If you have a fair credit score, generally defined as a FICO between 620 and 679, you probably already know that those really low advertised rates for credit cards,
and mortgages do not apply to you. However, you're much better off than consumers whose scores put them in the "poor" credit category. Borrowing may not be cheap, but at least it's available to you.
Why People with Fair Credit Pay More
If you have a fair credit score, it's important to understand that lenders are not trying to punish you when they charge higher interest rates -- they just want the same return on investment for lending to you that they get when lending to someone with excellent credit, and to get that, they have to charge more.
Here's an illustration. Suppose Desert Credit Union wants to earn five percent on all of its loans, or $50,000 for every $1 million loaned out. However, it won't earn $50,000 by charging five percent, because some borrowers don't pay them back. When that happens, the lender loses its interest income plus the money it loaned out. So the credit union has to charge extra to make up for the borrowers who default.
Desert Credit analyzes its records and finds out that borrowers default at different rates: while just one percent of people with excellent credit default, that increases to five percent for those with good credit, 15 for those with a fair credit score and 25 percent for people with poor credit.
Desert Credit expects to lose $150,000 of every $1 million it loans to borrowers with fair credit, so it will only have $850,000 actually earning interest income. To end up with its original $1,000,000, plus the $50,000 it needs to earn, then, the Desert Credit has to charge a higher interest rate. To get from $850,000 to $1,050,000 in one year requires an interest rate of 23.53 percent. The table below shows how this works.
Fair Credit Interest Rates
While the example above is just an illustration, people with fair credit do pay more than people with excellent credit for every kind of loan:
- Rates approximately .5 to .75 percent higher for 30-year fixed-rate mortgages
- Between four and seven percent higher for auto financing
- About five to seven percent higher for credit cards
- Approximately seven percent higher for unsecured personal loans
Advantages of Fair Credit
If you have a fair credit score, you have an advantage over consumers with poor credit -- at least you can still get loans. For example, there are many rewards credit cards marketed especially to borrowers with fair credit. And guess what? The rewards are just as good as they are for people with excellent credit. If you're smart and avoid carrying a balance at that high "fair credit" rate, you can get all the benefits of your fair credit score without the disadvantages.
With your credit score, you're still able to get approved for credit cards, auto loans, mortgages and personal loans, as long as your income is sufficient. That makes it easier to improve your score and move up to "good credit" status. Simply use your accounts sparingly, pay your bills when you're supposed to, and get your balances down over time.
People with poor credit, however, have a hard time getting loans, which makes improving a bad score a real challenge. You'll want to be extra careful with your debt management to make sure you don't slip into that group.
Best Loans for People with Fair Credit
Just because you have fair credit doesn't mean you should pay too much for your borrowing. At every credit grade, there are lenders offering a wide range of products and a variety of interest rates. It's up to you to find the best ones available to you in the "fair credit" range. Online marketplaces like LendingTree allow fair credit lenders to compete for your business, and make it easy for you to compare offers side by side.