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What does a 540 credit score mean?
A credit score of 540 is higher than the lowest credit score of 300, but it’s still a long way off from the highest credit score of 850. In the main scoring models used by US credit bureaus, 540 is in either the lowest credit score range (FICO) or the second-lowest range (VantageScore).
A score this low can make it hard to open new lines of credit and can damage your quality of life.
Here’s how your score stacks up against the average credit score for different generations.
How a poor credit score can affect your finances
Having a 540 credit score makes it very hard to get approved for a loan or a new line of credit, as shown in the table below. Even if you do qualify, you’ll end up paying more money for your credit or loan because your lender will charge you a much higher interest rate.
Loans and Credit You Can Get with a 540 Credit Score
|Credit Type||Loan Type||Eligibility|
|Installment loans||Mortgage||Eligible for FHA-backed mortgages, although you’ll have to pay a higher down payment (10%); eligible for some non-qualified mortgages|
|Car loan||Eligible, but you’ll have to pay a higher interest rate|
|Private student loan||Usually ineligible without a cosigner|
|Personal loan||Only eligible for high-risk loans, such as payday loans and car title loans, or cosigned loans|
|Revolving credit||Unsecured credit card||Usually ineligible, except for cards with very high interest rates|
|Secured credit card||Eligible|
|Personal line of credit||Usually ineligible|
|Open credit||Cell phone contract||Eligible, but you may need to pay a deposit|
|Utilities (gas, electricity, etc.)||Eligible, but you may need to pay a deposit|
|Charge cards||Usually ineligible|
A bad credit score can also affect your life in other ways. For instance, it can make it hard to find an apartment and can limit your job prospects because many landlords and employers run credit checks. Employers probably won’t see your actual numerical score, but they will be able to see the negative items in your credit history that contributed to it.
Having a low credit score also means you’ll probably end up paying more for services like insurance.
How your 540 credit score was calculated
As mentioned earlier, the two main credit scoring models are FICO and VantageScore. Although the two scoring models have some minor differences, both calculate credit scores based on the following factors:
- Payment history: Late payments lower your credit score. The later the payment, the more damage it will do. Charge-offs, collection accounts, and bankruptcies are even more damaging to your score.
- Credit utilization: This refers to the amount of credit that you’re using (also known as your debt-to-credit ratio). A lower utilization rate is better for your credit score. Many experts recommend keeping yours below 30% (meaning you should try not to reach a $3,000 balance on a credit card with a $10,000 limit). VantageScore recommends keeping your credit utilization even lower, under 10% if possible. 1
- Length of credit history: This is determined by the age of your oldest and newest credit accounts as well as the average age of all of your accounts. Old accounts that you’ve had for many years boost your credit score, whereas new accounts lower it.
- Credit mix: Your credit score will be lower if you don’t have a balanced mix of revolving accounts (e.g., credit cards and store credit) and installment accounts (e.g., mortgages, car loans, and student loans).
- New accounts: When you apply for a credit card or loan, the lender will run a credit check. This will trigger a hard inquiry. Hard inquiries take a few points off your credit score, and the effect lasts for up to 12 months. 2 Actually opening the account can further hurt your score and have even longer-lasting effects.
Usually, if your score is 540, it suggests you have one (or both) of the following issues with your credit history:
- Derogatory marks: If your credit report has several derogatory marks (negative items in your payment history, such as missed payments or marks related to debt collection), they can easily lower your score to 540.
- Insufficient credit history: A thin credit file can bring down your credit score even if you don’t have many derogatory marks. It could be that you haven’t used your credit enough to establish a positive enough payment history or that you don’t have a good mix of different types of credit.
The good news is that you can recover from both situations. However, before you worry about improving your credit score, it’s important to make sure you’re not doing anything to damage it.
To do this, follow these tips:
- Pay all of your bills on time.
- Avoid opening any new credit accounts (unless you need to build your credit history).
- Avoid closing old accounts.
- Send a debt validation letter demanding proof of any future debts that anyone tries to collect from you—this is one of your rights under the Fair Debt Collection Practices Act (FDCPA).
VantageScore vs. FICO credit score calculation methods
VantageScore and FICO take the same factors into account to produce your score, but they weigh them slightly differently (which is why you might have different credit scores in the two models). Here are just a couple of the differences between FICO and VantageScore: 3
- VantageScore groups the length of your credit history and your credit mix into one category called Depth of Credit.
- In addition to your credit utilization (represented as a percentage), VantageScore also looks at your current balances and your remaining available credit (represented as dollar figures).
The tables below show how the models weigh your financial decisions to produce your score:
|Payment History||Amounts Owed||Length of Credit History||Credit Mix||New Credit|
|Payment History||Credit Utilization||Depth of Credit||Recent Credit||Balances||Available Credit|
Putting your 540 score in context: how it compares to other scores
The table below shows the average VantageScore and FICO credit scores among US consumers, as well as your credit rating in each of these models and how far your 540 credit score is from the next scoring category.
|Your Rating||Points to Rating Upgrade||Points to Rating Downgrade||Average Score in US|
How to recover from a 540 credit score
With a credit score of 540, it’s likely that you have at least a few derogatory marks on your credit report, such as late payments. Fortunately, it’s possible to recover from these in relatively short order with the right strategies. Look into both:
Quick fixes for your 540 score
To fix your credit quickly, you’ll want to delete as many negative marks from your credit report as you can. This isn’t always possible, but it’s worth a try. Try to:
- Obtain copies of your credit reports, which you can get for free once per year from AnnualCreditReport.com
- Dispute any items you find on your credit reports that seem like they might be mistakes (e.g., overdue debts that you actually paid on time)
- Try to negotiate with your creditors (and any debt collection agencies they’ve hired) to delete your other (legitimate) negative marks; you might be able to convince them to do this asking for a goodwill deletion or proposing pay for delete
To file a credit dispute with the bureaus, use the template provided below.
