You checked your credit score, it’s a 650, and you’re now categorized as a person with a “fair” score. What does that mean? Fair?! You may be wondering what this score means, if you’re in good standing, or whether or not you can get a loan.
Is 650 a good score?
The answer to that is no, BUT, it’s not a bad score either. If your rating is 650, you’re not in the red zone, but you’re not in the green zone either.
It means that with some effort, you can get your score up to the good, or even excellent range! It won’t happen overnight, but with a little time and effort it can be done!
A rating of 650 also means that you’re close to the red zone. You’re very close to being in bad standing, so you have to be very careful with your future financial decisions.
Make sure you make your payments on time, decrease your debt to credit ratio, and avoid opening new accounts.
Can I get a loan with a 650 credit rating?
Yes, you can get a loan with a 650.
Don’t get too excited though. If you have a 650 credit rating, you’ll get approved on higher rates. You will be paying a lot more for a loan than a person with a 700 or 750 score will be paying.
A jump from 3% to 5% doesn’t sound like a lot, but if you’re buying a car or a house, it’s a huge difference. Think tens of thousands of dollars of difference.
If you have a 650 rating, it’s recommended that you don’t take out a big loan.
You should work on your score for 6 months to a year, and then attempt to get a loan. I know, no one likes to wait, but believe me it will make a huge difference on your financial situation.
How is my score determined?
There are a few different factors that go into determining your rating.
Understanding these factors will allow you to determine what may be bringing your score down, and what you can do to improve it.
According to Investopedia there are five main factors that go into determining your score.
These factors are based off of FICO’s credit scoring parameters. Each reporting agency calculates things a little differently, so this formula may vary across agencies.
- Payment History
Your payment history has a 35% impact on your rating, and it has the biggest effect out of all of the scoring factors. It has such a big effect on your rating because your payment patterns reflect on how likely you are to pay your bills, and whether or not you will do so on time. This reflects a lot on your responsibility and commitment to deadlines.
Your payment history is made up of information such as:
- Meeting payment deadlines, and if they are not met how late they are paid. There’s actually a big difference between 2-3 days late and 60 days late. The later your payment is made, the worse it reflects on your score.
- Accounts gone to collections. If any of your accounts or bills have gone to collections, it’s a very bad sign.
- Whether or not you have any bankruptcies, foreclosures, debt settlements, or any judgements against you.
- Amount of Debt
The amount of money you owe has a 30% impact on your score. This may sound straightforward, but this factor takes more into consideration than just your amount owed:
- The amount of credit used on your accounts. If you have a credit card, even if you pay your bills every month, it doesn’t look good if you get close to your limit, or even above half of your limit. Conservative spending habits (on cards) look better on your financial history. In addition, not using your cards at all can be a bad sign. Try to keep a good balance.
- The type of credit you have has a substantial effect too. It looks good if you have a mix of different types of borrowing lines, as it shows that you have more experience with borrowing money.
- Credit History
The length of your history has a 15% impact in your score. Having a longer history looks good, as it makes you appear more established and experienced with borrowing. History takes into account:
- Your oldest account.
- The average age of all of your accounts.
- Recent Credit
FICO considers how many new credit lines you have, and how new they are. This factor plays a 10% effect on your credit score. Specifically, it looks at:
- Your newest credit line
- How many accounts you’ve applied for
- When you opened your last account
It doesn’t reflect well on your report if you have a few new accounts, because this says that you’ve recently opened the door for new debt, and may not know how to handle it properly.
5. Types of Credit
The types of credit you have play a 10% role in determining your rating. It’s favorable to have a mix of lines, including credit cards, auto loans, mortgages, or store accounts. However, don’t worry too much if you don’t have a good mix. Opening new accounts will have a negative effect on your score (until they become older). Thus, if you want to increase your rating in the short run, don’t open new accounts. However, if you’re on a multiple year plan, this may be a good option.
What doesn’t go into calculating your 650 credit score:
It’s important to understand what goes into calculating your score, but it’s also important to understand what doesn’t go into calculating your rating, as these are things that lenders may consider.
While your credit rating is important, and it has a big impact on your chances of getting a loan, it’s not the only factor considered.
Two people with 650’s do not have the same odds of getting a loan just because they have the same score.
Lenders consider the 5 C’s of Credit:
- Credit History
This is where your score, and everything detailed on your report come into play. Lenders consider your credit score and report, yet they all evaluate them a little differently.
Lenders refer to your financial ability to make payments as your ‘capacity’. A few factors go into determining your capacity: income, stability of income, employment status, as well as debt-to-income ratio.
Collateral is taken into consideration when you apply for secured loans such as an auto loan or a home loan. Collateral is what you put down and promise to give if you default on your loan. The lender will consider the type of collateral and value of it.
Capital, the amount of capital, investments and other assets you own are considered. For example, having a large sum of money in the bank will help you. However, your income is usually considered to be your main form of payment, so even if you have a lot of investments and a substantial amount of money in the bank, you still don’t have the best odds because lenders want to see income stability.
Lenders also consider “conditions” which represent the purpose of the loan, as well as other economic or environmental conditions that may affect you. For example, a loan to start a business is considered differently from a loan to buy a car. In addition, the market conditions may be considered, and you may be denied for a loan that you would be approved for if the economic/environmental situation was different.
Now that you understand your rating, what determines it, and what other factors affect your eligibility to get a loan, it’s time to create an improvement plan to raise your 650 score.
There’s no one-size-fits-all plan for improving your rating. This is why it’s so important that you understand how you’re evaluated, and what may be affecting your rating.
Your score may be low because of erratic spending habits, while your neighbor’s rating may be low because she has a lot of debt.
In order to improve your score, you will need to analyze your report and devise ways to improve the factors that may be adversely affecting your rating.
Don’t let your credit score get you down; it’s just a number, and it can be improved. You’re more than a number, and you will be evaluated as more than a number 🙂