When people find out that they have a 500 credit score, it is rational to…
One of the surprising things that have come out of this pandemic is the record-high average credit score in America. (It’s a 710 FICO Score, in case you are wondering.) But it actually makes sense because as we live in uncertain times, people will want to fix the things they actually have control over.
You probably came across this article, though, because you just saw your credit report, and you found out that yours is way below that average. In case you needed to hear this, don’t worry! It’s not the end of the world.
Right now, you are probably curious about the options you can actually get with this kind of score if there are any at all—and there are! We promise. However, it’s better if we put things into perspective to plan wiser and work better for the outcome that we truly want.
As you read on, we hope to answer these questions that might be brewing in your mind:
- Which credit scores exactly are considered poor ratings?
- What factors affect our credit scores?
- What kind of mortgage can I get with a 550 credit score?
- And finally, what can I do to improve?
When it comes to our finances and goals, it’s important to keep an open mind, so we can learn new ways to overcome our obstacles. You’ll learn that a ton of determination can also do the trick!
Table of Contents
How bad is bad credit?
Since we will be talking about credit scores in general, we shall refer to the FICO Score, which is the most common type of credit score used by credit reporting bureaus.
Many components are judged and put into a numerical value system to develop our credit score. However, it all really boils down to how responsible you are for repaying a debt. It really is just that, a number. If you’re not convinced, know that our credit payment history is reviewed to come up with our FICO Score. This actually makes up 35% of our total score.
According to FICO themselves, any credit score that is below 670 is already in bad shape. And if your credit score is less than 580, it is especially poor. But while this definitely doesn’t paint a good picture, this is not the entire picture. There are still options for borrowers with this kind of credit score.
If you haven’t learned it yet, FICO Scores range from 300 to 850, with 850 being the highest. Nobody actually starts with a FICO Score of zero. It just isn’t possible. You either get a credit score or don’t because you haven’t built any credit history.
Only 9% of people actually have a credit score that’s below 550. Furthermore, almost everyone actually has a FICO Score over 500. So if you really want to categorize “bad credit,” there’s only about 1% of borrowers who have that kind of rating.
How come I only got 550?
One of the reasons why credit scores can get so personal is because of all the information found in your report. This document can even go back a couple of years, showing events in your past that you probably don’t want to remember. But it is important to take a good look for two reasons.
Firstly, of course, nobody wants to see someone else’s debt in their credit report, but this kind of mistake is actually possible. In fact, this is exactly what happened to Judy Thomas, who was featured in an episode of “Last Week Tonight with John Oliver” because of her horrifying experience checking her report and finding out that the credit history and information of another woman, named Judith Candle, had been showing up in her history, giving her a significantly lower credit score. Thomas fought TransUnion in court and was later awarded $5.3 million, which is sweet but still. Unfortunately, she had to go through all that trouble because her poor credit score blocked her from becoming eligible for a home loan.
Hopefully, this is something that will never happen to you. However, it’s still better to be safe than sorry. If you have your credit report on hand, try to check every line. Maybe it’s saying you missed a payment somewhere, which can really pull down your score, no kidding. You can dispute some of the information to get corrected and stop counting towards your rating.
Once you have gone over the whole report line by line and breathed a sigh of relief (fingers crossed) that you don’t have to go through the inconvenience of disputing any errors, now it’s time to reflect on what you’ve just read.
At this point, you’ll probably know just exactly where the credit reporting bureau said; yes, this deserves a 550 score. If you skipped a payment, or maybe you have gone through bankruptcy, these can be tough to recover from, but they’ll definitely explain why you have this kind of rating. Depending on how long ago you experienced those, it might take a lot of hard work before you can improve your credit.
If those issues aren’t what’s holding you down, if there are no errors, missed payments, or bankruptcies, the next reason could be that you don’t have enough credit history after all. It doesn’t even depend on how old you are. Some people can be in their fifties with enough kept in the bank but still living with poor credit scores, just because they never actually take on any debts. If this is the case, then a little more experience will be all you need, and it can even turn your situation around in just a brief period.
A home loan is a debt you apply for where you use your house as collateral. You can either be applying for it because you don’t have the cash for full payment upon purchase or because you want to free up the capital that’s tied down to your real estate. Whichever is the case, you can’t be approved for a mortgage if you don’t happen to meet the minimum credit score requirements for the loan type you need.
Minimum Credit Score for each Loan Type
To give you an idea of the general loan options out there, here is a shortlist of the most common types of mortgages you might find as you shop around.
This might be the hardest to qualify for because unless you have military experience or are married to someone who has, you can’t qualify for a mortgage insured by the Department of Veterans Affairs. You also need to have a minimum credit score of 640 to ensure that you have a good chance of getting approved.
If you already have a lot of savings and need a high loan amount, you might need a conventional loan. This type of loan is most ideal for someone who can make a larger down payment (at least 20%) because without this, you’ll have to pay for private mortgage insurance. You’ll need to score at least 620 in your report if you have any plans of applying.
To encourage Americans to purchase real estate in the rural country, the U.S. Department of Agriculture backs USDA loans. Unfortunately, these don’t actually have a minimum credit score, but ideally, you should score a minimum of 640. Below this number, you’ll want to prepare documentation about the factors that led to your low credit score so that they can hear you out.
Finally, the government does its best to ensure that anyone can get a good shot at getting a mortgage loan by offering FHA loans. The Federal Housing Administration guarantees these, and they are meant for borrowers with credit scores that start at 500. So if your credit score falls from 500 to 579, you can get approved for an FHA loan, provided that you can make a down payment of at least 10 percent.
What To Do
So there you have it. Think you have a low credit score? So what! At 550, you can actually still be considered for an FHA loan or a USDA loan.
It is the American dream to buy a house you can call home, and everyone should have the right to be assisted when they truly need it. Whether you have bad credit or excellent credit, there are loans available to get a house.
However, we still have our own unique needs. What if you don’t really want to live in the middle of nowhere, in case you get approved for a USDA loan? What if you actually need to borrow a greater amount of money, and you can only get approved for an FHA loan?
Improving your credit can be a big game-changer, and this is why we recommend that you work hard on doing the following:
- Use your credit cards wisely, and make sure you don’t miss any of your credit card payments.
- Augment your income. If you have more money, you may be able to pay off the debts that are causing your score to go down. Just don’t overwork yourself!
- Watch how much you borrow. Since you’re aiming to qualify for a loan, and not just any loan, it will be great if you can show mortgage lenders that you don’t have too much extra debt that you’ll have to pay together with a mortgage loan.
If you are a first-time homebuyer (or even not!), and you have more questions, don’t be hesitant to shoot us a message. Remember, everyone needs help sometimes, and you absolutely deserve it!