Worried about your credit score? Whether you're hoping to qualify for a new line of credit or you simply want to ensure your credit profile is in good standing, keeping track of where you fall on different credit score ranges can help you make smart financial decisions tailored to your profile. But how low can a credit score go, and how worried should you be?
The two most common scoring models, FICO and VantageScore, start at 300 points. However, industry-specific scores, such as FICO's auto, mortgage, and bankcard scores, start as low as 250 points. Scores at this end of the scale are viewed as bad credit and can negatively impact your finances.
In this post, we'll discuss low credit scores, outline the risks of a poor score, and cover the worst type of credit report entries that can do the most damage to your credit profile. To kick things off, let's gain a better understanding of the lowest score possible.
What Is The Lowest Credit Score?
Technically, some people don't have a credit score at all. This is often because they have little to no credit history or what's known as a "thin credit file." When someone doesn't have enough data to feed a particular credit scoring algorithm, the scoring model won't even register a score. The score isn't zero—it just doesn't exist yet.
This can make understanding what the lowest credit score is confusing. For this reason, we turn to the FICO Score and VantageScore models. The majority of financial institutions, businesses, and other lenders use these scores along with other financial information to understand the reliability of a borrower to pay back their debt on time.
Both of these scoring models range from 300 to 850 points. However, their ranges and corresponding category classifications are broken up with a slight difference.
|Category||Score Range||Category||Score Range|
Some lenders will also use industry-specific scores, particularly those from FICO, to determine a borrower's creditworthiness. These scores range from 250 to 900 points.
|FICO Industry-Specific Scores|
For example, a car loan lender may use FICO® Auto Score 8 or FICO® Auto Score 9 in their determinations, while a credit card issuer may use FICO® Bankcard Score 8 or FICO® Bankcard Score 9. A mortgage lender will use FICO® Score 2, FICO® Score 5, or FICO® Score 4, depending on which credit bureau they use.
In some cases, lenders will have proprietary algorithms or processes in place that generate completely different scores. However, consumers aren't privy to that information, so it's difficult to understand the bottom-end of these ranges.
What Are The Risks Of Having A Score That Falls On The Low End Of The Scale?
- Loan denials. Lenders tend to balk at applicants with a bad credit score. They often have strict criteria in place to weed out people who don't fit their ideal prospect. If your credit score doesn't meet minimum requirements, the chances are that they'll deny your loan application. One option for getting around this is to enlist the help of a co-signer, but even then, it will need to be someone who's in excellent financial health and has a great credit score.
- Higher interest rates. Lenders who work with bad credit consumers will approve a loan but use a risk-based pricing model to charge a higher APR (annual percentage rate). This is to compensate for the increased risk since borrowers in this category are more likely to default on their loan repayments. When an APR is high, it costs more to borrow money and takes longer to pay down the principal amount owed.
- Higher fees. Besides higher interest rates, lenders usually tack on higher fees for risky borrowers. This includes pricier application fees, origination fees, monthly services fees, and more. High fees are just one reason why shopping around for the best loan terms is so important.
- Larger down payments. In cases where a lender requires a down payment or collateral of some kind, the value may be higher if you're a bad credit borrower. The upside is that a larger down payment improves your approval odds since every dollar paid upfront decreases the financed amount, thereby reducing your perceived risk.
The good news is that the credit scores of U.S. consumers are increasing. According to a recent FICO report, the average credit score rose to 716 points in 2021, while only 3% of consumers have a credit score below 500 points.
But how exactly do you end up at the very bottom of the credit scoring totem pole?
How Is It Possible To Get The Worst Credit Score Ever?
Sure, a missed payment here or a closed account there can cause a minor credit score drop, but your score can bounce back relatively quickly after a certain amount of time. The real question is: what are the credit report entries that can totally obliterate your credit status?
Missing payments for an extended period may cause a lender to charge off the account. In this case, they'll write the account off as a loss and close it to future charges. Sometimes they'll transfer the debt to a collection agency or sell it to a debt buyer. Although a charged-off account is closed, you'll still owe the money.
Charge-offs create a derogatory tradeline on your credit report, which remains there for seven years from the date the account becomes delinquent. Even if you eventually pay the amount, it's simply recorded as a paid charge-off but continues to stay on your report. While it's true that a paid charge-off has less of a negative impact on your score than an unpaid charge-off, it can still ding your score by up to 150 points.
2. Debt Collections
If a creditor hands a charged-off account to a debt collector, the debt collector will report the collection account to the credit bureaus. This effectively creates another negative entry, which will also remain on your report for seven years. Your score can drop by up to 50 points if a debt collection is recorded. As with charge-offs, paying the account can make the damage a little less painful.
If you default on a loan, a lender can start taking repossession steps almost immediately after you miss a payment. A repo can cause your score to plummet anywhere from 50 to 150 points and remains on your credit report for seven years.
Fortunately, many lenders are open to negotiating a deal that doesn't impact your credit. However, you need to get ahead of it if you know you're not going to be able to pay a particular month. Don't wait until the damage is done because you're not going to be able to undo it.
Filing for bankruptcy removes the liability for all or some of your debts. Many people see this as the easy way out, but that couldn't be further from the truth. Instead, bankruptcy will have a devastating impact on your financial health.
The effects vary from person to person, but FICO indicates a good score of 700 or above will—at the very least—nose-dive by about 200 points. A slightly lower score will be hit between 130 and 150 points. In addition, the negative entry can remain on your report for up to 10 years.
If your home loan goes into default, your lender has the right to repossess the property. Generally, they'll put it on the auction block to recover the outstanding amount. This process is known as foreclosure, which can drop your credit score by 100 points or more. Again, this is a derogatory credit entry that can stay on your report for up to ten years.
Besides hurting your score, many lenders won't extend home loans to consumers with past foreclosures on their report. As a result, you may struggle to buy a home long after the foreclosure stops impacting your score.
Bottom line: a low credit score is a big deal, especially if you have any of the above negative entries on your report. To ensure you keep track of changes, be sure to check your credit report at least once a month, as credit scores update regularly.
So, How Low Can A Credit Score Go?
It depends on what scoring model is being used. As mentioned earlier, the most popular scoring models start at 300 points on the low end, while industry-specific models can register scores as low as 250. Anything below that is either the result of a proprietary algorithm created for a lender or insufficient data to generate a score.
Fortunately, credit scores aren't permanent. There are many ways you can raise your credit score, increase your chances of qualification for new credit, and save on interest and fees. But it starts with understanding where your credit score falls on specific credit score ranges and what your score means in terms of your negotiating power. If your score is low, start taking immediate steps to rectify the problem.
Also Read: How Long Does It Take To Get A Credit Score?
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.