Smart Money Moves if You Have a 400 Credit Score

Having a good credit score means it’s easier to get approved for a loan, land a job, and find an apartment. It also means that you can save a lot of money with lower interest rates and insurance premiums. Unfortunately, a poor credit score, such as one around 400, can make it harder to get good terms on a major credit purchase such as a car or a house, if you can get approved for terms at all. 

But don’t lose hope. Having a credit score of 400 only means that it’s harder to do these things, not that it’s impossible. And best of all, if you start building good financial practices now, you can dramatically improve your credit score in just a few years.

What It Means To Have a 400 Credit Score

Several companies calculate credit scores, but the biggest two used in the United States are FICO and VantageScore. Both use a scale that ranges from 300 to 850 — the higher the score, the better. Experian explains how these scores break down and what they mean. For FICO scores:

• About 16% of people have a score between 300 and 579, which is considered very poor.

• About 18% of people have a score between 580 and 669, which is considered fair.

• About 21% of people have a score between 670 and 739, which is considered good.

• About 25% of people have a score between 740 and 799, which is considered very good.

• About 20% of people have a score between 800 and 850, which is considered exceptional.

VantageScore credit scores can be broken down the following way:

• 300 to 499 is very poor. About 5% of people have a score in this range.

• 500 to 600 is poor. About 21% of people have a score in this range.

• 601 to 660 is fair. About 13% of people have a score in this range.

• 661 to 780 is good. About 38% of people have a score in this range.

• 781 to 850 is excellent. About 23% of people have a score in this range.

Under either credit scoring model, a score of 400 is in the lowest category. It likely signifies that the individual has had significant financial struggles. Lenders will often refer to someone with a 400 credit score as a “deep subprime” borrower. If you apply for credit with a credit score of 400, you’ll have difficulty getting approved. And if you do get approved, you’ll pay much higher interest rates.

If you try to rent an apartment, the landlord may deny your application or make you pay a significant security deposit. Some states also allow car insurers to charge higher premiums to policyholders with lower credit scores. Finally, some employers will look at your credit score when considering whether to hire you. A score of 400 might mean they give the job to someone else.

What Causes a 400 Credit Score? 

As mentioned earlier, a credit score of 400 is on the low end. Less than 16% of American consumers have a FICO score that low. In most cases, a combination of factors helped create a 400 credit score. The following five factors go into creating a FICO credit score:

• Payment history (35%): The primary focus here is if the borrower has made any late payments.

• Amounts owed (30%): This looks at the borrower’s credit utilization ratio. This is how much of the borrower’s available credit they’re using at a given time.

• Length of credit history (15%): The longer a credit account is open, the higher the credit score.

• Existence of new credit (10%): If a borrower opens too many credit accounts in a short period of time, it’ll hurt their credit score.

• Credit mix (10%): Having different types of credit accounts, including installment credit (mortgages and car loans) and revolving credit (credit card accounts) can help boost your credit score.

According to Experian, 17% of borrowers with a 400 credit score have gone more than 30 days past due on a payment at least once in the last 10 years. The average credit utilization rate of these borrowers is 103.4%, and their average credit card debt is $7,661.

It’s also likely that they have had one or more of the following:

• A recent charge-off; 

• Multiple missed payments;

• At least one debt currently in collections; and/or

• A vehicle repossession.

Can I Get Housing With a 400 Credit Score?

Yes, but it’ll be challenging. If you’re looking for an apartment, you can expect a potential landlord to run a credit check when they review your application. This helps them predict how likely you are to make timely rent payments. With a 400 credit score, your landlord may doubt your ability to do this. If you’re having trouble finding a rental, there are several strategies you can use to increase your chances of getting approved.

How To Improve Your Chances of Getting a Rental

First, look to rent from an individual landlord rather than a property management company. Large, multi-state property management companies may have rules prohibiting them from renting units to tenants with certain credit scores. But smaller landlords can often adjust the terms of the lease or modify their rental criteria. They might, for example, agree to rent to you but ask you to make a security deposit equal to two month’s rent instead of one.

You can also try writing a letter to your prospective landlord explaining why your credit score doesn’t accurately reflect your financial situation and ability to make timely rent payments. For example, maybe your credit score took a hit after losing your job or dealing with an unforeseen medical emergency.

Second, you can ask someone to cosign the lease with you. This gives the landlord more security if you aren’t able to pay. They can go after your cosigner for back rent or other compensation if you break or don’t follow the terms of the lease. This may give them the confidence to rent to you because if there are any problems, they have multiple avenues of potential financial recovery. 

How Your Credit Score Affects Buying a Home

If you want to buy a house and your credit score is 400, you won’t get approved for most mortgages. For instance, to get an FHA loan, you need to have a credit score of at least 580 as of August 2021. And in the fall of 2018, less than 1% of borrowers who were approved conventional mortgages had a FICO score below 600.

But there’s good news. It doesn’t take that long to improve your credit score enough to get approved for a mortgage. Borrowers who file Chapter 7 bankruptcy can typically get a mortgage to buy a home two years after they file.

Can I Get an Auto Loan With a 400 Credit Score? 

Yes, but it’ll be expensive to borrow the money to buy a car. Your first challenge will be finding an auto lender that offers you a car loan. Some lenders will have policies that require their borrowers to have a minimum credit score to receive a loan. Most likely, 400 will be below that cutoff. Luckily, this challenge shouldn’t be too difficult to overcome. Several dealerships understand many of their potential customers won’t have great credit.

