Bad credit can make life difficult in many ways. Getting approved for new credit cards or loans can be challenging, and you may pay higher interest rates. Having bad credit can even prevent you from getting certain jobs.
But what exactly is bad credit? And how can you improve your credit score? Let’s take a closer look.
Generally, having fair or poor credit (as measured by your FICO score) means that you may have difficulty getting approved for new lines of credit. Your credit limit may also be lower, and you may have to pay higher interest rates.
Several factors go into your credit score, including payment history, outstanding debt, length of credit history, and more. You can improve your score by paying your bills on time, keeping balances low on your existing accounts, opening new lines of credit, and then responsibly managing them over time.
By taking these steps, you can improve your chances of getting approved for the financial products and opportunities you need.
What Is A Bad Credit Score?
The two most popular credit scores are the FICO Score and VantageScore. However, these scoring models use different ranges when measuring creditworthiness.
FICO Scoring Model
The FICO scoring model predicts the likelihood that a borrower will repay a loan. Scores range from 300 to 850, with higher scores indicating a lower risk of default. A score of 579 or below is considered poor, which may make lenders hesitant to extend credit.
The FICO credit scoring system ranks credit scores on the following scale:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
The average FICO credit score for 2021 was 716 points, which is a good score. However, scores below 670 are considered poor or fair, which means that there are people with bad credit.
VantageScore Scoring Model
VantageScore is a credit scoring model that uses data from consumer credit reports. A score of 300 to 660 is considered bad, with scores below 500 considered very poor.
The VantageScore model breaks down its credit score ranges as follows:
- Very Poor: 300-499
- Poor: 500-600
- Fair: 601-660
- Good: 661-780
- Excellent: 781-850
5 Factors That Impact Your Credit Score
Many factors go into calculating a person’s credit score. One of these is the information contained in an individual’s credit report. Each of the three major credit bureaus (Equifax, Experian, and TransUnion) has its own method for compiling a credit report based on how a person uses various credit accounts.
The following five factors are used to calculate your credit score according to the FICO model:
- Payment history (35%): The timeliness of payments on credit accounts and prior credit history are important factors in determining one’s creditworthiness.
- Credit utilization (30%): It is calculated by dividing the total outstanding balance of all credit accounts by the total credit limit of those accounts.
- Credit history (15%): A long, positive credit history shows creditors that you’re a responsible borrower who pays back debts on time.
- Credit mix (10%): Lenders like to see that you can manage both revolving credit (e.g., credit cards) and installment loans (e.g., car loans).
- Credit applications (10%): The frequency with which you apply for new lines of credit.
Even though you might not be strong in one of the five credit factors, you can still have a high credit score. For example, people new to credit may not have a long credit history or many different types of credit. However, if you make your payments on time, keep your balances low, and don’t apply for too much credit at once, you can still have a good credit score.
Consequences Of Having A Bad Credit Score
There are some ways in which a bad score can have a negative impact on your life:
- Bad credit can make it difficult to get approved for a loan or credit card. Lenders view borrowers with bad credit as a risk, which means they’re less likely to approve you for credit. This can make it difficult for anyone with a bad credit score to get the financing they need.
- Some lenders are more lenient with borrowers who have bad credit and will approve them for credit products. However, these loans and credit cards often come with high-interest rates and more restrictive terms. This can end up costing the borrower more in the long run.
- In most states, insurers are allowed to check your credit scores when determining how much of a risk you are. They may charge you more for bad credit because they see you as more likely to file a claim.
- It’s getting harder to find a place to rent these days. A lot of landlords are now running credit checks on potential tenants. This means they can see your credit score and payment history and use this information to decide whether or not to approve your lease. So, it’s becoming more difficult for people with bad credit to find a place to live.
- Although some states restrict employers from reviewing credit reports and using the information when hiring decisions, other states do not have such protections. This lack of regulation can limit career opportunities for individuals with poor credit histories.
- Utility companies are known to perform background checks on those who seek their services. Bad credit history might mean you must pay a security deposit to establish utility services.
Don’t let your credit score hold you back in life. There are things you can do to improve it. Take proactive steps now and see your score rise in no time.
How To Improve Bad Credit Score
Credit scores are important to many aspects of our lives. A high credit score can mean the difference between getting approved for a loan and being denied or getting a lower interest rate on a loan. A low credit score can result in higher insurance rates or denying coverage altogether. That’s why keeping your credit score as high as possible is important.
- It’s important to monitor your credit report and score. You can get a free credit report and score from each of the three major credit bureaus at AnnualCreditReport.com.
- Paying your bills on time is crucial to maintaining a good credit score. Late payments can significantly negatively impact your credit rating, so it’s important to stay on top of your payment schedule. One way to do this is to set up automatic payments for your accounts so you don’t have to worry about forgetting or falling behind.
- A low credit utilization ratio is key to a high FICO score. Lenders like to see that you’re not maxing out your credit cards and using a small percentage of your available credit. A good rule of thumb is to keep your balances below 30 percent of your credit limit.
- Adding an authorized user to your credit card account is a great way to improve your payment history and build up your credit. You don’t need to use the card or even know the account number – just being an authorized user will help you establish a good credit history. Choose someone with a high credit limit, low credit utilization, and a strong track record of timely payments to benefit from this strategy.
Bad credit can be frustrating and seem like an insurmountable obstacle, but it doesn’t have to be the end of the world. You can take steps to improve your credit, and with some effort, you may see results quickly. Good credit opens up more opportunities and has financial benefits, so it’s worth taking the time to improve your score.Clearone Advantage, Credit Associates, Credit 9, Americor Funding, Tripoint Lending, Lendvia, Simple Path Financial, New Start Capital, Point Break Financial, Sagemore Financial, Money Ladder, Advantage Preferred Financial, LoanQuo, Apply.Credit9, Mobilend