTI is 50%.
Many mortgage lenders prefer your DTI to not exceed 36%.
Monitor Your Credit Reports
Consumers may receive a free copy of their credit report annually. Reviewing the report allows for identifying any errors that might hinder good credit scores, detecting any possible fraudulent activity, and helping with tracking your improvement.
FAQs
Can You Have a Credit Score of 0?
You cannot have a zero-credit score, but you may have no score. Credit score “invisibility” occurs among those without a credit history.
Invisibility occurs among young adults without any credit history or older consumers that haven’t used credit in years.
FICO generates credit scores for consumers with at least one account reported to a credit bureau in the past six months unless they receive confirmation of a person’s death.
What is Too Low of a Credit Score?
FICO Score 8 uses a range from 300 to 850 and scores at or below 579 represent a “poor” credit risk.
Consumers in this range will struggle with obtaining credit approval and only qualify for financing with exorbitant interest rates.
Is 500 a Bad Credit Score?
A 500 FICO score is substantially below average. Many mainstream lenders will not finance consumers with scores in this range.
Applicants for credit cards with a 500 score will have limited, high-interest options, and many utility providers will likely require security deposits before establishing service for these consumers.
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
