What is a fair credit score? Credit reporting agency (CRA) Experien says it includes FICO scores from 580 to 669. What is a poor credit score? Anything under 580 is “poor” or “very poor.” And there are huge benefits to getting out of the poor range and join mainstream consumers. This report will tell you how to raise your credit score from poor to fair.
Life with a poor credit score
Poor credit means your access to credit is pretty restricted. Lenders offer less and expect you to pay a lot more for it. Here’s an example of how these restrictions can cramp your style.
Let’s look at two credit applicants, one with poor credit and one with fair credit. They both earn $5,000 a month and both have bills and housing costs totaling $1,600. Here’s how their request for a personal loan might play out:
The lender allows the consumer with fair credit to borrow until his debt-to-income ratio is 43%, and offers an interest rate of 20% for a personal loan. So 43% times $5,000 monthly income $2,150. With $1,600 in current expenses, that leave a payment of $650 a month. The maximum for a 5-year loan at 20% with a $650 payment is $24,534.
The applicant with a poor credit score gets a different offer: up to a 38% debt-to-income ratio and a 36% interest rate. So 38% times $5,000 is $1,900. After expenses of $1,600, the consumer can spend $300 a month for a personal loan payment. With a 36% rate over five years, you get a loan amount of just $8,303.
Fair credit and mortgages
While FICO and Experian say that fair credit begins at 580, most mortgage lenders have a different cutoff. In mortgage lending, fair credit begins at 620. To get a mainstream, traditional mortgage, then, you should shoot for a score of at least 620. The 580 FICO can make you technically eligible for FHA financing, but very few of these applicants with scores under 620 actually secure loan approval.
The benefits of going from poor to fair
Rising from the poor tier into the fair tier provides more credit opportunities and lower costs.
According to myFICO’s Loan Savings Calculator, going from poor to fair can save you $796 on a five-year new car loan. Your interest rate drops from 16.9% to 15.7%.
And for mortgages? myFICO’s calculator doesn’t even consider mortgages for people with scores under 620. However, there are non-prime lenders who do — at about 6.25%. For fair credit, you’d pay 4.9% with a 620 -639 FICO as of this writing.
Then, there are credit cards.
The best credit card rates for fair credit run between 21% and 27%. While most consumers with poor credit pay in the 36% range if they can even get a credit card. If your FICO score is in the basement, you may have to use a secured credit card until you improve and join the ranks of people with fair credit.
How to raise your credit score
Now that you see the benefits of fair credit, let’s make it happen:
- Pull your credit report at www.annualcreditreport.com. The law entitles you to a free report from each of the three biggest CRAs every year
- Look for inaccurate credit history or balances, and the “reason codes” showing why your score is less-than-perfect
- Dispute incorrect information. About one-fifth of credit reports contain errors serious enough to get the consumer denied credit or cause him or her to pay more for borrowing
- Address the reasons for your fair score –most common include bad credit history, high credit usage, or insufficient credit use or history.
Now it’s time to address these issues.
How to dispute incorrect information on your credit report
Items like these can harm your score.
- Balance reported is higher than actual balance
- Accounts discharged in bankruptcy are still showing as delinquent
- On-time payments are reported as late
- Account was wrongly sent to collection
- Account brought current still showing as delinquent
- Derogatory item reported belongs to another consumer
- Derogatory history is result of identity theft
First, contact the creditors that reported your account incorrectly. This may be all you have to do. Once they resolve the error, they should report correctly to the credit bureaus in the next cycle and you’ll see the results in a few days or weeks.
Alternatively, you can dispute an incorrect entry in writing with the credit bureau(s) reporting it. Send a letter or report the error online on the TransUnion, Experian or Equifax web site. Supply anything that proves your case, like an automated bill payment on your bank statement. And keep copies of any letters or documents sent.
Fixing errors can raise your credit score in a few weeks. The credit bureau has 30 days after receiving your dispute to investigate and verify information with the creditor. It must also report the results back to you within five days of completing its investigation.
Fixing bad credit history
As long as you’re behind on your payments, you’ll never improve your FICO score. It’s time to stop the bleeding.
Contact your creditor and explain that you can make your monthly payments but just can’t catch up the past-due amounts. If you send in a payment or have a non-profit credit counselor contact the creditor for you, it may agree to re-age your account for you.
That means you don’t have to catch up. The creditor adds your past-due amount to your balance, and as long as you pay on-time in the future, you won’t get any more late payments on your credit report. Re-aging can raise your credit score very quickly.
What about missed payments in the past? Again, if you throw yourself on the mercy of your creditors, you may get relief. This is more likely if your history with them has generally been good. Write them a goodwill letter explaining the circumstances that caused you to pay late. Apologize and ask them to please remove the late payment from your credit history. You have a better chance of success if you are current, have a long-standing relationship and a good reason for being late.
Sometimes, the only cure for bad credit is time. Every month that passes makes a late payment less important because the greatest weight is given to the most recent entries. Keep making your payments on time for six months to a year and you’ll see a difference. Don’t increase your credit balances. Just devote yourself to paying on time and owing less. Monitor your credit and watch your score climb.
Decrease credit use
If you carry balances on credit cards, and those balances increase over time, you’ve created an unsustainable spending pattern. Eventually, you won’t be able to afford your bills. That’s why credit scoring models pay close attention to the amount of available credit you actually use. The relationship between the amount of credit you have and the amount you use is called utilization.
If you have $10,000 in available credit and use $6,000, that’s a 60% credit utilization ratio. Most consumers with good credit scores have utilization of 30% or less. You can decrease utilization by:
- Paying down balances
- Increasing credit limits (by applying for more cards or by asking your existing creditors to extend more credit)
- Replacing credit card balances with a personal loan (personal loans are installment loans, so paying off your credit cards drops your utilization ratio to zero, even though you still owe the same amount)
Don’t consolidate your debt with a personal loan unless you are confident that you won’t run your credit card balances back up.
Build or rebuild a credit history
You can bulk up a “thin file” by opening a few accounts, charging small amounts and paying off the balances each month. But it can be hard to get credit if you haven’t had credit. There are a few tools to help:
- Phone a friend — get a co-signer
- Tailgate — with an authorized user account
- Borrow from yourself — with a secured credit card
Borrowing with a co-signer may allow you to get a better interest rate. Don’t borrow more than you can comfortably repay. Try a small personal loan, and pay on-time every month. Remember that late payments on your part can harm your co-signer’s credit report — and your friendship.
Authorized user accounts are safer. Your friend or family member who has good credit can share it by making you an authorized user on one or more credit cards. You don’t actually use the card. But when the account-holder pays the monthly bill, that good history shows up on your credit report and helps improve your score.
Secured credit cards are not really credit. That’s because you deposit money to cover your limit with the card issuer, and it can keep that deposit if you don’t pay your balance. But you do get a card, and your credit limit may increase over time. You may eventually even get your deposit back if you manage the account responsibly. Look for a card with low fees, and make sure the issuer reports to all three major credit bureaus.
Once you have taken care of the most serious reason codes on your credit report, continue making your payments on time and reducing your balances. You’ll continue to raise your credit score — until you get to the fair range and continue into good.