Credit disputes aren’t always successful, but they’re your best bet for boosting your score of 540 quickly. 540 isn’t that far from the threshold at which a bad credit score becomes a fair credit score, so if you can remove some of the negative marks on your credit report, it might be enough to push your score back into a decent range.
Long-term strategies to rebuild your credit
Unfortunately, it’s relatively unlikely that you’ll be able to remove every mark bringing your score down (in fact, it’s possible you won’t be able to remove any). To make sure that your 540 score bounces back, you should also look into different methods to rebuild your credit in the long run. You should:
- Focus on rounding out your credit reports with positive information (such as on-time payments). If you don’t have any credit accounts in good standing that you can do this with, look into secured credit cards and credit-builder loans, which are easy to get even with a below-average score like 540.
- Manage your credit responsibly in the future. Use your credit cards in moderation and always pay off your credit cards in full every month before the due date.
- Prioritize getting out of debt (and stay out of it once you get there).
- Bolster your credit reports with alternative data from a service like Experian Boost or a third-party rent-reporting service, such as PayYourRent or eCredable
Plan on continuing to pursue these strategies even after your score recovers. In fact, these are general credit-building best practices that you should keep following no matter how high you’re able to boost your score.
How long will it take for your score of 540 to fully recover?
Any and all negative marks on your credit report will fall off in time. Most will remain on your credit report for 7 years (some bankruptcies stay for 10). This means that in 7–10 years, none of the negative information weighing down your credit will remain, and your score of 540 score will have recovered (unless you incur more negative marks in the future, that is).
In practice, you probably won’t have to wait that long. If you have good luck removing negative marks with the quick fixes listed above, you may see a modest improvement in your score in just a few months. Even if you don’t, your score will improve significantly within 1–2 years, since the older the negative marks on your credit report are, the less weight the scoring models will assign to them.
Getting a credit card with a 540 credit score
Opening a new credit account with a low credit score of 540 is possible, but you should temper your expectations. Credit cards for bad credit (also known as subprime credit cards) have significant drawbacks. While your 540 credit score is closing in on the fair credit score range, the credit cards available to you still won’t have the amazing reward schemes and benefits that you may want.
Below are credit cards that would be suitable for a 540 credit score.
When picking cards, you should be aware that subprime cards come in two forms:
- Secured credit cards: You’ll need to pay a security deposit, your credit will keep if you don’t pay your bills.
- Unsecured cards with high interest rates: With these cards, creditors compensate for the lack of a security deposit by charging very high interest rates and additional fees (e.g., inactivity fees).
Given the choice between those two options, it’s always better to go with a secured credit card. Unsecured subprime credit cards are dangerous because their high interest rates and fees can further jeopardize your finances.
Don’t apply for a credit card if you know your credit score doesn’t meet the company’s requirements. Most applications will trigger a “hard inquiry,” which will cause your score to temporarily drop. To find out if the card issuer has a minimum credit score, check their website or give them a call.
Getting loans with a 540 credit score
There is no credit score too low to get an auto loan, but you might have difficulty getting one while your credit score is in the poor range. You may be able to get a bad-credit car loan, but the interest rate will be relatively high, meaning that the toll it’ll take on your finances and credit score probably won’t be worth it.
According to a 2020 quarterly report by Experian, people with credit scores in the range of 300–580 (referred to as deep subprime borrowers) had an average interest rate of 20.3% on their used car loans, whereas people with credit scores of 781–850 (super-prime borrowers) received an average rate of 3.8%. 4 Waiting until your score improves could save you hundreds of dollars each month and thousands of dollars over the life of the loan.
If you need to buy a car before your credit improves, then consider getting a used car that you can pay for upfront.
If you’re set on getting an auto loan with bad credit, then pay as large of a down payment as you can afford and consider getting prequalified or applying for a preapproval from your bank or credit union to increase your bargaining power.
Getting a mortgage is possible with a credit score of 540, although your options will be limited. The minimum credit score to get a mortgage backed by the Federal Housing Administration (FHA) is 500. To get an FHA loan, these are things you’ll need to do:
- Pay a minimum down payment of 10% 5
- Show proof that your mortgage payments won’t exceed 31% of your gross monthly income and that your debt-to-income ratio will be less than 43% 6
- Choose a mortgage that doesn’t exceed the FHA’s mortgage limit in your area
It’s worth noting that you won’t be eligible for an FHA-backed loan if you had a foreclosure in the past three years or filed for chapter 7 bankruptcy in the past two years. 7
If you want a conventional mortgage instead of an FHA loan, then you’ll probably have to wait until you have a credit score of 620, which is the minimum score many lenders require, in line with the guidelines set out by the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). 8 9
If you’re not interested in an FHA loan or you don’t qualify for one, you’ll probably need to rent an apartment.
Renting with a 540 credit score
You often need a credit score to rent a house or apartment since many landlords run credit checks on prospective tenants. There’s no universal minimum credit score for tenants, but many landlords look for a score of at least 620–650.
If you’re looking for a rental and the landlord plans on doing a credit check, it’s best to be upfront with them about your low score. You may be able to get the landlord to look past it if you can convince them that you’ll reliably pay your rent on time each month.