Most people’s credit scores will benefit from paying down revolving debt.
If you have a 600 credit score, or something near that, certain doors might be closed to you. That’s because lenders rely on your score to predict how you handle credit. And when your number is around 600, they’re likely to think you won’t manage your credit as successfully as someone with a higher score. In that case, some credit products will be unavailable to you, and others will be very expensive.
Opening the door to affordable financing opportunities is simple, but that doesn’t mean it’s easy. Here’s what you can do.
The No. 1 move you can make right now: Pay down your debt
If you have credit card debt, pay it down and pay it off. High credit utilization can cause a big drag on your credit score.
Credit utilization is how much revolving debt you have compared to your credit limits. To find your credit utilization, divide your current balance by your credit limit and then multiply this by 100.
For example, if you have a credit card with a $1,000 limit, and your balance is $900, your utilization rate is 90%. If your balance is $200, your utilization rate is 20%.
It’s worth noting that credit scores are inversely proportional to credit utilization. This means that — generally speaking — the higher your utilization, the lower your credit score (and vice versa). So if you can pay down your credit cards, you can watch your score rise.
There is no perfect credit utilization rate, although a rate in the single digits is not likely to ding your credit score. If you use a credit card, pay it off in full every month. You don’t have to carry a balance to have a high credit score.
Other factors affect your credit score, too, so we’ll go over your plan of attack below.
Analyze your credit reports
If you don’t have debt but have a credit score that’s lower than you’d like, check out your credit reports. Your credit score factors could be totally different from someone else with a similar score.
Get your free credit reports by visiting annualcreditreport.com (the only website authorized by the federal government to let you access the credit reports you’re entitled to by law). Pull your report from all three credit bureaus (Equifax, Experian, and TransUnion). Creditors are not required to report to all three, so your information may differ among the bureaus.
Your reports don’t show your actual credit score, but they can reveal a host of information that could be impacting that number. Here are some of the factors that can lower your score.
Credit report errors
Millions of people have errors on their credit reports. Most of those mistakes won’t affect your score (like having the wrong occupation listed). But it could cause problems if your credit identity has been confused with someone who shares your name and has numerous collection accounts. No matter what kind of error you find, request correction immediately via the credit bureau’s online dispute process.
Very late payments and collection accounts
If you pay a bill a day late, it probably won’t hurt your credit score (but you might have to pay a late fee). However, if you pay a bill 30 days late, that’s almost always going to be reported to the credit bureaus.
The later you are, the more it hurts. Sixty days late dings your score more than 30 days late does. And being 90 days late or being sent to a collections agency are even bigger torpedoes.
The age of the late payment also matters. Your credit score is heavily weighted to the past two years. A late payment from five years ago isn’t going to put you into the credit score doghouse. Even better, when you pay off a collection account, it will stop hurting your score. But if you have recent late payments, that’s a red flag to creditors.
If you missed a payment recently but it’s totally out of character for you, call the creditor and ask them to remove the late payment from your report. If it’s truly a once-in-a-blue-moon event, they often agree.
Significant derogatory event, like a bankruptcy or foreclosure
These events are often related to bills you didn’t pay, and they’re scored like late payments on steroids. If you had a bankruptcy, foreclosure, or other significant derogatory event within the past two years, there isn’t much you can do to raise your credit score other than wait for the event to age off your report. (That doesn’t mean you can’t get new credit, though, which can help your score.)
Thin credit
If you have no credit history, you may have no credit score. If you have very limited experience with credit, you might have a low score. Most people build a healthy credit score naturally over time. If you want to move the process along faster, ask your bank about a credit-builder loan, or apply for a secured credit card and use it sparingly. Your score should improve within about six months assuming you pay the bill on time.
Maxed-out credit cards
Aside from payment history, credit utilization has the biggest impact on your credit score. If you’re focused on getting out of debt and improving your credit, close your credit card accounts so you can’t add to your balances. By the time you pay off your balances, your credit score will be high enough that getting a new credit card will (probably) be a piece of cake.
Why can a 600 credit score be a barrier?
Both the FICO® Score and the VantageScore (the two most common scoring systems used to rate credit) range from 300 to 850. In both cases, a higher number indicates better credit. Most lenders consider any score over about 660 or 670 to be “good.”
There is no universal ranking for high and low credit scores. Those tiers are determined by each lender. That said, by most measures, a 600 credit score is low and tends to have financial consequences.
When you have low credit, you’re considered a higher risk by lenders. They generally won’t have confidence that you will repay your debts on time and as agreed. As a result, your application for some credit products will be rejected. Many mortgage lenders, for instance, require a 640 or higher.
Other products will be available to you, but at a higher price tag. When you have a 600 credit score, you’ll likely pay a higher interest rate on a car loan than the rate someone with a 700 credit score will pay.
Credit scores represent a moment in time. That means every step you take toward improving your credit can have a positive impact right away. Paying down debt is a big help. Tackling other issues, like credit report errors and limited credit history can help too. Depending on the factors influencing your score, a little time and diligence can go a long way toward improving your number, sometimes in just a few months.
