What Is a Bad Credit Score? And How to Improve It
Your credit score is a three-digit number ranging from 300 to 850. It is a crucial indicator of your financial reliability and ability to repay debts.
A score below 600 typically signifies bad credit. Bad credit can severely limit one’s financial opportunities, making it challenging to secure loans, favorable interest rates, or even a place to live.
A low credit score can have significant implications. It can stall long-term plans like buying a home, launching a business or purchasing a vehicle.
Factors such as late payments, high credit card balances, and a limited credit history contribute to a diminished score. Low scores lead to higher interest rates and potential loan rejections. While dealing with debt and credit can offer benefits when managed wisely, mismanagement often results in financial strain and a tarnished credit history.
Fortunately, you can improve your credit rating with diligence and good financial habits. You must focus on timely bill payments, responsible credit usage, and reducing overall debt.
Key Takeaways
- A bad credit score typically falls below 600.
- Poor credit can result in higher interest rates, loan rejections, and even negative effects on non-credit aspects of life.
- You can improve your credit score through responsible financial behavior.
What Is Considered a Bad Credit Score?
Answering what is considered bad credit depends on where you look. There are two primary credit scoring models: FICO and VantageScore. While both use a range of 300 to 850, their classifications differ slightly.
FICO
Your FICO score, ranging from 300 to 850, is calculated based on five factors: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). Maintaining timely payments, low balances, and a mix of accounts can improve your score.
- Bad Credit Score: Below 580
- Fair Credit Score: 580 to 669
- Good Credit Score: 670 to 739
- Very Good Credit Score: 740 to 799
- Exceptional Credit Score: 800 to 850
VantageScore
The VantageScore, ranging from 300 to 850, is calculated based on payment history (40%), depth of credit (21%), credit utilization (20%), balances (11%), recent credit behavior (5%), and available credit (3%). Maintaining on-time payments, low credit usage, and a longer credit history can help improve your score.
- Very Poor Credit Score: 300 to 499
- Poor Credit Score: 500 to 600
- Fair Credit Score: 601 to 660
- Good Credit Score: 661 to 780
- Excellent Credit Score: 781 to 850
What Impacts Your Credit Score?
Many factors impact your credit score. Knowing them can help you fix your credit issues.
- Payment History: This is the most critical determinant. Consistently paying on time reflects financial responsibility. Late or missed payments will lower your score.
- Credit Utilization: The amount of credit you have utilized versus available credit: lower is better. Try to keep this below 30 percent.
- Length of Credit History: The general rule is that a more extended credit history will make for a higher score, as it shows that you’ve got a track record of borrowing money responsibly.
- Credit Mix: Holding multiple types of credit accounts, like having credit cards and an installment loan, can boost your score. This combination demonstrates your competence in dealing with various types of credit.
- New Credit Inquiries: Too many requests for new credit in a short period can lower one’s score since more credit means more risk.
What Happens If You Have a Bad Credit Score?
Your credit score is more than a number. It’s a financial scarlet letter that can haunt you as a stigma for years if it falls too low.
Imagine having an application for a loan denied for the car repair or emergency medical bill you simply couldn’t afford. Or worse, picture yourself in a cycle of debt at ridiculous rates. A borrower with bad credit will likely be charged exorbitant fees simply because they don’t have ‘good credit.’
It’s the same story with your employer. If your credit report indicates that you’re not a reasonable risk, you’ll end up on the wrong side of the candidate shortlist. You could even miss out on the career of your dreams.
You can reinvent your credit number with intelligent, timely, and responsible decisions. Your credit score is a byproduct of your financial habits. So, ensure that your habits are worthy of a healthy relationship with the bank!
Tips to Enhance a Low Credit Score
Improving your credit score might not be magic, but once you commit to it, you can make steady improvements. It is a realistic goal for anyone willing to devote the time and energy needed. All it takes is a few simple steps to begin rebuilding.
Here’s a roadmap to guide your journey toward a healthier credit score:
1. Pay on Time: Missed or late payments stay on your record for up to seven years and can cause significant damage. Make sure you have reminders in place to ensure you don’t miss a payment. Consider automatic payments if you’re afraid you’ll forget.
2. Pay Down Your Credit Card Debt: High credit card balances can lower your score. Develop a plan to pay down your credit card balances strategically, focusing on your highest-interest debts first.
3. Keep Your Credit Accounts Open: The longer your credit history, the better. Avoid closing old accounts, even if you aren’t using them. Doing so shortens your credit history, which negatively affects your score.
4. Make New Credit Requests Sparingly: Each credit request can temporarily lower your score. Apply for new credit only when necessary, and try not to open accounts too close together.
5. Become an Authorized User: Ask a trusted friend or family member with good credit to add you as an authorized user on their account. You’ll be piggybacking your credit score on the back of someone with good credit.
6. Check Your Credit Report: Check your credit reports with the ‘big three’ credit bureaus regularly to see if there are any discrepancies.
Rebuilding your credit happens slowly, so be cautious about your financial choices. Eventually, your credit will become more stable. You will then have access to better interest rates, loan approvals, and an improved financial trajectory.
The Power to Rewrite Your Financial Story
If your credit score is below 600, you’ll have limited options. People with low credit pay higher interest rates than people with good credit. Plus, you’ll likely get turned down for loans, and your rental or mortgage applications may be rejected.
If you’re wondering: ‘What’s a bad credit score?’ or ‘What is bad credit?’, it results from not having the best financial habits. Thankfully, bad credit scores can be overcome by making simple changes.
Pay your debts on time, gradually reduce your debt, and keep a vigilant eye on your credit utilization rate, and your score will improve. The longer you commit to these changes, the better your credit score will become.
Remember, borrowers with bad credit are often required to pay more interest and fees, making credit repair even more imperative. By getting out of the destructive credit cycle today, you empower yourself to achieve new successes tomorrow.
Credit Score FAQs
What Is a Low Credit Score?
A low credit score is typically one below 580, but it can vary depending on where you look.
What Are the Best Credit Cards for Bad Credit?
Finding a credit card that allows you to start with a low credit line and does not require collateral is the best place to start. Ideally, you want one that also reports payments to the three credit bureaus each month.
In What Ways Can a Negative Credit Report Affect Your Financial Goals?
Poor credit can make life more difficult. It can prevent you from getting jobs, renting houses or apartments, or buying a home.
