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Your credit score is a reflection of your overall borrowing track record. Recent adjustments to the FICO score better reward consumers who pay on time and have no negative remarks and have a harsher impact on the scores of consumers with a history of serious delinquencies and charge offs. If your score is below 620, odds are you have quite a few negative items -- such as late payments or over-extended credit -- included on your credit report. It may be worth a quick view of your report to dispute any inaccurate negative items.
Risk of Default
While you may have every intention of paying your bills on time, being classified as high risk places you in a bucket of consumers that experience higher default rates than those with good or excellent credit scores. If a lender extends you credit, you can be sure they think you will repay the loan, but you are likely to have to pay higher interest rates, come with more cash upfront or put up collateral to compensate for the higher chance you will fall into default status. Fortunately, as you make payments on time, your score will gradually increase and
hopefully lead you out of the high risk pool of borrowers.
You may pay an account on time each month, but that does not mean your performance on other accounts is irrelevant. Many lenders, particularly credit card issuers, will automatically raise your interest rate to the penalty rate -- which can exceed 30 percent -- or even close your account if your credit score falls into the high-risk category. If you have been extended credit from multiple sources, you are obligated to stay current with each account -- one misstep on one account can have radical effects on other open accounts, even if they are in good standing with no history of delinquency.
Prime Rate Threshold
Once you fall into the high risk category, you are typically below the cutoff to obtain a prime loan. This does not mean you will not be able to obtain financing; however, it does mean that you will have to pay higher interest rates and likely be excluded from the advantageous financing offers available to those with better credit. While a 620 is considered a respectable score, many lenders use that figure as the threshold as the cutoff to extend preferred financing offers.