It's relatively easy these days to get a reasonably accurate estimate of your credit score. Every American is even entitled to a free copy of their credit report once per year, which can help them ensure that their credit is in good shape and that their credit score is accurate. So when you get your credit information and see that you have a 500 credit score, how should you feel?
The truth is, a 500 credit score is considered a score in the "bad" range. While this may mean that your score is closer to the bottom than the top, it also means that there is plenty of room for improvement. It also means that improvements you make will often have a significant impact.
Using the most common scale, a FICO credit score of 500 is considered "bad." This won't completely preclude you from getting any credit products, but it can limit your options relatively significantly. We're going to look deeper at what exactly having a 500 credit score means, as well as what you can do to increase your credit score.
Is A 500 Credit Score Good Or Bad?
A 500 credit score on the most common FICO scoring models is categorized as "bad," but it's not the worst score you can have, but it's in the lowest category of scores. The same 500 credit score would be categorized as "poor," with only the "very poor" category containing lower scores on the VantageScore system. While FICO is used for the majority of lending decisions, the VantageScore model is employed as the next most popular method.
While having a 500 credit score means you're currently closer to the bottom than the top, it also means that improvements you make are going to reflect more significantly on your credit score. However, once you improve your score, you'll want to make sure you keep working at it because any negative marks will drag it down quickly.
Just because 500 is technically in the "bad" credit category in most considerations, that's no reason to become apathetic about it either. Even though 500 is bad, it can go lower. Though it's incredibly difficult to get down that low, the scale does go down to 300. Coming back from a 500 score could take a year or two, but coming back from a score below that can take several years because the lending options are so limited and expensive.
What Are The Other Credit Score Ranges?
There are two commonly used credit scoring models: the Fair Isaac Corporation's FICO score and the VantageScore model. FICO is used in most decisions involving objective ratings for creditworthiness, and for the small percentage that remains, VantageScore is the runner-up.
The lowest tier in the FICO system is "bad," and it is comprised of scores of 300 through 629. The next tier is "fair" credit and is denoted by credit scores of 630 through 689. Once the consumer hits 690, their credit is considered "good," and when they reach 720, it is considered "excellent."
On the VantageScore system, there is an additional category, and the scoring is shifted slightly. Consumers with credit scores of 300 through 499 are considered to have "very poor" credit, while those with scores of 500 through 600 are said to only have "poor" credit. Once a score of 601 is reached, the consumer has graduated to "fair" credit, reaching "good" credit at 661, and "excellent" at 781.
What Can You Do With A 500 Credit Score?
With a 500 credit score, you will be able to do just about anything you would want to do with higher grades of credit, you just may not get the best terms offered to you. You will still be eligible for credit cards, auto loans, and even mortgage programs, but they will generally be more costly over the term of the account and will have higher penalties in some cases.
For credit cards, those with a 500 credit score will likely be able to get secured cards with better APRs than unsecured, but even with a 500 score, getting approved for an unsecured credit card can be possible. You should look for secured credit cards with low deposits and be sure you only operate one or two at the most.
You may be able to qualify for auto loans, but just like with a secured card, the lender may require a higher down payment. They may also charge significantly higher interest on the loan, which will cost you much more over the life of the loan. In some cases, the lender may require a modified payment schedule, even up to weekly payments.
How Is Your Credit Score Calculated?
Many factors will come into play when a lender is deciding whether or not to extend a line of credit to you. These factors are all aggregated and used to score your creditworthiness on a scale of 300 to 850. You also don't have just one score; each out of the major bureaus will have one for you, based on their records of your credit history. This means that due to reporting differences, you can have a score with Experian that is several points different than your TransUnion score.
Credit scores are calculated using several criteria, and depending on the scoring model, each criterion will have a secondary consideration that dictates how heavily it will influence the overall score. These will vary based on the organization calculating the score and include:
- The total number of open credit accounts
- The types of open credit accounts
- Credit utilization, or the amount of total credit versus the amount that is currently used
- The length of the overall credit history
- Payment history, including payment on time or late, how late payments were, how much your payments were, and how often or recently you've missed a payment
Your payment history is generally one of the more heavily weighted categories, and it represents the risk a potential lender takes on of potentially not getting paid back. Payment history is often seen as an early indicator of default potential.
Your credit utilization is another relatively significant factor, and in most applications, the ideal utilization rate is about 30%. This means that if you have $30,000 in total credit lines, you average only having about $10,000 of the credit line used on a month-to-month basis.
Another factor that can have a bigger impact on your application acceptance depending on what type of credit you're applying for is the types of credit accounts you already have shown open. This means that if your credit report shows that you have several credit cards open already, you're less likely to be approved for another. Having a more diversified variety of credit lines will help you achieve a higher credit score.
The length of your credit history will affect your credit score, but generally speaking, the negative impact it can have is incredibly small. The length of credit history will often strengthen your score as it gets longer if you didn't have a sufficiently long enough history before. Having less history tends to contribute to a "no credit" situation instead of a "bad credit" situation.
Also read: How Marriage and Credit Scores Are Related
How To Improve Your Credit Score
The most effective thing you can do to improve your credit score is to begin making payments on time for every account you have. If you don't have a credit card, getting a small secured credit card can be great for boosting your score over a few months. If you rent, paying a rent reporting service to report your last year or two of rent can be an incredibly fast way to add to your score, sometimes raising it a dramatic amount.
Other options are credit builder lines of credit, which can include loans or credit cards. Credit builder credit cards will operate just like any other pre-paid debit card, where money is put on the card and then used to fund purchases. Those purchases are aggregated over the month and reported to credit bureaus as paid in full and on time, which can be very powerful ways to create good credit.
Credit builder loans are loans that are taken out and held by the bank. Your monthly payments on the note are reported and deposited into a CD. After all loan payments are made, the CD matures, and the funds with interest are paid out to you, while the loan is marked as paid and closed in good standing.
Also read: How Accurate Is CreditWise Credit Score?
A 500 Credit Score: Could Be Better, Could Be Worse
If you have a 500 credit score, you are certainly in a position to turn your credit history around. While you may think there is a long road ahead of you, and there is, it just may not be quite as long as you think. The biggest hurdle is getting your first few "baby steps" lines of credit, and then keeping those in good standing for several months before you start to see benefits. Once you see the benefits, however, it becomes a whole lot easier.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.