What You Should Know About a 550 Credit Score
A 550 Credit Score isn’t such a great rating. It may not be among the lowest range, but there’s a lot of work needed if you want to get loans, mortgages, or several other benefits that come with a high credit score.
With a 550 credit score, you probably wouldn’t get loans on easy terms. In fact, it would probably be very hard to get loans approved in the first place.
What Is a Credit Score?
A credit score is the culmination of your credit decisions and repayment history of any loans, credit cards, and other debts you’ve racked up in the past. Better decisions and responsible repayments make for a good credit score.
The higher this number goes, the more confident creditors would be in lending you more money. Below are some examples of the audiences you want to impress with a high credit score:
- Credit card companies
- Car dealerships that finance automobile purchases
- Banks that approve mortgages
Usually, a credit score falls between the values of 300 and 850. Anything above 700 is generally a good score and likely to make loan approvals, credit cards, and several other financial sources easier to obtain.
Simply put, the higher your credit score, the more potential lenders would be aware of your reliability to pay them back.
What Does a 550 Credit Score Mean?
Below are some loans and other lines of credit that could be affected by the low score of 550.
While it’s possible to get a car loan with a 550 credit score, it’s not always easy persuading a dealer to do so.
If they do give you a vehicle, you would be likely to have a much higher rate of interest than people with better credit scores.
This would make your repayment terms very difficult to fulfill.
For instance, if you take the average auto loan sum of $27,000, you would probably have to pay back the amount in 36 months or three years.
There are also 48- and 60-month repayment periods available for new auto loans.
If you have a 550 credit score, you would probably have to pay around 15% interest. On the other hand, a person with a 650 credit score would probably only have to pay around 9% or slightly higher than that.
If you get the 36-month repayment period, you’ll be paying almost $2500 more in interest than someone with a 650 credit score.
The difference would only keep growing the longer it takes you to repay the loan. For four years, you would have to pay an additional $3500 or thereabouts, whereas a 60-month loan would cost you almost $4500 more.
As you may see, it’s a much better option to first work on your credit score and then go for an auto loan.
This could potentially save you thousands of dollars. Fixing your credit score, on the other hand, would only cost a few hundreds of dollars. All things considered, this is a small price to pay for the benefits you get. We’ll be discussing more on how to improve your credit score later on.
Credit cards are a risky line of credit at any point since there’s always the chance of missing payments and having to pay avoidable interest.
However, even getting a credit card could be severely limited for a person with a 550 credit score.
When issuing credit cards, the usual rule is that only scores of 600 and above may qualify for unsecured cards.
A 550 credit score would only give you a secured credit card, which comes with a number of limitations. You would also have to deposit a certain amount in the bank before they would see it fit to issue you a credit card.
The good news, though, is that opening a secured card could raise your overall credit score. If you perform well with this card, you may even be able to qualify for an unsecured one the next time.
Your low 550 credit score could limit you when buying a house as well. Such a score would even make the terms of renting a living space much stricter than otherwise.
If you want to mortgage your home, you would have to get a credit score of 620 or above. You may be able to locate a loan that allows for a 550 credit score, but this may make several other factors much harder, such as debt to income ratio.
Getting a home loan with a 550 credit score may be possible in a few circumstances, but they’re usually not worth taking in the long run. You’d just end up spending more money in making those high payments.
As the years go by, you could find yourself paying almost $70,000 more than if you’d just worked on your credit score a bit. This is because the monthly mortgage installments would likely go up by a few hundred dollars.
How Credit Scores Are Determined
Credit scores aren’t set in stone but determined by several factors. Fortunately, most of these factors are within your control, even though they may be difficult to manipulate. In general, one’s credit score is determined by the following:
This means payments on loans, credit cards, mortgages, and any other conventional line of credit.
These payments are reported automatically to the credit bureau. If they’re made on time and above the minimum requirement, they would be a booster for your credit score.
However, frequent late payments would serve to knock your credit score down. The extent of the lateness is also a key factor in adversely affecting your credit score.
This includes any instance where you may have filed for bankruptcy or come under civil judgment. It is also concerned with tax liens or any changes made to your public history.
This would include the number of credit accounts in your name along with the duration they’ve been open and their type. The credit utilization rate, numbers of new credit accounts, and the number of times people have inquired to see your credit report also count.
