How Good Is a Credit Score of 540?

FT Contributor
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FICO credit score of 540 is classified as “Very Poor” and makes it challenging to secure credit cards or loans with reasonable interest rates. It will be difficult to get a line of credit without expensive fees and restrictive conditions and terms, but not impossible to get approved for a credit card or loan.

If you have a credit score of 540, your borrowing options are limited. Based on history and prior activity, lenders view you as a risk for missing payments or defaulting on a loan.

Hard work, discipline, and consistent displays of proper credit management can begin to instill a sense of trust among the credit reporting agencies and lenders that will be more likely to approve a loan or credit card.

Table of Contents

Why Your Credit Score Is 540

A Very Poor credit rating does not happen overnight. A credit score of 540 indicates poor credit management resulting in a long history of missed payments and unfilled settlement promises.

The following are examples of actions and circumstances that lead to a Very Poor credit score of 540:

Account Delinquency and Default

The most influential factor in determining your credit rating is how consistently you make timely payments on your credit accounts. Late and missing payments added to your credit history will damage your score over time. Defaulting on a loan will cause your credit score to plummet further and make it more challenging to recover.

What to do: If you are late on payments, but the account has not defaulted, you should do anything you can to prevent the debt from going to collections or having the lender file a lawsuit. Communicate with the lending officer, arrange a payment plan and stick to it.

Home Foreclosure, Property Repossession

The foreclosure of a home or repossession of other property will result in a major credit score drop. A person who has built up great credit can see their score fall by over 100 points after a foreclosure or repossession.

It will be a long time before lenders will consider someone with a foreclosure on their history for a loan or credit card with good interest rates and terms.

What to do: The repossession of property only takes place after repeated attempts to recover missed payments. There are likely to be several negative marks on your credit report that need to be addressed on top of the foreclosure.

Unfortunately, there is no quick fix, as these items will remain on your credit report for seven years. The good news is that you can use that time to pay off your debt and improve your credit management skills.


Filing for bankruptcy comes with the most severe consequences to your credit. A bankruptcy can destroy the highest of credit ratings and drop a credit score hundreds of points. It can take a decade or longer to recover from the credit damage caused by bankruptcy.  

What to do: You’ll need to take incremental steps to restore your credit following a bankruptcy. Start by opening a secured credit card when it is safe and appropriate to do so.

Identity Theft

It is possible to have your credit destroyed through cybercrime that is beyond your control. If you see your credit score dropping even though you are making loan payments on time and have no outstanding foreclosures or bankruptcies, you could be a victim of identity theft.

Financial fraud that compromises your credit cards to add large sums of debt to your account still happens in the modern age of secure online banking.

What to do: The most effective way to guard against identity theft is to be vigilant about monitoring your credit card activity. Set up automated email or text alert notifications to alert you any time there is activity on your account.

What Can You Do With a 540 Credit Score?

Going to a lender with a credit score of 540 will make it difficult to find terms and rates that will not put you into a further financial hole with excessive fees and restrictions. A Very Poor credit score does not mean you are completely unable to get credit, only that loans and lines of credit you can secure will likely come with a steep price.

The following are examples of the credit options available if you have a 540 credit score:

Auto Loans

Many auto dealers are eager to sell cars to people with bad credit. They will offset the higher risk with higher rates that can often wind up costing you thousands of dollars more in interest payments over time.

Credit Cards

Many people with a Very Poor credit rating have had prior problems making credit card payments, making companies reluctant to give them another card. The options for credit cards are limited if you have a credit score of 540.

You will likely need to start with a secured credit card to build up credit and trust before acquiring an unsecured credit card to extend your credit.

Home Loans

While a 540 credit score will not qualify you for a traditional home loan, some options come with specific qualifications and parameters. Home loans insured by the Federal Housing Administration (FHA) are available to prospective homeowners with low credit ratings, but you can wind up spending more money over the life of an FHA loan.  

How to Repair a 540 Credit Score

If you have a credit score of 540, repairing it will take time and improvements to the way you approach your credit management. The best way to repair and rebuild Very Poor credit is to manage it responsibly for a sustained period, often several years.

Taking the following steps will help you get control of your finances and move towards a higher credit rating:

Pay Your Bills on Time

Making sure your bills get paid in full and on time will satisfy your creditors and pare down what you owe monthly and your overall debt total. If you are behind on any accounts, get and stay current, or it will be impossible to improve your credit rating.

Inspect Credit Reports for Mistakes

Inaccurate or missing activity on your credit report can unfairly drive your score down. Carefully inspect the activity listed and dispute incorrect information with the credit bureaus and your lending institution.

Avoid Applying for Multiple Credit Accounts

Every time you apply for a loan or line of credit, the lender will often run a “hard inquiry” of your credit. Hard inquiries are listed on your credit report and can harm your credit score.

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