Fair Credit: What's that Mean?

"Fair" can be a very positive thing -- fair weather means sunshine, My Fair Lady was a pretty woman, and a fair shake means an honest deal. However, "fair" credit isn't like that. It's actually just a step above poor credit -- typically, lenders rate credit scores as excellent, good, fair or poor.

What Is Fair Credit?

This category is loosely-defined as a FICO score between 620 and 679. Applicants with scores under 620 are routinely classified as subprime, while 680 to 740 often defines the "good" range. Currently, the average FICO score in the US is 640, but the median is 720. That means that 720 is the middle score -- half of US scores are higher and half are lower -- and a "fair" or average score puts you solidly in the bottom half of the country. It's certainly "okay," but there's definitely room for improvement.

Borrowing Costs

While those in the "fair" range have plenty of borrowing opportunities, they pay more for credit than those with good or excellent scores. For example, an applicant with excellent credit qualifies for a 30-year mortgage at 3.662 percent today, according to LoanExplorer by LendingTree. The borrower with a fair score gets 4.160 percent. For a $300,000 home loan, having fair credit costs an extra $85 a month, and over the life of the loan, almost $31,000.

How about auto loans? The best auto loans for people with excellent credit have rates in the three percent range, according to MyFICO.com. For those whose credit is just "fair," they run between seven and ten percent. A borrower with a 669 FICO would pay $3,164 more for a $20,000 car financed over four years than one with excellent credit would.

Then, there are unsecured accounts like credit cards and personal loans. Without collateral to repossess if you default, lenders rely even more on credit scoring to price their loans. There are actually many good cards for people whose credit scores are "fair" -- some with rather generous rewards programs -- but the interest rates are higher. Credit card rates in the "fair" category are at 15%, while low-interest cards for people with good credit are five points below that.

And while personal loans for people with excellent credit can be found with rates under seven percent, those with average credit scores may pay more than twice that.

What Causes a Fair Credit Score?

People can have mediocre scores for many reasons, but the main ones are insufficient credit, too much credit and derogatory credit. The "reason codes" on your credit report tell you which of these issues is yours.

You may simply have a short credit history or a "thin file," with too few trade lines for a creditor to make a decision. In this case, you can benefit by opening up a couple more accounts, charging small amounts and paying them off religiously. The score will usually come up.

If you have too many accounts, are using too much available credit, or owe too much, your credit utilization is too high and your scores suffer. The solution is to stop charging and pay the balances down to less than 30 percent of your credit limits.
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Missing payments, having a collection account or paying late on occasion will also knock your score down. In fact, a person in the good or excellent range can lose 60 to 80 points from a credit score with a single late payment. Over time, fortunately, the effect of that missed payment diminishes and the score can come back up.

Carefully selecting and using accounts for people with fair credit can help you move into the good range, while irresponsible use of credit could drop you into the poor credit bucket -- something to be avoided.

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