Credit Tier Breakdown, Part 3: Fair Credit

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Welcome back to our ongoing series on credit scores—from the very best to those with the… um… most room to grow!
In our first entry, we covered Great Credit: scores from 720-850. In our second entry, we looked at Good Credit: scores from 680-719. In our third entry, we’ll be talking about scores from 630 to 679, which fall under “Fair Credit.”

What Kind of Loans Can You Get?

If you have a FICO credit score between 630 and 679 then lenders are going to see you as less-than-reliable. You’ll feel the negative effects of your score most severely when you apply for unsecured personal loans, especially ones from traditional lending institutions, like a bank.

Since unsecured loans don’t involve any collateral, decisions to lend money (or deny loan applications) are made based entirely on the borrower’s ability to repay the loan. (Or rather, they are made on the lender’s belief in the borrower’s ability.) As such, a borrower’s credit score is critical to receiving an unsecured loan from a traditional lender.

With a score in this range, you will likely be shut out from these traditional unsecured loans. However, you still might qualify for a personal loan from a non-traditional, internet-based lender. These lenders usually offer higher rates than traditional lenders, but those higher rates allow them to lend to borrowers with lower scores.

You will still probably qualify for secured loans, like auto loans and mortgages—though you’ll still be charged higher interest rates. If you’re not careful, those high rates could lead to you defaulting on the loan and having your car or house repossessed.

What Kind of Interest Rates Can You Get?

If you have a score in this range, it sends a signal to lenders: this person is not so great at paying back the money they owe. While some lenders won’t lend to you at all, the ones who do will be obligated to charge you more in interest.

According to the MyFico Loan Savings Calculator, a person with a score of 655 who takes out a $300,000, 30-year, fixed-rate mortgage would pay over $66,000 more than a person with a score of 760. That same calculator estimates that a person with a 655 credit score who takes out a $30,000, 60-month auto loan would be charged an annual precentage rate (APR) of 9.661 percent, almost three times the 3.517 percent rate that someone with a 760 score would be charged. That adds up to an additional $5,186 paid in interest.

Higher interest rates are not the only way that having fair credit will increase your costs. Roslyn Lash AFC®, (@RosLash) Founder of Youth Smart Financial Education Services, says that “If you’re buying a car, don’t expect to receive “a 0 percent interest rate, rebates, or incentive.” These perks are reserved for persons with good credit.”

But Lash is clear that people with scores in this range still have options, saying “If you put more money down, you’ll be able to buy the car,” but that “since your interest rate will be higher, your payment will also be higher.”

When it comes to getting a credit card, your options will also be limited and your APRs higher, but personal finance reporter J.R. Duren (@jr_duren) still has some good suggestions. Namely, he recommends that folks with fair credit look to Capital One’s QuicksilverOne card and Chase’s Southwest Rapid Rewards Plus card.

“The QuicksilverOne gives you 1.5 percent cash back on every purchase you make,” says Duren. “That doesn’t sound like a lot, but think about that number in relation to how much you’d spend over the course of one year. If you spend $2,000 a month on the card, you’ll earn $360 in rewards.”

According to Duren, the downsides of the card are “A $39 annual fee and a high APR of 24.99 percent.” But he also points out that “The APR will only kick in if you don’t pay your balance off in full every month.”

As for Chase’s Southwest Rapid Rewards Plus card, Duren says that this card “is a great option because you’ll get 50,000 Rapid Rewards points if you can make $2,000 in purchases within 90 days of being approved for the card.”

This card also has an annual fee ($69) and an APR of approximately 23.49 percent, but when your credit score is this low, those fees and rates are literally the price you pay to borrow money.

Just remember Duren’s advice that the APR only applies if you don’t pay your balance off every month. That’s pretty good advice, in general, which brings us to …

What Can I Do to Improve My Score?

If you have a score in this range, it is very likely that you are carrying high balances month to month on your credit card. If that’s true for you, then getting those balances down is a great way to start improving your score – even if you can’t get them all the way to zero.

Lash recommends that you “Keep your balance under 30 percent of your credit limit.  For example, if you have a card with a $1,000 limit, try to keep the balance at no more than $300.”

This 30 percent benchmark is something you’ll hear a lot, which is because it’s totally true! But there’s actually something you can do that’s even more impactful.

As Lash puts it, “The most important action to take is to pay your bills on time.  This simple act has the greatest impact on the credit score.”

Do whatever it takes. Set reminders on your phone, go into your bank account and set up auto-pay, write a sign to hang on your bathroom mirror that says “Remember To Pay Your Bills.” Whatever it takes, do it.

Your payment history makes up 35 percent of your credit score, while your amounts owed makes up an additional 30 percent. While there are no ways to instantly jack up your credit score (we would know), taking care of those two categories will go a long way towards netting you a better credit score, which in turn will net you better loans at lower rates.

About the Contributors:

Roslyn Lash, is an Accredited Financial Counselor and the founder of Youth Smart Financial Education Services.  She specializes in youth financial education, adult coaching and works virtually with adults helping them navigate through their personal finances i.e. budgeting, debt, and credit repair.  Her advice has been featured in national publications such as USA Today, TIME, Huffington Post, NASDAQ, Los Angeles Times, and a host of other media outlets.

J.R. Duren, is a personal finance reporter for highya.com. He covers credit cards, credit scores, student loans and other topics important to consumers’ financial life.