540 Credit Score: Everything You Need To Know 

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Your credit score influences much of your adult life. From buying a home to renting an apartment, financing a car or getting basic services such as a cell phone or cable, your credit score ultimately influences whether you’re approved to do so and at what rate. 

A credit score is a numerical value with a range of 300 to 850. The higher the numerical value, the better. Your credit score measures your financial reputation. It helps a lender determine how likely you are to pay back what you borrow. If you have a 540 credit score, here’s everything you should know. 

Is 540 a good credit score?

A credit score is a numerical range between 300 and 850. But this range is typically divided into five sections:

  • A poor credit score has a range of 300 to 579.
  • A fair credit score has a range of 580 to 669.
  • A good credit score has a range of 670 to 739.
  • A very good credit score has a range of 740 to 799. 
  • An excellent credit score has a range of 800 to 850.

A 540 credit score is certainly on the lower end and is not considered a good score. But remember, your credit score is forever moving. If you have a 540 credit score, you can work on improving it and see fantastic results.  

Why your credit score is 540

First, unpack why you have a 540 credit score. Generally speaking, there is no silver lining here, and there are numerous factors that contribute to this low score. 

Payment history

Your payment history is without question taken into consideration. Do you have a history of paying your bills and debt obligations on time, or do you miss payments or pay late? Missed or late payments will negatively impact your credit score. 

Credit usage

Credit usage is simply a ratio of how much credit you are using. If you’re maxed out on your credit usage, lenders will consider you a higher lending risk considering how leveraged you currently are. If you have a low credit usage ratio, lenders will consider you a lower risk as you are financially more solvent.  

Length of credit history

Your credit score is often considered your financial reputation. Like all reputations, it takes time to establish a name for yourself. Your credit score is no different. If you’ve never had credit before, a lender will have a difficult time determining how financially reputable you are. If you have a long history of borrowing money or fulfilling debt obligations, a lender will have numerous data points that can help, or hurt, your credit score. Your low credit score may be a result of not having credit for a long period of time. 

Credit mix

All debt and borrowing obligations are not the same. Your credit mix refers to the many different types of credit accounts, or loans, you have. For example, you could have a cell phone bill, a mortgage, a credit card balance and a car loan all in your name. These are four different credit ingredients. Installment loans and revolving credit lines, such as credit cards, are typically healthy items to have in your credit mix. 

New credit

New credit is similar to the length of credit history. The new credit would be things like a new personal loan or a new credit card opened in your name. Opening numerous credit cards all at once is not going to help improve your credit score, as the length of your credit history is also taken into account when calculating your credit score. 

Is it possible to get a loan with a 540 credit score? 

Obtaining a loan with a 540 credit score will be challenging. Your chances of rejection will be higher considering a lender will consider a 540 credit score to be a higher risk. However, despite how challenging it can be, you can secure a loan with a 540 credit score. These loans will require more terms and conditions to be met. 

For example, you may get a loan with a 540 credit score if you:

  • Have a co-signer or guarantor of the loan. If for whatever reason you personally default, the co-signer and/or guarantor will be held responsible for the outstanding balance. 
  • Take a higher interest rate. Interest rates are what a lender charges you to borrow its money. If you have a great credit score, lenders consider you a lower risk and will not need to make as much money on you. If you have a 540 credit score, you are considered a higher risk and a lender will charge you a higher interest rate to justify taking on such a great risk. 
  • Additionally, if you want to obtain a loan with a 540 credit score, be prepared to make a larger down payment. A higher down payment not only reduces the amount of money you are asking to borrow, it also shows a lender you are committed to the purchase you are making. If you part ways with a lot of money for a large down payment, it may be safe to assume you do not want to default on that loan and have the item repossessed — as you’d be out of your large down payment if that happened. 

Options for loans with a 540 credit score

Various loans are available to people with a 540 credit score. However, payday loans should be avoided at all costs. Take a look at some of the most common options below. 

Secured credit card

A secured credit card is when the account holder, or cardholder, deposits money to open a secured credit card. Instead of a typical credit card, which is issued on your credit score, a secured credit card will require the cardholder to give a deposit in order to be issued the card. This deposit can be a few hundred dollars and essentially reduces the risk the credit card company takes on. If the cardholder did not pay their credit card balance, the credit card company will keep the initial deposit. 

Credit builder loan

A credit-building loan is a loan that helps people with poor credit scores improve their credit. Unlike a traditional loan, where the money is given to the borrower, a credit-building loan requires the borrower to pay a fixed payment for a specific period of time. Once the borrower makes all of their payments and fulfills the obligations of the term, the lender issues the borrower the cash. This not only allows the borrower to build their credit score but also allows the borrower to build savings. 

Car Loans

Although obtaining a car loan is challenging with a 540 credit score, it is possible. A lender typically considers a car loan on the less risky spectrum because it is backed by an asset, which is the car. If the borrower defaults on the loan, the lien holder can repossess the car. If you’re applying for a car loan with a 540 credit score, expect to pay a higher interest rate and fees. 

Tips to improve your 540 credit score

If you have a 540 credit score, don’t get discouraged! Your credit score is forever moving, and just because your credit score is low today doesn’t mean it needs to stay low. You can take deliberate steps to improve your credit score. 

Stick to a budget

One of the best ways to improve your credit score is to establish and stick to a budget. Far too many people live their life with no clear budget, and this can easily lead to overspending. Establish a budget that allows you to fulfill all your debt obligations and save money. This may mean you cut back on miscellaneous spending, such as going out to dinner or shopping. 

Set up automatic payments

Setting up automatic payments for any bill or debt obligation you currently have is a great free way to improve your credit score. Automatic payments will ensure you never make a late payment, and that will only help improve your credit reputation. 

Pay off your balance in full every month

If you charge money to your credit card, pay it off in full each month. Making the minimum payment is better than not paying, but the best way to improve your credit score is to pay that balance off in full every month. 

Don’t use more than 30% of your credit limit

Do not use more than 30% of your credit limit. For example, if a credit card has a $10,000 limit, do not exceed $3,000 a month, and pay that $3,000 off in full every month. This shows lenders you are not dependent on borrowed money to sustain your lifestyle. 

Don’t apply for credit too often

Even though having a diversified credit mix is a factor that helps improve your credit score, you do not want to apply for credit too often. Remember, the length of credit is more important than the number of credit options you have. For example, having the same credit card for five years is better than having two credit cards you opened within a few months of each other. Reputation takes time to earn. 

A 540 Credit Score Is Just the Beginning 

Some people are pleasantly surprised to find out their credit score. Others are disappointed to see their credit score be as low as it is. If you have a 540 credit score, don’t give up hope. You can improve your credit score in many ways, and you can get started on improving your credit score today. Considering how influential your credit score is for so many adult purchases, the better your credit score is, the easier those purchases become. 

FAQ

Is 540 a bad credit score?

A 540 credit score is considered to be a poor credit score.

Can I buy a house with a 540 credit score?

If you want to buy a house, you will need a credit score of at least 580. With a 580 credit score, you can secure funding through the Federal Housing Administration.

Can I get a car loan with a 540 credit score?

Getting a car loan with a 540 credit score is challenging, but it is possible.

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