The Ultimate Guide to Credit Cards
Tuesday, July 23, 2024

What is Fair Credit? A Guide to its Impact on Lending Decisions & How to Improve Your Score

What Is Fair Credit
Eric Bank

Written by: Eric Bank

Eric Bank
Eric Bank

Eric Bank is an M.B.A. who has covered financial and business topics since 1985, appearing regularly on Credible, eHow, WiseBread, The Nest, Zacks, Chron, BadCredit.org and dozens of other outlets. Eric specializes in taking complex subject matters and explaining them in simple terms for consumer audiences, particularly in the world of personal finance. Eric holds a Master's in Business Administration from New York University and a Master's in Finance from DePaul University.

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Edited by: Jon McDonald

Jon McDonald
Jon McDonald

Jon leverages 15-plus years of journalism expertise to inform financial consumers about emerging trends and companies making an impact in the industry. He is most knowledgeable in the areas of budgeting, credit card rewards, and responsible credit use. Jon has a passion for writing and editing, and his articles have appeared in publications produced by The New York Times.

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Reviewed by: Andrew Allen

Andrew Allen
Andrew Allen

For nearly 20 years, Andrew has worked for financial institutions ranging from regional investment organizations to some of the largest banks in the world. At Wells Fargo, Andrew was a Consultant within the Insight and Innovation division. A graduate of the University of Georgia’s Terry College of Business, Andrew’s goal has been promoting personal financial wellness and solid money decisions.

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Opinions expressed here are ours alone, and are not provided, endorsed, or approved by any issuer. Our articles follow strict editorial guidelines and are updated regularly.

When your credit score is considered fair, it means you’re right in the middle of the credit spectrum — generally somewhere between 580 and 669, depending on the credit scoring model. This score tells credit card companies and lenders that you may have had some challenges managing your credit. 

With a fair credit score, you can still borrow money and get approved for credit cards, but you will not get the lowest interest rates available.

In this guide, I’ll cover what you can expect if you have fair credit and ways to improve your credit score to help you access better options in the future. 

Credit Scoring Models and Ranges

A credit score is a number that shows how reliable you are at paying back the money you borrow. Lenders use this number to decide whether to give you a loan and how much interest to charge you. 

Credit card companies offer different cards with costs and benefits that match various credit scores. Using credit scores makes deciding who gets a loan fairer and clearer.

The three main credit bureaus (Experian, Equifax, and TransUnion) calculate your credit scores using information they receive from lenders, credit card companies, and other sources.

These sources usually send updates every month that cover your personal information, details about your credit accounts, any new loans or credit card applications, debt collections, and other financial data.

credit bureau logos
The three credit bureaus maintain credit report information for millions of Americans.

Each bureau uses one or more credit score models to calculate your score. They look at several data points, such as how well you pay your bills on time, how much you owe, and how long you’ve been using credit. FICO and VantageScore are the two main models the bureaus use to compute your credit score.

FICO

FICO, from the Fair Isaac Company, is the leading name in consumer credit scores. , According to the company, 90 of the top 100 U.S. banks use FICO Scores to decide whether a borrower is likely to pay back a loan. 

The most commonly used types of FICO Scores are Score 8 and Score 9. They rate people on a scale from 300, which is bad credit, to 850, which is exceptional.

FICO classifies scores between 580 to 669 as fair. The model looks at five main factors from your credit history to determine your score:

  • Payment History (35% of the total score): This factor shows whether you pay your bills on time. Your payment history can determine how likely you are to continue making payments on time. Payments more than 30 days late can significantly lower your score.
  • Amounts Owed (30%): This category compares your debt to your income and credit limits to determine your ability to manage more debt. This factor includes your credit utilization ratio (CUR), which is how much of your total credit limit you use each month. A CUR above 30% may show that you depend too much on credit.
  • Credit History Length (15%): FICO reviews how long you’ve had your credit accounts and if they’re still active. A longer credit history with good management can improve your score, especially if you’ve used credit recently.
  • Credit Types (10%): This factor examines the different types of credit obligations you have, such as mortgages, car loans, and credit cards. Responsibly managing various types of debt helps your score.
  • New Credit (10%): This reflects how many new credit applications you’ve submitted recently. The bureaus record each time you apply for credit, and too many applications can quickly reduce your score. However, reviewing your own score or having it checked for jobs or rentals doesn’t impact your score.

