Is a 640 Credit Score Bad for Your Finances?
Unpack the true meaning of a 640 credit score for your financial health and access to resources.
A credit score is a numerical representation of your creditworthiness, assessing your ability to manage financial obligations. This three-digit number significantly influences access to various financial products and services. Understanding your credit score is important for navigating financial decisions effectively. This article focuses on what a 640 credit score means for you.
Understanding Credit Score Ranges
A credit score of 640 falls into the “Fair” category across common scoring models. Both FICO and VantageScore models, used by lenders, range from 300 to 850. For FICO Scores, a 640 is within the 580-669 “Fair” credit range. VantageScore 3.0 classifies 601-660 as “Fair” or “Near Prime.”
This classification indicates your score is below the average U.S. credit score, which was around 715 for FICO in 2023. Lenders perceive “Fair” scores as indicating higher risk compared to “Good,” “Very Good,” or “Exceptional” credit. A 640 score suggests you may qualify for credit, but terms offered might be less favorable.
Impact on Financial Products
A 640 credit score has practical implications when seeking financial products. While approval is possible, you will likely encounter higher interest rates and less advantageous terms compared to borrowers with higher scores. Lenders adjust rates to offset the increased risk associated with a “Fair” credit score.
For auto loans, a 640 score leads to higher interest rates, ranging from 10% to 15%. This is considerably higher than average rates for borrowers with better credit, increasing the total cost of the vehicle. Personal loans may be accessible, but with less flexible terms and higher annual percentage rates (APRs). Lenders specializing in fair credit borrowers offer options, but these come with elevated costs.
Securing a mortgage with a 640 score presents challenges for conventional loans, which prefer scores of 620 or higher. These may still require private mortgage insurance (PMI) if the down payment is less than 20%. Government-backed options like FHA loans are more accessible, with minimum score requirements as low as 580 for a 3.5% down payment. Even with FHA loans, a 640 score might result in slightly higher interest rates. For credit cards, approval is possible, but options may be limited to secured cards or those with higher annual fees, interest rates, and lower credit limits.
Key Elements of a Credit Score
Credit scores are calculated using several factors, weighted differently to predict credit behavior. Payment history holds the most weight, accounting for approximately 35% of a FICO Score. Consistently making on-time payments demonstrates financial responsibility and contributes significantly to a positive score.
The amount owed, also known as credit utilization, makes up about 30% of your score. This considers the proportion of available credit used; keeping balances low, ideally below 30% of your credit limits, can positively impact your score. The length of your credit history, including the age of your oldest account and the average age of all accounts, accounts for about 15% of the score. A longer history indicates more experience managing credit.
Credit mix, which evaluates types of credit (such as installment loans and revolving credit), contributes around 10% to the score. Successfully handling diverse credit types can be beneficial. New credit, including recent applications and newly opened accounts, makes up the remaining 10%. Each new credit inquiry can temporarily lower your score, with inquiries remaining on your report for two years.
Other Uses of Your Credit Score
Beyond traditional lending, your credit score influences various other aspects of your financial life. Landlords check credit scores as part of rental applications to assess a prospective tenant’s reliability in meeting financial commitments. A lower score might lead to a larger security deposit or even application denial.
Some insurance providers utilize credit-based insurance scores to determine premiums for auto and home insurance policies. A lower credit score could result in higher insurance costs. Utility companies (electricity, gas, water) may also review credit scores before establishing new accounts. A lower score might necessitate a security deposit to initiate service.
Employers may conduct credit checks as part of background investigations for job applicants. While not universally applied, a history of financial mismanagement could be a factor in hiring decisions for such roles.