Credit 101: How Your Credit Score Range Affects Credit Card and Loan Options

April 21, 2011

In last week’s post, we brushed up on the basics about credit score differences between credit bureaus and even within the same credit bureau. Now, let’s discuss the significance that three digit number might have to lenders looking at your credit.

Let’s take a look at credit ranges based on TransUnion’s range and how it influences access to credit.

Poor Credit Score: 300 to low 500s

This score is often due to a derogatory mark like a bankruptcy or foreclosure. Consumers with scores this low are considered high-risk or subprime borrowers. Those who lend to poor credit score consumers are called subprime lenders and generally charge high interest rates and additional fees.

The first step to improve credit health in this range is to establish and build credit with good credit choices. The good news is it’s easier for poor credit consumers to improve their credit scores than those with higher credit scores, so each positive action will have big benefits.

In order to build positive credit history, get a secured credit card. Most secured credit cards offer guaranteed approval and require a security deposit—usually of at least $200—that works as a buffer protect from defaulting. Using a secured card sparingly on purchases required such as groceries and paying on time and in full each month will build a positive credit history without building debt.

Fair Credit Score: mid 500s to mid 600s

With the national average credit score right around 665, according to Credit Karma data, this score is not far behind most consumers, but you still have work to do on your credit.

When it comes to getting a loan, lenders may offer credit on their terms because they know these borrowers don’t have many options. They’ll likely offer the highest interest rates, low credit limits, and additional fees.

Avoid applying for a loan or additional credit until you’ve paid off your debts. Credit Karma’s Credit Simulator demonstrates that consumers with a fair credit score in the mid 500s could stand to gain nearly 60 points just by paying off all credit card balances. Managing expenses through a budgeting tool can help with covering necessary expenses, cutting back on unnecessary purchases, and paying down debt each month. Over time, healthy credit usage and a better score could lead to a chance to negotiate better loan borrowing terms.

Good Credit Score: high 600s to low 700s

People with credit scores in this range have more options available when it comes to applying for credit. This credit score tells lenders that it’s not likely that you’ll default on payments, so they’ll be more willing to lend .

Loan options will begin to broaden as well. With a good credit score, lenders will more readily extend credit for auto and home loans. Those in the market for a new home can compare mortgage interest rates to get the best one. Once you’re approved, set up automatic bill pay for mortgage payment so that your credit score will benefit from consistent on-time payments.

While its harder for higher credit score consumers to gain points on their score, it might be wise to apply for a new a credit card to increase credit availability. A good credit score can qualify for better interest rates and better bonus offers, like rewards points or airline miles on credit cards. Take advantage of low interest cards and rewards like cash back. Get rewards on purchases you already make, but remember to maintain that good credit score by always paying off the card balance on time and keeping the debt-to-available-credit ratio under 30%.

Excellent Credit Score: 720 and above

Congratulations! This credit score qualifies for just about any credit product. This score proves to lenders that you know how to manage credit, and you do it well.

You’ll be offered great terms when it comes to home and auto loans, but make sure you shop around for the best rates before you settle on one. Credit card issuers will offer the lowest interest rates so people with this score can shop around to find the one that works for their credit and financial lifestyle.

If you have excellent credit, there’s not always a lot of room for improvement; for many excellent credit consumers, their best bet at climbing higher is just longer credit history. But they have a unique challenge: working to maintaining a high credit score. Checking their credit report and score regularly and avoiding a few common pitfalls, such as not using credit, applying for too much credit, and overusing your credit can help.