If your score is 500, you may not be able to get credit, or you may face extremely high interest rates and fees. Fortunately, the sooner you start taking steps to actively raise your score, the sooner your credit rating will improve. This article covers the factors that lead to a 500 credit score, how that score can affect your ability to get financing, and some steps you can take now to start increasing your score.
Written by Attorney Paige Hooper.
Updated August 23, 2021
Your credit score is a number that lenders use to predict how likely you are to default on a new loan based on your past financial behavior. A credit score of 500 generally falls within the lowest score category. If your score is 500, you may not be able to get credit, or you may face extremely high interest rates and fees.
Fortunately, the sooner you start taking steps to actively raise your score, the sooner your credit rating will improve. This article covers the factors that lead to a 500 credit score, how that score can affect your ability to get financing, and some steps you can take now to start increasing your score.
What It Means To Have a 500 Credit Score
Although most people know that credit scores are important, many consumers have only a vague understanding of how credit scoring works or what their scores mean.
Credit Scores vs. Credit Reports
A credit score is not the same thing as a credit report. In simplified terms, your credit report is a summary of your credit accounts and payment history over the past 7-10 years. Credit reports are compiled by one of three credit reporting bureaus: Equifax, Experian, or TransUnion. The information from your credit report is then entered into a scoring model to generate your three-digit credit score. The scoring process allows lenders to estimate the likelihood that you will repay your debt without having to review your entire credit history.
Many companies offer different credit scoring models, but most lenders use either FICO or VantageScore. These models are similar, but each emphasizes aspects of your credit history slightly differently. Both FICO and VantageScore produce scores that range from 300 (the worst) to 850 (the best).
Score-Based Risk Levels
Your VantageScore is likely different from your FICO score. To account for this, the scoring companies use statistical information about all borrowers to divide credit scores into categories that lenders can easily interpret. A 500 score is considered very poor under the FICO model and bad under VantageScore. Also, lenders sometimes use credit scores to classify borrowers based on how they compare to an ideal, or prime, loan candidate. A 500 credit score is typically considered to be subprime or deep subprime.
Lenders use credit scores and score categories to assess how risky it is to loan you money. Your risk level determines your repayment terms. Usually, the higher the risk for the bank, the more you’ll pay for credit. Banks generally consider a person in the 500 credit score range to be high risk. Put another way, a 500 score is usually a sign that you’ve hit a financial rough patch or have struggled to manage your finances. Someone with a better record is usually a safer bet.
With a 500 score, you can expect to receive less favorable treatment from lenders, landlords, and others. You may have to pay a higher interest rate or a larger security deposit. Utility and phone companies may require you to pay a connection fee. Depending on the laws in your state, your credit score may also be used by auto and homeowners insurance companies to help determine your insurance rates and by employers when considering you for a job.
What Causes a 500 Credit Score
FICO scoring models use the following factors to determine your credit score:
Payment history: Your record of whether you pay your debts on time or late accounts for 35% of your FICO score. Late payments lower your score.
Utilization rate: Your credit utilization rate refers to how much of your available credit you’re currently using — in other words, how close you are to reaching your credit limits. Your utilization rate makes up 30% of your FICO score.
Account age: The longer you’ve been able to maintain active credit accounts in good standing, the higher your score will be. This factor accounts for 15% of your FICO score.
New accounts: 10% of your FICO score is based on whether you’ve recently opened, or tried to open, any new credit accounts. If so, your score might be lower. Multiple new accounts or inquiries imply that you might be desperate for money.
Credit diversity: Having different types of credit accounts on your report, such as a mortgage, auto loan, personal loan, and credit card, improves your score because it shows that you have experience dealing with different kinds of loans. This factor accounts for 10% of your FICO score.
If you have a 500 credit score, you’ve likely experienced one or more financial hardships or made some credit mistakes during the past 10 years. You may have multiple extremely late or missed payments, defaulted or charged-off loans, or a recent foreclosure or repossession. Court judgments, maxed-out credit card balances, and collection accounts can also contribute to a 500 credit score.
According to the most recent report from the U.S. Consumer Financial Protection Bureau, approximately 16% of U.S. adults have a credit score below 580. The latest figures from FICO indicate that around 7% of adults have a FICO score of 500 or lower.
Credit Cards With a 500 Credit Score
Having a credit score in a high-risk category can make it challenging to get credit. While roughly 38% of adults with a credit score of 500 or below have at least one active credit card account, these people likely opened their credit card accounts when they had higher credit scores, before they started to fall behind on payments. What’s more, many of those cards may be maxed out. Experian reports that adults with 500 credit scores have an average utilization rate of 113%.
Most major banks don’t issue credit cards to people with 500 credit scores. This can feel like a bit of a Catch-22: Improving your credit score requires using credit wisely and making payments on time. But how can you do that if you can’t get approved for credit?