Your credit score would suffer the more debt you pile up. However, if you have a history of paying it all off on time, this is actually a great way to boost your credit score.
There are several other factors at play when it comes to your credit score, but the ones above are the most common.
The most influential of these factors is your payment history. After that comes your total debt, and then the depth of your credit history. Your new credit lines, such as credit accounts, are among the least influential factors.
Range of Credit Scores and What They Mean
There are several measures of credit scores, but their results are usually more or less similar.
As mentioned above, most credit scores fall between 300 and 850. Below are the ranges that one could fall into within this wide spectrum. We’ll also be discussing what being in a certain range could mean for you and your financial aims:
This range, which falls just shy of our 550 credit score, is the poorest one. Around seventeen percent of the population could be expected to have such a range, which means it is well below average.
If you apply for any line of credit with this score, you would probably be asked to pay a fixed deposit that would diminish the benefits of the credit itself. In fact, you may not even get any credit approval in the first place.
This sort of credit range begins at 550 and may have some chance of loan approvals at stringent rates. You may expect around a third of the population to have this rating, so it is quite common.
However, this range is just slightly better than the lowest range. With a score within these numbers, you could expect to be counted among a group called ‘subprime borrowers.’
This range takes you to the score of 670 and above. This is a bit more common than the subprime group of borrowers mentioned above. Lenders usually don’t expect anyone from this group to become delinquent later on.
While it is possible, only a minor percentage of credit scores in this range are likely to have delinquent payments or other issues once they get their loan approvals.
This range of credit scores is quite good. Banks and other conventional lenders are likely to offer better interest rates to borrowers who fall into this category.
This range of credit scores is quite exceptional. It can be difficult to achieve this range and perhaps even harder to maintain it. However, there are several financial habits you can adopt to keep yourself in this excellent situation.
If someone who falls in this category applies for a loan, they would probably be a priority for the lowest interest rates and most beneficial rates from most lenders.
How Interest Rates Can Affect Your Credit Score
Credit products like mortgages and credit cards come with a certain interest.
This is itself linked to a benchmark prime rate that banks use to determine what rate they would charge their customers. The interest rate charged may go up and down with the prime rate, or it could be fixed for a certain period of time.
The movement of the prime rate depends on the Federal Reserve Board (FRB) and how much it would adjust its federal funds rate.
The latter is the interest rate paid by banks on overnight loans. The meeting of the FRB is, hence, highly important for anyone who has a variable rate on their loan. This meeting takes place every 42 days or 6 weeks.
Rising Interest Rates
If you notice interest rates rising, you are better off with loans having a fixed rate of interest.
If you think the rates are going to rise by a whole percent or more, fixed rate is an even better option. With a fixed rate loan, you wouldn’t have to pay any more interest or principal payment than was determined at the beginning of the loan and repayment period.
Most auto loans and home loans are fixed-rate loans. Getting more loans like these in a time of rising interest rates could improve your credit score. If you’re planning to live in the house you want for around 5-7 years, a fixed rate mortgage should be aimed for.
In order to get an even lower interest rate, you can consider a hybrid mortgage.
This means that you start with a fixed rate of interest, but this rate would convert after a few years, or even a decade, to a mortgage with adjustable rates. Going for such an option could result in a very low initial rate.
Below are some things you can do to improve your credit score when interest rates are rising:
- Take out a home equity loan on a fixed rate of interest and pay off all your credit cards that have high interests. You would want to get a tax advisor’s opinion on this, but this action just might save you a bundle if the timing is right.
- Pay off the balance on your credit cards by more than half. This action alone could aid in getting a great interest rate from any lenders in the future.
- Put your mortgage or adjustable rate loans under a ‘stress test.’ This would let you know if you can even make every payment on time if the interest rates go any higher.
- Leave the option of interest-only mortgages open in case interest rates go higher than you can afford.
- Think about making a serious purchase sooner rather than later, such as buying a large appliance, house, car, or land.
Falling Interest Rates
If your house is on an adjustable-rate mortgage, you should welcome a period of falling interest rates.
This would allow you to actually make lower payments as the time goes by. In fact, loans with adjustable rates are known for having lower rates in the beginning than fixed-rate loans.
