550 Credit Score: Is it really that bad?

Although 550 is not a perfect credit score, it is still possible to get a mortgage, car loan, or unsecured credit card with this rating. There are many companies that are willing to work with people who have less-than-perfect credit. You may have to pay a higher interest rate, but it is still possible to get the financing you need. Don't give up hope - there are options available for people with all different types of credit scores.

If you have a credit score of 550, you may be wondering how you can get approved for credit. There are some things you can do to improve your credit in the future. In this article, we'll go over what you can do to get credit with a score of 550 and how you can improve your credit in the future.

16.4% of consumers have FICO® Scores in the Very Poor range (300-579).

Although a 550 credit score is not the lowest score possible, it's still not a good score. This is because it's much closer to the lowest score of 300 than the 850. Having a score this low indicates that you've had payment problems in the past - possibly even going through bankruptcy or having your home foreclosed. This signals risk to potential lenders, which makes it difficult to qualify for a loan or unsecured credit card. If you're hoping to get a mortgage, car loan, etc., you will need to focus on rebuilding your credit reputation first.

How to improve your 550 credit score

Although your FICO® Score of 550 is well below the average credit score of 711, there is still plenty of opportunities to improve your score. A great way to get started is by obtaining your FICO® Score and credit report. The report will list all of the main events in your credit history that are lowering your score. This information is very useful because it can help you identify specific areas to work on in order to raise your credit score.

93% of customers have FICO® Scores higher than 550

How to build a better credit score

If your FICO® Score is in the very Poor range, it's a good idea to get your credit reports Experian and the other two national credit bureaus, Equifax and TransUnion. Reviewing their contents can help you better understand any missteps in your credit history, so you'll know what to avoid as you work to build up your credit. If you develop better credit habits and avoid negative activity on your credit reports, you'll likely see improvements in your credit scores over time.

Of consumers with FICO® Scores of 550, 17.5% have credit histories that reflect having gone 30 or more days past due on a payment within the last 10 years. This shows that these consumers are reliable and trustworthy. They are the perfect candidates for credit products.

What makes an impact on your credit scores

If you have bankruptcies or other public records on your credit report, it's important to take action to reduce their impact on your credit score. Settling liens or judgments as soon as possible can help, but in the case of bankruptcy, only time will lessen the harmful effects. A Chapter 7 bankruptcy will remain on your credit report for up to 10 years, and a Chapter 13 bankruptcy will stay there for 7 years. Even though your credit score may begin to recover years before a bankruptcy drops off your credit file, some lenders may refuse to work with you as long as there's a bankruptcy on your record. So it's important to be patient and take steps to rebuild your credit in the meantime.

The average credit card debt for those with FICO® Scores of 550 is $7,654

Your credit utilization rate is one of the key factors that lenders look at when considering your creditworthiness. This is because it shows how much of your available credit you are using. A high credit utilization rate can indicate to lenders that you may be in financial difficulty, and this can lead to them declining your application for credit. To avoid harming your credit score, it is recommended that you keep your credit utilization ratio below 30%.

Paying your bills on time is the single best thing you can do to promote a good credit score. This can account for more than a third (35%) of your FICO® Score. So if you want to improve your credit score, make sure to pay your bills on time and in full every month.

If all other things are equal, a longer credit history will usually result in a higher credit score than a shorter history. The number of years you've been using credit can influence up to 15% of your FICO® Score. Newcomers to the credit market can't do much about this factor right away. But with patience and by avoiding bad credit behaviors, they can improve their scores over time.

Your credit score is based on your total outstanding debt and the types of credit you have. The FICO® credit scoring system gives higher scores to users with several credit accounts, and a mix of revolving credit and installment credit. So if you only have one type of credit account, you could improve your credit score by adding another type of account. Credit mix is responsible for up to 10% of your FICO® Score.

If you want to maintain a good credit score, it's important to avoid applying for too many loans or credit cards. Every time you apply for credit, it triggers a hard inquiry, which is recorded on your credit report and reflected in your score. When a lender does a hard inquiry, they obtain your credit score (and often a credit report) to decide whether to lend to you. Hard inquiries can cause your credit score to drop a few points, but it will typically rebound within a few months if you keep up with your bills and avoid making additional loan applications. (Checking your own credit is a soft inquiry and doesn't impact your score.) New credit activity can make up for 10% of your FICO® Score.

Improving your credit score

If you have a very poor credit score, it's important to know that converting it to a fair or good score is a gradual process. There are no shortcuts to improving your credit score, so be wary of anyone who tells you otherwise. However, if you start developing habits that promote good credit scores, you can begin to see some steady improvements within a few months. Here are some good starting points:

Pay on time

It's important to remember that your payment history is a major factor in your credit scores. By paying on time, every time on accounts that report to the three main consumer credit bureaus, you can help build a positive payment history.

If you accidentally make a late payment, try to call your lender as soon as possible. They may be able to help you resolve the issue before it's reported to the credit bureaus. However, if it has already been reported, it can be difficult to remove from your credit reports.

Keep your balances low

You can help improve your credit utilization rate - or the amount of your available credit you're using at any given time - by keeping your balances low on your credit cards.

While it's a good rule of thumb to keep your balance below 30% of your limit, you'll actually benefit more if you can keep your utilization rate even lower than that.