One possible solution is to get a secured credit card. These are credit cards that are designed specifically for people with low credit scores. In most cases, these are the only credit cards available to people with a 500 credit score. To open a secured credit card account, you must pay an upfront deposit, usually around $200. Your spending limit on the card is equal to the deposit amount. You can use this card to increase your credit score by paying the bill on time each month.
Secured credit cards often have steep interest rates and high annual fees. You can avoid paying interest on your card by paying the balance in full each month. Interest on credit card debt adds up quickly, so avoid borrowing more than you can pay each month unless it’s absolutely necessary. Keeping your balance low will also improve your credit utilization rate.
Housing With a 500 Credit Score
Because a 500 credit score indicates a high risk that you’ll default on payments, you’ll likely be turned down for most mortgages. You may also have a difficult time getting approved for rental housing. That said, a low credit score doesn’t mean that you can’t rent an apartment or buy a house.
Renting a Home
If you’re seeking rental housing and you have a 500 score, there are ways to increase your odds of getting approved. Look for housing offered by independent owners and landlords rather than properties that are owned or managed by corporations. Larger investment or management companies tend to have stringent credit requirements and may use software to automatically deny your application.
By contrast, independent landlords are more likely to review your application thoroughly and consider your life circumstances. Include a statement in your application explaining how your financial situation has improved since the events that led to your poor credit score. If possible, try to have someone with a good credit score cosign the lease with you. This alleviates some of the risks for the property owner.
Buying a Home
Like renting, buying a home is more difficult with a 500 credit score, but it’s not impossible. Some things that can help you secure a mortgage despite a low credit score include:
Having a co-borrower with good credit;
Presenting evidence of an improved financial situation, such as pay stubs showing a steady income; and
Maintaining a healthy debt-to-income ratio (your monthly minimum debt payments divided by your monthly income).
It’s also important to apply for the right type of mortgage. Some kinds of loans are better for people with bad credit than others. Loans backed by the Federal Housing Administration (FHA), for example, are often a good choice for borrowers with scores in the subprime or deep subprime range.
FHA loans are insured by the federal government, which reduces the mortgage company’s risk. As a result, the credit score and down payment requirements are often lower for FHA loans than for other kinds of mortgages. Assuming you meet the other loan requirements, you can qualify for an FHA loan even with a 500 credit score, so long as you can pay 10% of the home’s purchase price as a down payment. If your credit history includes a bankruptcy filing, you can still qualify for an FHA loan if the bankruptcy was at least two years ago (one year in some cases).
How To Bounce Back From Bad Credit
If your credit score is 500, your credit report probably includes some negative events, such as missed payments, repossession, or bankruptcy. As time passes, those things will have a smaller impact on your credit history. The negative items will eventually disappear from your report and your score will increase. In the meantime, there are some things you can do to further improve your credit score.
Review Your Credit Reports
Because your credit score is based on the information in your credit report, it’s important to make sure that everything in your report is accurate. You can get a free copy of your credit report from each credit reporting bureau every 12 months. Review your credit reports regularly. If you spot any inaccurate information, especially if it’s negative, contact the appropriate credit reporting bureau to dispute the erroneous item.
Make On-Time Payments
The best thing you can do to help a low score bounce back is to avoid missing payments. Make on-time payments on all your open debt accounts. Timely payments only improve your credit score if they’re reported to the credit reporting bureaus, meaning that paying your cell phone or utility bill on time each month isn’t enough.
Use a secured credit card, if necessary, and establish a history of paying the balance on time each month. If you’re renting, there are now third-party reporting services that you or your landlord can use to report on-time rent payments to credit bureaus. Reporting timely rent payments can be an excellent way to boost your credit history without taking on additional debt.
Making your monthly payments on time is key to increasing your credit score, but what if you can’t afford to make the minimum payments on all your debts on time each month? In that situation, bankruptcy might be a good choice for you. People often think of bankruptcy as a last resort, but bankruptcy is often less harmful to your credit than multiple missed payments across various accounts. If you think bankruptcy might be right for you, you can use Upsolve’s free online filing tool. Upsolve is a national nonprofit that helps Americans file for Chapter 7 bankruptcy for free.
A 500 credit score is classified as bad or poor. Having a low score can make it difficult to get new credit, secure housing, purchase affordable car insurance, and even find new employment. If you have a 500 score, though, you aren’t alone. Most people with a 500 credit score have experienced some sort of setback or hardship that caused them to fall behind on debt payments. Fortunately, a low credit score isn’t a life sentence.
With time, most negative items will eventually be removed from your credit report, so long as you’re not missing additional payments. Paying your bills on time each month is the most important thing you can do to increase your credit score. If you can’t afford to make your minimum payments on time, filing for bankruptcy might be a smart choice. Continuing to miss payments often hurts your credit more than filing for bankruptcy. Upsolve’s free tool or a local bankruptcy attorney can help you decide if this path is right for you.