Don’t be alarmed if your credit scores from Experian, Equifax, and TransUnion differ slightly. Each bureau’s FICO Score depends on its data collection and interpretation methods. Still, generally, your scores should be similar across all three.

VantageScore

In 2006, the big three credit bureaus created VantageScore (VS) to compete with FICO. VS is less popular than FICO but is still widely used. 

Both VS and FICO Scores have ranges of 300 to 850, but VS uses somewhat different calculations. VantageScore considers scores between 601 and 660 a fair credit score.

Here’s how VantageScore 4.0 computes your score:

  • Payment History (41% of your total score): This factor looks at whether you pay your bills on time. Late payments will lower your score. The timing of your last missed payment also matters. Remember, late payments can stay on your credit report for seven years.
  • Depth of Credit (20%): This category includes the ages of your credit accounts and your credit mix, such as revolving and installment accounts.
  • Credit Utilization (20%): This measures how much of your available credit you are using on your credit cards; VantageScore advises keeping your ratio below 30%.
  • New Credit (11%): This looks at how many new accounts you’ve applied for recently, as indicated by the hard inquiries on your credit report. VantageScore considers all hard inquiries within a 14-day period as a single inquiry — for those who want to rate shop.
  • Total Debt (6%): This factor checks how much you owe across all of your credit accounts, even those you’re late on. High overall debt can impact your score.
  • Available Credit (2%): This last category measures the unused credit in your revolving accounts. While it doesn’t greatly affect your score, having more available credit can slightly boost it.

VantageScore 4.0 has some unique features compared to FICO’s models:

  • VantageScore groups together credit checks made within 14 days to lessen their impact on your score. In comparison, FICO 9 also groups inquiries, but only those related to auto, home, and student loans over 30 days.
  • It doesn’t count unpaid medical debts against you.
  • VantageScore considers your long-term debt management habits, such as whether you are reducing your debt or making minimum payments.

Although your FICO and VantageScore may not be exactly the same, they should generally be comparable.

How Fair Credit Compares to Other Credit Categories

Credit scores determine how likely you are to pay back borrowed money on time. Your credit score can fall into different categories, each showing how well you handle your money. Knowing where your score stands helps you understand your financial options.

The following sections refer to FICO score categories.

No Credit

If you have no credit, it is because there’s no record of you borrowing and paying back money. This doesn’t mean you’ve been irresponsible. Usually, it’s because you have not used credit yet. 

Lenders may be reluctant to approve you for loans or credit cards because they can’t use your past behavior to judge. You’re a new player in the game of credit.

Poor/Very Poor

A poor or very poor credit score is below 580. It tells lenders that you’ve had significant trouble managing your credit in the past. Maybe you missed payments frequently, or you’ve defaulted on a loan. 

Because of this, lenders will be wary to let you borrow money, and they will charge you higher interest rates to compensate for the risk.

Good

A good credit score ranges from 670 to 739. It shows lenders that you’re generally dependable at repaying your debts on time. You’re likely to get approved for loans and credit cards with reasonable interest rates. 

However, you may not get the best deals available, which creditors usually reserve for those who have very good or exceptional scores.

Very Good

FICO considers your score very good if it is between 740 and 799. Lenders see you as a low-risk borrower, which means you’re likely to pay your loans on time. You’ll qualify for better interest rates and more favorable loan terms. 

This is a strong position, but with a bit of effort, you may achieve the highest credit score level.

Excellent/Exceptional

An excellent or exceptional credit score is anywhere from 800 to 850. This top tier of credit scores shows that you manage your finances superbly. Lenders will offer you the best interest rates, higher borrowing limits, and other perks.

You’ve proven you’re extremely dependable when it comes to managing and repaying debt.

What Fair Credit Consumers Can Expect From Lenders

Lenders will allow you to borrow money if your credit score is fair, but the terms will be less favorable than they would be for someone with a higher score. You will have to pay more interest, and your limits will likely be lower. Knowing this can help you make smart choices and improve your credit over time.

Limited Credit Eligibility

You can still qualify for credit cards if you have a fair credit score, but they will likely be simple. Because they’re more basic, these cards may only offer a few perks, such as cash back or rewards points. 