There's no credit-building benefit to carrying a balance on your cards if you can afford to pay off the full balance each billing cycle. So when it comes to credit-building strategies, it's best to make consistent charges to the account while keeping the total amount owed under 30% of your credit limit. If you can, pay your statement balance off in full and on time each month so you aren't charged interest on those purchases.

Debt-management plan

If you're struggling to repay your loans and credit cards, a debt-management plan could bring some relief. You work with a non-profit credit-counseling agency to create a manageable repayment schedule. Entering into a DMP effectively closes all your credit card accounts, which can lower your credit scores. However, your scores will rebound more quickly than if you declare bankruptcy. If this sounds too extreme for you, you may still want to consult a credit counselor (not a credit-repair outfit) to devise a plan for improving your credit.

Credit-builder loan

Credit unions offer small loans designed to help their members build up or rebuild their credit. These loans can be very beneficial, as long as you make regular, on-time payments. The credit union reports your payments to the national credit bureaus, which can lead to improved credit scores. Before obtaining a credit-builder loan, make sure the credit union reports payments to all three national credit bureaus.

Apply for a secured credit card

A secured credit card is a great way to improve your credit score. You put down a deposit in the full amount of the limit, which is usually just a few hundred dollars. As you use the card and make regular payments, the lender reports those activities to the national credit bureaus. This activity is then reflected in your credit files and FICO® Scores. By making timely payments and avoiding "maxing out" the card, you can improve your credit score over time.

Credit cards and loans with a 550 credit score

Although it will be difficult, you can still borrow money with a 550 credit score - for example, by taking out a student loan. In fact, since 2018, a small percentage of other types of loans and lines of credit have been opened by people with credit scores below 540.

For example, you may still be able to qualify for a mortgage despite your low credit score. This is because FHA-backed home loans only require a minimum score of 500. So even though your odds are not great, it is still possible to get other types of loans.

Credit Cards For Poor Credit Score

Store credit cards

If you're looking to build credit, a store credit card is worth considering. This type of card usually comes with incentives to shop at a particular retailer. It can be either secured or unsecured, so it doesn't technically fall into a third category. But store credit cards are definitely worth looking into as an option for building credit.

If you have poor credit, you might have a better chance at getting approved for a store credit card. The potential downside is that these cards tend to come with high interest rates, and you may only be able to use them at a specific store. However, they might offer rewards and benefits that make sense if you already shop at the store in question. Therefore, it could be beneficial to apply for a store credit card, even if you have poor credit.

If you've looked into all of your options and still can't find a credit card that you can get approved for, there are other options available to you. Consider asking a family member or trusted friend to add you to their credit card account as an authorized user. But before you do, be sure to familiarize yourself with the pros and cons of being an authorized user on a credit card.

Unsecured credit cards

If you can't afford a security deposit, you might be able to find an unsecured credit card. The trade-off is that it will potentially come with an annual fee — which is arguably worse than a security deposit because it's typically nonrefundable. However, you could also face higher interest rates if you choose this option.

Secured credit cards

If your credit still needs some work, applying for a secured credit card might be your best bet. With a secured card, you’ll pay a security deposit upfront, which typically sets your credit limit. So if your security deposit is, say, $400, your credit limit will also be set at $400. This gives the issuer some insurance in case you close the account without paying off your debt.

Because they pose less of a risk for credit card issuers, secured cards may be more readily available to someone with poor credit. And a secured card can benefit you as a borrower if the lender reports your on-time payments and other credit activity to the three main credit bureaus.

Personal loans with a 550 credit score

When you have poor credit scores, it can be challenging to get approved for a personal loan. This means that you might not have the luxury of shopping around for the best personal loan with the lowest interest rate. Instead, you may have to settle for a personal loan with a high interest rate — not to mention other fees, such as an origination fee.

This might make a personal loan seem very unappealing to you, especially if your intention with the loan is to consolidating high-interest credit card debt. However, it's important to remember that the APR on your personal loan could be just as high, if not higher, than the interest rate you’re currently paying on your credit cards.

If you're considering taking out a personal loan, you should first ask yourself whether you really need the money right now. If you can wait a little while and build up your credit first, you may be able to qualify for a personal loan with a lower APR and better terms down the road.

If you're in a tight spot and having trouble finding a personal loan you qualify for, you might be considering a payday loan. But before making a decision, you should know that these short-term loans often come with high fees and interest rates. They can quickly turn into a cycle of debt that's even harder to break out of.

Auto loan rates for poor credit

Even though there's no minimum credit score required to qualify for a car loan, it can be difficult to get approved for one if you have poor credit. And even if you do get approved, the interest rates will be high, making it very expensive to borrow money. So be careful if you're considering an auto loan with poor credit. It's not worth the hassle and expense in the end.

If you have time to build your credit before applying for a car loan, you may be able to get better rates eventually. But if you don’t have time to wait, there are some strategies that can help you get a car loan with bad credit.

Consider finding a co-signer if you have a trusted family member or friend with good credit who is willing to share the responsibility of a car loan with you. Seek out alternative lenders, such as a credit union or an online lender. Ask the dealership if there’s a financing department dedicated to working with people with poor credit. Use buy-here, pay-here financing only as a last resort.