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The unique thing about a credit score that falls between 600 and 650 is that it can put you in one of two major credit brackets. Your credit can either be considered “bad” or “fair,” which means you may be limited on what types of loans you qualify for or whether or not you can take out a home loan .
There are two major factors to consider — what kind of interest rate you can expect for lines of credit, and whether or not you actually qualify for a home, car, or any other type of loan. A score that is below 630 is considered bad credit, while scores between 630 to 689 are considered fair credit.
Do you qualify for a car loan?
You should have no major problem finding an auto loan as long as you have steady income. The interest rate you qualify for depends on a variety of factors such as how much of a down payment you provide, the amount you wish to take out, the length of your loan, and the lender.
If your credit is fair, you should be able to find an auto loan that offers five to ten percent interest throughout the term of your loan. If you have a bad credit score, on the other hand, you will most likely have an interest rate of 10 percent or more. The best way to avoid paying higher interest when you have bad credit is to have a big down payment. Lenders like to see more money being put towards the vehicle, and will reward you by lowering your interest rate. This move will reduce your monthly car loan payments.
Do you qualify for a home loan?
Home loans are still possible with a credit score that falls between 600 and 650, but you may need to receive government assistance in order to qualify for a loan. Find lenders that specialize in FHA loans and learn what type of home loan you can qualify for.
Unless you have a substantial down payment, anticipate a high interest rate on your home loan. Before you commit to a home loan, it’s wise to take steps to raise your credit score so that it is above 650.
The higher your credit score and the better your credit history, the lower your interest. Since a mortgage is such a long-term commitment, take the time to raise your score in order to obtain the lowest interest rate that is available to you.
If you decide to take out a home loan, you can expect an extremely high rate. Your rate may even be as high as 6.5 percent. Compare that to a someone with better credit who qualifies for a lower interest rate of 4.5 percent for a home loan valued at $300,000. At 6.5 percent, you will pay a total of $488,000 throughout the term of the loan, or $1,400 a month. Yet with an interest rate of 4.5 percent, you will pay a total of $397,000 for the entire loan, or $1,100 a month. That is a savings of $92,000 throughout the term of the loan, or $300 less if you had better credit. Find out what current mortgage rates are, below.
While you may be able to qualify for a home loan, it may be wiser to wait to until your credit score has improved before you commit to a loan. If it is absolutely necessary to purchase a home now, consider refinancing a few years down the line.
What kind of credit cards do you qualify for?
There are still a lot of valuable credit cards you can open with fair credit. Even though you probably
don’t qualify for top tier cards with lucrative benefits and rewards, it might still be worth a shot to apply a credit card such as the Barclaycard Rewards MasterCard. If you are a student, the Discover it can be a valuable card to add to your pocket since it can both earn you cash back, as well as provide you with a f ree FICO® Credit Score online and on monthly statements.
Remember, applying for any credit card means your credit will be pulled, which dings your score. Only apply for a new credit card when you feel it is absolutely necessary. Practice responsible credit habits and pay your bills on time.
What about interest?
Expect an interest rate upwards of 20 percent, the closer your credit score is to 600. You should avoid accumulating a massive amount of debt if you have bad credit. Try your best to pay at least double the minimum requirement — this will reduce your overall debt as well as help improve your credit score faster.
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Can you take out a personal loan?
As long as you have a steady source of income and do not max out your credit cards, you should be eligible for a personal loan. How much you are eligible for, the interest rate, and terms and conditions of the loan depend on how much you wish to take out, as well as your current monthly income.
Expect a higher-than-average interest rate if your credit score is below 630. You may want to wait before you apply for a personal loan if your score is on the cusp of 630 and you are working towards raising it. If you can afford it, consider paying off an existing credit card to raise your score.
What is necessary to improve your score?
You can improve your credit score above 650 by paying all of your bills on time, reducing your overall debt-to-credit limit ratio to 30 percent and below, and avoiding new lines of credit.
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When your overall debt is 30 percent or lower, you’re rewarded with an improved credit score. Maintaining a low debt-to-credit limit ratio shows lenders that you have proper money management skills. You are also less at risk for maxing out the overall amount of credit you have available, which helps puts lenders at ease when you apply for a new line of credit.
Maintaining various lines of credit is fine, and can be healthy for your credit, yet opening too many lines of credit can be a detriment to your overall score. Too many lines of credit, or credit inquiries (which is what appears on your credit score when you apply for a credit card, car loan, or another line of credit) can lower your credit score.
Work at building your credit and if you are consistent with your efforts, you will see your score slowly rise. This will happen over the course of several months and years, so be as patient as possible because your credit score definitely has a lot of potential to improve to good standing. Make the effort to improve your score to 700 or higher and more doors will open for you, financially.
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