These cards also have higher interest rates that could cost you more money in the long run if you don’t pay off the entire amount you owe each month. This is how credit card companies mitigate their risk if you can’t pay back what you owe.

Capital One pre-approval screenshot
Issuers may allow you to find out if you have been pre-approved for card offers without any impact on your credit score.

If you want to get better cards in the future, the best thing to do is make sure you pay all your bills on time. Managing your money well can boost your credit score. Eventually, you could qualify for credit cards with better benefits and higher limits.

Just keep working at it and be careful with how you spend and pay back your money.

Increased Borrowing Costs

When you have a fair credit score, you’ll face higher interest rates on loans and credit cards. Lenders consider you riskier than borrowers with better credit. 

For example, someone with excellent credit may get a personal loan with a 10% interest rate. But if your credit is fair, you may have to pay 15% or more for the same loan. That also means you’ll end up paying more over the life of the loan. 

Similarly, credit card offers for high credit scores may include low introductory rates, but not so for fair credit. By improving your credit score, you can qualify for better rates in the future.

Low Credit Limits

When your credit score is just fair, the amount of money you can borrow from lenders isn’t as much as it would be for someone with better credit. This means the limit on your credit card or line of credit will be lower. Lenders do this deliberately to lower their risk and ensure you don’t incur more debt than you can manage.

With a fair credit score, you may get a credit card, but the limit could start at just a few hundred dollars. This is far less than what someone with very good or excellent credit might get; they could have limits of several thousand dollars.

steps to increase credit card limits
Responsible cardholders can take steps to have their credit card limits increased.

Use your credit wisely to receive a higher limit. You can do this by always paying your bills on time and not maxing out your credit cards.

If you keep this behavior up, lenders will notice your good habits and may increase your credit limit after a period of responsible use.

How to Improve From Fair to Good Credit

You need to be smart about how you manage your money if you want to move your credit score from fair to good. Making smart choices now can make a big difference later. And when you obtain a good credit score, you’ll get better deals on loans and credit cards.

Manage Credit Responsibly

One of the best ways to start improving your credit score is always to pay your bills on time, every time. This shows lenders that you are reliable. Another important aspect is to use only some of the credit you have available. Try to use less than 30% of your total credit limit because this shows youaren’t overextending yourself.

If your credit utilization is above 30%, consider paying it down. Setting up automatic payments can help ensure you never miss a payment date. On-time payments and low credit usage boost your score.

Here are a few simple tricks to ensure you pay your bills on time: 

  • Set Reminders: Use your phone, calendar, or personal finance software to set reminders a few days before your bills are due. This way, you will remember to make the payment.
  • Automatic Payments: Set up automatic payments for your bills. This will take the money out of your account automatically on the due date, so you won’t have to remember to do it yourself.
  • Organize Your Bills: Keep all your bills in one place, whether it’s on your computer or a filing cabinet in your home. Knowing where everything is helps you stay on top of your bills.
  • Pay Right Away: If you can, pay your bills as soon as you get them. This can stop your bills from piling up.

Using these strategies can help you avoid late payments, which is essential for maintaining a healthy credit score. 

You can also help your credit score by managing different types of credit, such as a car loan, a credit card, and a small personal loan. But you should borrow money only when you need it, as unnecessary debt can become costly.

Avoid Unnecessary Hard Inquiries

Lenders check applicant credit reports to see how good they are at paying back debt. A “hard inquiry” can impact your credit score if you apply too often within a short period. Many hard inquiries close together can make you look desperate.

To keep your score from taking unnecessary hits, only apply for new credit when you really need it. Don’t apply just because you got a mail offer or see a signup bonus

Before you apply, check if you’re likely to get approved. Some issuers allow you to prequalify, which doesn’t hurt your credit score. Using these tips can help you keep your credit score healthy by avoiding dings from too many hard inquiries.

