Bad credit score: what does it look like?

Bad credit can make life difficult in many ways. Getting new credit cards or loans approved can be difficult, and you may end up paying 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 rating? Let’s take a closer look.

Generally, having fair or poor credit (as measured by your FICO score) means you may have difficulty getting new lines of credit approved. 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 your existing account balances low, opening new lines of credit, and then managing them responsibly over time.

By taking these steps, you can improve your chances of being 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 the VantageScore. However, these rating models use different ranges to measure creditworthiness.

FICO scoring model

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The FICO scoring model predicts the likelihood that a borrower will repay a loan. Scores range from 300 to 850, with higher scores indicating lower default risk. A score of 579 or lower is considered poor, which can make lenders hesitant to extend credit.

The FICO credit scoring system classifies credit scores on the following scale:

  • Poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Very well: 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, meaning there are people with bad credit.

VantageScore scoring model

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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 bad.

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 affect your credit score

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Many factors go into calculating a person’s credit score. One of them 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 of 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 speed of payments on credit accounts and credit history are important factors in determining a person’s creditworthiness.
  • Use of credit (30%): It is calculated by dividing the total outstanding balance of all credit accounts by the total credit limit of these accounts.
  • Credit history (15%): A long and positive credit history shows creditors that you are a responsible borrower who pays off your debts on time.
  • Composition of credit (10%): Lenders like to see that you can handle both revolving credit (eg credit cards) and installment loans (eg car loans).
  • Credit requests (10%): How often you request new lines of credit.

Even though you may 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 long credit histories or many different types of credit. However, if you make your payments on time, keep your balances low, and don’t ask for too much credit at once, you can still have a good credit score.

Consequences of having a bad credit score

There are several ways a bad score can negatively impact your life:

  • Bad credit can make it difficult to get approved for a loan or a credit card. Lenders view borrowers with bad credit as a risk, which means they are less likely to approve you for credit. This can make it difficult for anyone with bad credit 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 your risk level. They may charge you more for bad credit because they see you as more likely to file a claim.
  • It is increasingly difficult to find a place to rent these days. Many landlords now perform credit checks on potential tenants. This means they can see your credit score and payment history and use that information to decide whether or not to approve your lease. Thus, it becomes more difficult for people with bad credit to find housing.
  • Although some states prevent employers from reviewing credit reports and using the information in hiring decisions, other states have no such protections. This lack of regulation can limit career opportunities for people with poor credit history.
  • Utility companies are known to perform background checks on those seeking their services. A bad credit history can mean you have to pay a security deposit to establish utilities.

Don’t let your credit score hold you back. There are things you can do to improve it. Take proactive action now and see your score increase in no time.

How to improve a bad credit score

Credit scores are important for many aspects of our lives. A high credit score can be the difference between being approved for a loan and being refused or getting a lower interest rate on a loan. A low credit rating can lead to higher insurance rates or a complete denial of coverage. That’s why it’s important to keep your credit rating as high as possible.

  • 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.
  • Pay your bills on time is crucial to maintaining a good credit score. Late payments can have a significant negative impact on your credit rating, so it’s important to stick to 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 rate is the key to a high FICO score. Lenders like to see that you are not using your credit cards to the max and are only using a small percentage of your available credit. A good rule of thumb is to keep your balances below 30% of your credit limit.
  • Adding an authorized user to your credit card account is a great way to improve your payment history and boost your credit. You don’t need to use the card or even know the account number – just being an authorized user will help you build a good credit history. Pick someone with a high credit limit, low credit usage, and a strong history of timely payments to benefit from this strategy.

Final Thoughts

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 can see results quickly. Good credit opens up more opportunities and has financial benefits, so it’s worth taking the time to improve your score.

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