Some car loan creditors will modify their loans for borrowers with not-so-perfect credit. This often means paying a much higher interest. How much more? 

According to Experian, Americans with a credit score between 300 and 500 had an average car loan interest rate of almost 14% in the second quarter of 2020. During that same time, the average interest rate of a car loan in the United States was 5.14% for a five-year loan. This difference is even more dramatic when you consider that car loans are secured loans, which typically have lower interest rates. Borrowers with poor credit scores face interest rates that rival many unsecured credit cards. These rates are often very high because the creditor has no collateral to go after if a borrower defaults. They can cost you a lot in the long run.

So yes, it’s possible to buy a car with a loan if you have a credit score of 400. But you’ll be much better off buying your car with cash or waiting until you can increase your credit score and improve your credit history. It might take a little bit of time to get there, but it’ll save you a lot in the long run.

How To Bounce Back From Bad Credit 

It might feel like there’s a lot of bad news for people with a poor credit history. But the good news is that with a bit of patience and sound financial decision-making, you can increase your credit score.

Credit scores are calculated using the information from your credit report. So if there’s a negative event in the report, your credit score goes down. But negative information doesn’t stay on your credit report forever. Events like missed payments, late payments, vehicle repossessions, foreclosures, loan charge-offs, and bankruptcies will eventually have little to no effect on your credit score. 

Most of these events will stay on your credit report for seven years, although a Chapter 7 bankruptcy will be on your credit report for 10 years. This is a long time, but remember that as time passes, these events will have a smaller impact on your credit score. In turn, this leads to a higher credit score. If you’re looking for ways to improve your credit, there are several things you can do to get a higher credit score.

Check your credit report.

Get free copies of your credit report from Equifax, Experian, and TransUnion. The Fair Credit Reporting Act (FCRA) allows you one free copy from each of these credit bureaus every year. You want to review your credit reports to make sure all the information contained in them is correct. Errors are more common than you might think, and your credit score can be negatively impacted by inaccurate information. If you find that your credit report contains a mistake, file a dispute with the credit bureau and/or the creditor.

Add positive information to your credit report.

Do everything in your power to make all your debt payments on time. Remember, the single biggest component of your credit score is your payment history. This means whether you make your payments on time each month. It also helps to get caught up on as many of your credit accounts as possible. If you’re past due on an account, become current. If you’re current on a credit card account but are carrying a large balance each month, try to pay off or pay down the credit card. This not only saves you money on interest, but it can also improve your credit utilization ratio.

It’s also smart to hang on to your old credit accounts even if you’re no longer using them regularly. The length of your credit accounts makes up 15% of your credit score. The older your accounts, the better.

Finally, carefully consider opening a new credit account. This might sound counterintuitive, but there are a few benefits to doing this. Part of your credit score comes from the types of credit you have. By improving this mix, you can potentially increase your credit score. Another benefit is that it’ll increase how much credit you have access to. This can improve your credit utilization ratio. If your credit isn’t great, you can do this with a secured credit card or credit builder loan.

Get a secured credit card or credit builder loan.

Make use of credit repair tools. Two common examples include secured credit cards and credit builder loans. With a secured credit card, you deposit a set amount of cash with the credit card company. This becomes your credit limit. Then, when you use the credit card, your available credit drops by however much you used. Secured credit cards are easier to get than traditional credit cards. They’re perfect for individuals whose credit has been damaged and who need an opportunity to show that they can handle a credit card and make on-time payments.

Credit builder loans are secured loans that use the borrower’s own money as collateral. If the borrower wants a loan for $1,000, they’ll make a cash deposit with the lender of $1,000. Then the borrower takes out a $1,000 loan and pays it back over time. The lender reports these payments to the credit bureaus. As long as you make on-time payments, these will be positive reports and improve your credit score.

File bankruptcy to get a fresh start.

If there’s no realistic way you can continue making minimum payments on all your loans and working your way out of debt, bankruptcy may be your best option. 

It’s true that bankruptcy will have a big impact on your credit history. But many borrowers fail to understand that having several missed or late payments on your credit report may damage their credit score even more seriously than bankruptcy. After your debts have been discharged in bankruptcy, you can begin the process of rebuilding your credit. But if you hang on to debts you can’t fully repay, you’ll continue hurting your credit score and never have the chance to “reset” your credit history.

If you’re interested in filing Chapter 7 bankruptcy, you might want some help. Hiring a bankruptcy lawyer is an option, although it’s not always required. Upsolve is a nonprofit that can help you file Chapter 7 bankruptcy for free.

Let’s Summarize...

If you have a credit score of 400, you’re not alone. There are many people in your shoes. Most consumers with low credit scores have had financial struggles that caused them to fall behind on their bills. As interest and late fees pile up, they can’t dig themselves out of debt.

Having a poor credit score can hurt your chances of getting new credit accounts as well as securing housing or getting a job. But your credit score changes all the time, and you can work to improve it. Most importantly, make all your debt payments on time. If you can manage to do that, your credit score will gradually improve on its own. But you can also make use of credit repair tools to speed up the process. And if catching up on your debts isn’t feasible, you can consider filing bankruptcy.