The lowest credit score is 300 in the United States, according to the Fair Isaac Corporation (FICO). But the truth is that no matter how bad the management of users may be, rarely has such a low score been recorded. Despite the mark established by FICO, financial entities assure that a person has bad credit when their score falls below 580.
But are low credit scores good? Of course not, since having such a low score makes it difficult to access financial benefits granted by banks or other entities. Most likely, you will not be able to obtain credit cards, personal access loans, or a mortgage.
How can your credit score be so low?
Several elements will severely affect your credit score. Here are the most common ones:
1. Reduced credit history
If a person has little or no credit history, their credit score is likely to be much lower than usual. Your credit history will be affected if you have forgotten to make a timely payment on a credit card debt, for example.
2. High credit utilization
Abusing credit will affect your credit score. It should be taken into account that the credit utilization index makes a detailed measurement of the percentage of credit that a person uses compared to the credit available from a bank.
3. Late payments
Failure to pay bills on time will significantly impact your score. Creditors will notify you of the problem if you are 30 days in arrears in a row. And they will do so at the three major credit bureaus in the United States: Equifax, Transunion, and Experian.
This occurs when a person cannot pay a debt owed to a financial institution. Your creditor may sell the debt to a particular collection agency. But once the collection department learns of the debt, it notifies the credit bureaus. Ultimately, this mechanism can lower your credit score. But the problem is that it can take up to seven years before it is definitively eliminated from your history.
One of the reasons why your credit score decreases is when a person declares bankruptcy. And it can remain between 7 and 10 years on your report.
What are the risks of having a very low credit score?
The implications of having a very low credit score are many. And they can affect you in this way.
1. Denial of any loan
Most likely, the financial institution will consider that you do not meet the basic requirements to access a personal loan or any other type of loan. The most likely outcome is that the requested loan will be denied outright. If your score is low and you still need this benefit, you can access it through a co-signer.
2. Entities demand higher requirements
Lenders will likely demand more requirements to meet your loan application. One of them is the payment of higher down payment, being their intention to reduce the level of risk. When applying for leases, the landlord may ask for a security deposit with a much higher value.
3. Higher interest rate
Interest rates will be higher than standard if you are lucky enough to be approved for a loan even with a low credit score. With this, the lender intends to reduce the level of risk. As a consequence, the cost of the loan will increase considerably, while the amount allocated for other financial purposes will be reduced.
4. Much higher rates
Lenders will ask you to pay much higher fees if your credit score is low. One may be the origination fee, which will greatly increase your expenses.
This way, you can improve your credit scores
Now that you know your lowest credit score and how this situation affects your credit history, you should know how to improve your credit score to access multiple financial products.
1. You must start building your credit history
Start building or increasing your credit history by applying for an introductory loan or a credit card. To obtain either of these products, a security deposit is required. This deposit will be returned once you repay the requested credit or cancel the card.
Another option is to ask a trusted person with an impeccable credit history to affiliate you as an authorized user from your credit card. This way, you can significantly improve your score and access your benefits later on.
2. Don’t stop paying your bills
Payments of outstanding bills represent up to 35% of the credit score. Negative information derived from non-payment will affect that score. It will remain in your history for approximately seven years, so to avoid this uncomfortable situation, it is best to pay each of your bills on time.
3. Avoid debts
It is important to pay each of the acquired debts. But it is even more important to do it during the period established by the finance company. In this way, the utilization rate decreases, and the credit score remains intact.
4. Keep an eye on your credit report
Your credit report must remain clean, so to avoid errors that affect your credit score, you should review it, even once a year. You may have a problem if there is any incorrect or negative information. If you have detected any errors, the best thing to do is to notify the credit bureaus so that they can make the corresponding corrections.
5. Seek as much help as possible
When a person has enough debts or if his credit problems are noticeable, the best thing to do to avoid major inconveniences is to ask for help from an expert in the financial area. The benefit of an advisor will be indispensable to coping with the problem diligently. But before making a decision, research which credit repair companies fit your needs and requirements.
Learning about credit is indispensable nowadays. It is even more so to prevent your credit score from dropping and influencing your credit history. If you succeed, you will access most of the financial benefits granted by entities such as banks or lenders.