What Is a Cut-Off Score?

A cut-off score is the lowest possible credit score one can have and still qualify for a loan. Cut-off scores vary widely depending on the type of loan requested and the lender. The cut-off score for credit cards and other high-interest loans will tend to be lower when compared to lower-interest credit, such as mortgages.

Key Takeaways

  • A cut-off score is the lowest possible credit score one can have and still qualify for a loan.
  • Each type of credit, such as mortgages and credit cards, will have a different cut-off score.
  • The cut-off score is always determined by the entity extending credit, such as a bank.
  • If an individual does not meet the cut-off score, their loan application will be denied.
  • Typically, credit scores range from the poorest quality (300) to the highest quality (850).
  • The three main credit bureaus that determine credit scores are Experian, Equifax, and Transunion.

Understanding a Cut-Off Score

When a bank or other lending institution is evaluating whether to lend money to an individual, they aim to do so with as little risk as possible. The only real way they can determine the creditworthiness of an individual is through a person's credit score, which reflects a person's credit history.

Different lending institutions will have different cut-off scores, reflecting their risk tolerance, as well as different cut-off scores for different credit products.

Lenders will determine their acceptable cut-off scores, and anyone applying for a loan and having an adverse credit score, or a score below the cut-off score, is usually rejected.

Also, there is no guarantee a person with a score above the minimum level will get approval. Lenders may override the cut-off score limitation and approve a loan, but it is rare. In addition, these loans may carry a higher interest rate or be for a limited amount of funds.

Cut-Off Score and Credit Score

A credit score is a statistical number that has a basis on the credit history of an individual. Lenders use the score to evaluate a borrower's creditworthiness. A person's credit score may range between 300 and 850 or 250 and 900. It really just depends on the model used. The higher the score, the more financially sound a person is considered to be. There are various credit-scoring systems, but the FICO score is the most commonly used.

You can improve your credit score by maintaining a long history of paying your bills on time and keeping a low level of debt. Payment, or credit history, accounts for the most significant percentage of a credit score and is considered the best indicator of whether an individual will repay their debts. Other factors contributing to the credit score include the amount owed, the length of credit history, the mix of credit used, and new credit inquiries.

There are uses for a credit score outside of traditional loans or credit card applications. A person’s credit score may determine the size of an initial deposit required to obtain a cell phone, cable service, utility deposit, or the ability to rent an apartment. Also, some employers will request a potential employee's score. This type of employer request is common in occupations that involve handling money and is a requirement to obtain U.S. security clearance.

Credit scores are determined by three major credit bureaus: Experian, Equifax, and Transunion.

Importance of Cut-Off Score Thresholds

Credit scores are broken into tranches. For example, a very poor credit score ranges from 300 to 579. A poor credit score ranges from 580-669. An individual might think that because they are close to the next tranche, a difference in a credit score of a few points is not an issue. This is not the case.

Most lending institutions stick to the ranges, and with the ranges come different interest rates. For example, you might be looking at a mortgage, and if you have a credit score of 570, you may think it is close enough to 580 to receive a better interest rate; however, the interest rate in your credit score range might be 5%, whereas in the next range it might be 3.8%. This is a significant difference that can cost you thousands of dollars over the life of your mortgage.

It is for this reason that cut-off scores are important, not only in obtaining a loan but also in the interest rate you will pay on your loan.