The credit scores of some borrowers in the US are as low as 3,500 points, according to a new study.
Credit scores can often be used to compare lenders’ interest rates and even get a better understanding of borrowers’ ability to repay.
But small loans, especially those from smaller lenders, can be hard to access due to strict rules.
“Credit scores have become the most commonly used and used indicator of a borrower’s credit standing, with credit scores typically being as low or lower as 3 to 5 points, and it can be as difficult to obtain as a credit card or a mortgage,” the report, Credit Score, Low Credit, and Low Interest Rates: A Review of Credit and Loan History by the Federal Reserve Bank of St. Louis, said.
“There is some evidence that low credit score is correlated with poor loan outcomes, and this report highlights the importance of understanding the extent of a credit score for a borrower to make an informed decision on whether to borrow.”
The study, titled Credit Score Low Credit and Low Rate of Return, looked at a cohort of nearly 3,600 people with a credit rating of 500 or less, who were offered a loan between 2009 and 2012, or a loan with a loan-to-value ratio of less than 3.5, according the US Department of Housing and Urban Development.
The median credit score of borrowers was 3,074, while the median rate of return for loans with a 3.0 to 4.0 rating was 13.6% over the same period.
That was slightly higher than the rate of 4.4% for borrowers with a 4.5 or higher credit rating.
The average credit score was 4,099, according, with the median of a 3,000 point rating being 2,958.
The median credit-to -value ratio was 4.9.
The report said that borrowers with low scores have less access to credit.
For example, borrowers with less than a 3-point score on their credit score would be eligible for loans at higher interest rates than borrowers with high scores.
And because loans with lower credit scores are more risky, they could result in higher interest charges, the report said.
Borrowers with a lower credit score, which can range from 1,000 to 3,999, are often at greater risk of losing their home or having their credit scores decline.
“The average low-credit score borrower has a lower likelihood of having their debt discharged from a loan, but they are also less likely to be able to make payments on their home equity loans,” the researchers said.
Low credit scores and low rates of return can also lead to a high risk of foreclosure.
The risk of being evicted and facing foreclosure can be a major financial burden for many low-income households.
The US Department and US Department on Aging estimates that the median household income in the country in 2012 was $45,000.
“Lenders and consumers alike have a responsibility to protect their borrowers and borrowers’ credit scores, and to make sure that borrowers and lenders have access to affordable loans, affordable credit, and affordable mortgage options,” said Daniel Siegel, director of research at the Federal Housing Finance Agency.