Today I was on Wiki Answers and I saw this question: What does a 650 credit score mean? Naturally Dr. 650 wants to answer the question!
I recently wrote an article about whether 650 is a good or bad credit score and I want you to start by reading that. If you’re lazy, you’ll have to live with this summary – 650 is a FAIR credit score. It’s not good, but it isn’t bad either.
You can probably get most loans with a score in this range, but you’ll have to pay extra interest and in some situations, you’ll have to pay extra in fees.
What is a 650 Credit Score Then?
This question is a little difficult to answer because there is more than one way you can end up with a score in this range. That said, we’ll be able to understand the score a lot better if we start by talking about credit, in general.
Truth be told, there are a lot of different bureaus and companies that create credit scores. To add to the complication, different bureaus use different methods to calculate the scores. Fortunately, most banks in the U.S. use FICO scores and FICO scores are used by banks to make almost 10 billion financial decisions per year. If you have a good FICO score, you will be able to get a loan. You might have to go to a different bank but again, most of them use this score.
FICO Score Breakdown
1. Payment History – this accounts for a whopping 35% of your score. This part of the score takes into account your revolving accounts (such as credit cards and merchant credit cards) and your installment accounts (such as your mortgage and auto loan).
If you start making late payments on these accounts, you will see your credit tank in a hurry. It doesn’t take long to drop to 650 if you start making payments that are 30 or 60 days late.
Late payments stay on your credit report for seven years and they are therefore very difficult to fix. All you can do is start paying on time. That improves the ratio of on-time payments to late payments.
2. Amount of Debt – this accounts for 30% of your total credit score. Revolving credit accounts like credit cards are weighted the most heavily in this part of your score. This means that you kill your credit if you maintain high balances on your credit cards. Fortunately, this part of your score can be fixed. Your credit report doesn’t show what your debt was last year or even last month. As soon as you pay down your debts, your FICO score will change accordingly. This process can take up to 30 days so plan accordingly.
It’s possible to drop to a 650 score by using most of your available credit, even if you make payments that are on time. You typically want to stay under 30% of your available credit on revolving accounts or better yet, pay them off every month.
3. Length of credit history. This accounts for 15% of your score. The older your accounts are, the better. You can’t really fix this issue overnight but fortunately, it doesn’t account for that much of your score.
The bottom line here is that you want to keep your accounts open. If you have a credit card, keep it open. Do it even if you get a new card and/or don’t use it.
This aspect on its own isn’t going to be enough to drop you to 650.
4. New credit. This accounts for 10% of your score. Opening a bunch of new accounts at once is a red flag and your score will reflect accordingly.
This aspect can’t have much affect on your score.
5. Credit mix. This also accounts for 10% of your score. Your score will be higher if you have different types of credit accounts. This part showed in my score a lot when I bought a home. The new real estate account helped my score to go up.
Of course, at 10%, you aren’t going to see a huge difference here.
What Does this Mean for my Score then?
If you have a score in the range we’re talking about, you should really take a hard look at improving it. It will cost you a lot of money in your lifetime to keep borrowing money at the interest rates you’ll be getting in the current situation and improving your score is probably as simple as paying down your debt and making on time payments from now on.