In order to boost your credit score, you should take advantage of decreasing interest rates. Below are a few ways to do just that:
- When you see lower interest rates on the market, you should start thinking about refinances, whether they’re about your car or your mortgage.
- Pay off credit cards with a high rate of interest using a home equity loan or a similar line of credit. Home equity loan rates tend to fall more quickly than those of credit cards. Hence, it’s best to get the lower rates on the loan rather than waiting for the credit cards to adjust to the change.
Difficulties of Applying for Credit with a 550 Credit Score
Heightened Risk for Lenders
Your credit score is the tool with which lenders make the decision to approve your loans and decide on their repayment terms.
These scores would tell them just how likely you are to repay your loans on time. Whenever someone lends you money or capital, they’re risking their assets, so it’s only fair that they should be able to assess that risk before taking any such step.
When you have a 550 credit score, you’re telling prospective lenders that your past repayment history isn’t very good. They may, hence, not even approve your loan. Even if they do, the interest rates would likely be very high. The difference could end up costing you thousands of dollars in the long run.
Another difficulty involved with a low 550 credit score is in the choice you get. The average person usually wants to take out a loan for the following reasons:
- To purchase a vehicle
- To start a business
- To purchase a home
When you don’t qualify for a loan on good terms, you also lose the chance to get the car, apartment, house, or business of your dreams. You may, hence, have to settle for something less than your original plan. This also goes for something like a cell phone service.
Improving a 550 Credit Score
It’s hard to imagine why someone with a need for financial resources would stay content with a low credit rating. It’s now clear that a 550 credit score is simply going to create more problems and cost you more money whenever you’re in need of any credit. Hence, it’s high time we looked at just how such a score can be improved. Below are a few ways in which you can go about this:
Paying Off Balances
If you have any debts pending, focus on paying them all off as soon as possible. Granted, this may not be possible for everyone in the short term. After all, if they haven’t been able to pay their debts up until now, who’s to say that they’d be able to do so anytime soon?
If you’re unable to pay off huge loans right now, focus on the small ones. Sometimes it’s the little debts that tend to pile up and chip away at your credit score. See if you can pay off revolving balances to a third or less of their value.
Credit Repair Companies
If there’s a need to improve your credit score quickly, you can do so within a month by enlisting experts for the job. There are several credit repair and credit building programs that could help you reach the right credit score to make it easier to get a line of credit.
Credit repair companies would not just repair your credit score but also build it up to a high level.
This could help you get financial success very quickly. However, be warned that restoring your credit is not a straightforward matter. There is no model that fits every individual with a poor credit score. This is why the help of experts is necessary. Going at it alone without the right experience or knowledge would be a highly risky effort that could knock your credit score even lower.
Avoiding Certain Habits
There are several ways in which you could avoid making your credit score worse than it already is. In fact, by avoiding the items below, you could repair your 550 credit score and get it to a higher level sooner than you think:
- Delinquent payments
- Short sales, especially of real estate that you personally own
- Declaring bankruptcy
The Bare Minimum
If you have payments pending, pay the minimum on all of them.
This may only make a tiny dent in your credit score, but something is better than nothing. In any case, meeting the deadline by even the minimum would eventually get your score up to a decent level.
In any case, resolve never to miss a payment again. Let the previous non-payments pile up for now, but get to them as soon as possible. For the moment, focus on the current payments in order to start some short-term damage control.
Go through the procedures for removing negative items on your three most significant credit reports. The whole method would take a lot of time and even be frustrating. It may also not always work. Still, anything is worth a shot in order to fox your credit score. After all, this would help make your life better and easier, especially from a financial point of view. This is worth looking at to improve your 550 credit score.
Talking Out Your 550 Credit Score
You may not be on the best of terms with your creditors if you have a 550 credit score.
However, it’s worth trying to talk to them and see if a beneficial arrangement could be set up. If there is such an agreement, get it in a contract right away.
However, be aware that certain arrangements may seem to benefit you but would hurt your credit score. If a creditor agrees to lower the loan balance, for instance, your credit score could plummet even further. See if you can wrangle a later payment date if at all possible. That would make your payments a little easier to make and actually boost your credit score.