Dispute Credit Report Errors 

Sometimes, your credit reports need corrections. Errors may include payments that are missing, accounts you didn’t open, and hard credit checks you didn’t authorize. It can help if you fix these mistakes because they can drag down your credit score. Here’s how:

  1. Get Your Credit Report: First, attain copies of your credit reports to check for errors. You can get free reports weekly from each of the three main credit bureaus through AnnualCreditReport.com.
  2. Check for Mistakes: Review your reports and check for inaccurate, missing, obsolete, and unfair information.
  3. Write Dispute Letters: Create a dispute letter for each error you find. Explain what you want the credit bureau to fix. Include copies (not originals) of any documentation that supports your claim, such as payment receipts or bank statements. Use certified mail with a return receipt.
  1. Wait: The credit bureau should complete its investigation within 30 days. It will also check with the merchant that reported the disputed information.
  2. Receive Results: The credit bureau will tell you the result of its investigation. It will fix your report if it agrees with your dispute. If it rejects your challenge, you can add a statement to your report explaining your side of the story.

This process helps you ensure your credit reports are accurate and may improve your credit score.

Keep an Eye on Your Credit Report

It’s really important to keep track of your credit report. Check it regularly to catch mistakes or signs that someone stole your identity. Spotting errors early makes them easier to fix.

Regularly reviewing your credit report can help you see if anyone is using your information to open accounts in your name. This is a big deal because identity theft could drastically impact your credit.

How to check credit reports graphic

You’ll also learn more about how your financial behavior affects your credit score, which can help you make smarter decisions about borrowing and repaying money.

Many credit cards, websites, and services offer credit monitoring for free — or for a fee. These services can alert you quickly to changes in your report. Get into the habit of reviewing your credit report at least once a year to keep your financial health in check.

Consider Credit Counseling

If you’re feeling overwhelmed with debt or unsure about how to manage your credit, it may be time to consider credit counseling. Credit counselors can give you advice and help you improve your credit.

Credit counselors can help you manage various forms of debt, including:

  • Credit Card Debt
  • Student Loans
  • Mortgages and Other Personal Loans

Talking to a professional can clarify how credit works and give you strategies to improve your credit score. Counseling can also help you make more informed decisions about significant financial purchases, such as buying a home or paying off a lot of debt. Credit counselors can help you create a budget that fits your spending habits and mitigates unnecessary debt.

Counselors could also assist in getting your creditors to lower your interest rates or monthly payments. Many credit counseling services offer workshops and tools to teach you about managing money and Credit. These educational resources may allow you to avoid financial problems in the future.

You can find reputable credit counseling services through the National Foundation for Credit Counseling or other consumer organizations. Many services offer free consultations.

Tools to Manage Your Credit

Some tools can help you monitor your credit status. You really want to catch issues before they become bigger problems.

Credit Monitoring Services

There are several popular free or fee-based credit monitoring services available, such as Credit Karma, Experian, and Equifax, to help you track your credit score. These services provide regular updates on your credit scores, alert you to any new inquiries, and explain what’s affecting your credit.

Benefits include:

  • Staying Informed: You should know where your credit stands before you make financial decisions.
  • Detecting Errors and Fraud Early: Address errors and fraudulent activities on your account quickly to protect your credit score from serious damage.
  • Tracking Progress: Regular checks let you see whether your efforts are succeeding.

Credit monitoring tools help you manage your credit effectively and strengthen your credit profile.

Tools For Planning Your Finances

Other tools can help you manage your finances more effectively. For example, budgeting and debt management apps such as Mint, YNAB (You Need A Budget), and EveryDollar make it easier to keep track of your spending and set realistic budgets.

These tools can help you allocate your income to cover your expenses, savings, and debt payments.

Additionally, apps allow you to maintain or improve your credit. They help ensure you have enough funds to cover your bills on time every month. Moreover, they can help you plan debt repayment more systematically. 

Educational Resources

I recommend these popular (and effective) books to assist in your credit-building journey: 

Many online platforms offer courses on financial literacy. Websites such as Khan Academy, Coursera, and Udemy have classes ranging from basic budgeting to advanced investing. Also, financial blogs and websites like CardRates provide practical advice and tips daily.

Continually educating yourself about financial management is crucial for maintaining and improving your financial health. With better knowledge, you can avoid common financial pitfalls. Learning about the success stories of others can also keep you motivated to reach your own financial goals. 

Fair Credit Provides Opportunities for Improvement

If you have fair credit, it’s a good idea to improve it. To do so, you must pay your bills on time and use less of the credit you have.

A higher score can help you access better deals on loans and credit cards. Keep working at it, and over time, you’ll see more opportunities to reach your financial goals.