It’s obvious that we now live in a credit-driven world. There are numerous banking institutions that provide various types of credit, ranging from credit cards to personal loans.
Bad credit score situations arise due to lack of financial education and discipline on the part of the majority of these consumers, they frequently find themselves in bad situations such as court judgments, bankruptcy, and loan default, making it difficult for them to obtain any credit at all in the future.
Any financial institution or lending agency will first check your credit history before granting you credit. If you have previously defaulted on a loan or have a bad credit score, you will find it extremely difficult to obtain credit whenever you apply for it. You may now wonder, “What exactly is bad credit score?”
A bad credit score is one that is less than 670, indicating that it is in the fair or poor credit range. Similarly, a bad VantageScore model score is one that is less than 661, putting you in the fair, poor, or very poor credit ranges.
Let’s take a closer look at how credit scores work, what factors contribute to a poor score, and how to improve or build a new good credit history by repairing your credit and re-establishing your credit-worthiness.
What is a Bad Credit Score?
FICO Score and VantageScore are two popular credit scores. While both scoring models employ a credit spectrum ranging from 300 to 850, their credit scoring ranges differ slightly.
What is a Bad FICO Credit Score?
Scores in the FICO scoring model range from 300 to 850. This figure represents a borrower’s likelihood of repaying a loan. If your credit score falls between 300 and 579, it is considered poor, and lenders may consider you a risk.
The FICO credit scoring system ranks credit scores as follows:
What is a Bad VantageScore Credit Score?
VantageScore is another credit scoring model that uses information from consumer credit reports to calculate a credit score. In the VantageScore model, a credit score between 300 and 660 is considered poor, with scores below 500 considered very poor.
The VantageScore model categorizes credit scores as follows:
How to Fix a Bad Credit Score
There are numerous ways to raise your credit score. Finally, it comes down to taking action and making sound financial decisions on a consistent basis. Here are four things you can do to improve your credit score.
- Examine your credit reports: Begin by visiting AnnualCreditReport.com to obtain a free credit report and score from each of the three major credit bureaus. Dispute any errors and identify the negative information lowering your credit score so you know where to concentrate your credit repair efforts.
- Avoid paying late: Because payment history accounts for 35% of your credit score, paying your bills on time is one of the most effective ways to build and maintain good credit. To avoid late payments, consider setting up autopayments on your accounts.
- Reduce your credit utilization ratio: 30% of your FICO score is accounted for by your credit utilization ratio. A good rule of thumb is to keep your balances under 30% of your credit limit, and the best credit achievers use less than 10% of their available credit.
- Make yourself an authorised user: If your credit history is spotty or you simply want to improve your payment history, consider requesting that a friend or relative add you as an authorised user on their credit card account. Assure the person assisting you that you are not required to use the card or know their account number. This strategy can be advantageous if the person you ask has a credit account with a high credit limit, low credit utilization, and a strong track record of timely payments.
Aside from the four methods listed above, there are several other methods that can help you improve your bad credit score.
Factors influencing your credit score
Your credit score is calculated using information from your credit report. The three major credit bureaus (Equifax, TransUnion and Experian) each create a unique credit report based on how you use the various credit accounts in your name.
According to the FICO model, the following factors contribute to your credit score:
- Credit utilisation (30%): Your credit utilisation ratio, also known as your debt-to-credit ratio, is the ratio of your current credit balances to the amount of credit available to you.
- Payment history (35%): Your track record and timeliness of credit account payments.
- Credit mix (10%): The credit mix in your account. Lenders want to see that you can manage revolving credit, such as a credit card, as well as instalment loans, such as a car loan.
- Credit history (15%): The length of your credit history, or how long you’ve successfully kept open credit accounts.
- Credit applications (10%): How frequently you apply for new lines of credit.
Even if you are weak in one of the five factors, you can still have a high credit score. You can still build and maintain a good credit score if you make on-time payments, keep your balances low, and avoid applying for too much credit at once.
Consequences of a Bad Credit Score
Here are some of the consequences of a low score:
- Higher interest rates and more stringent loan and credit card terms: Some lenders have more lenient guidelines and will approve a bad credit borrower for credit products. They will, however, most likely compensate for their risk by charging a higher interest rate on the loan or credit card — the higher your interest rate, the more you will pay in interest.
- Difficulty in credit approvals: Borrowers with bad credit are viewed as a risk by lenders, so they are less likely to approve you for credit. Because banks and lending institutions typically have stringent qualification standards for their products, getting approved for a loan or credit card with a bad credit score can be difficult.
- Career opportunities: Good credit habits position you for better job opportunities. Most states allow employers to obtain consumer credit reports when making hiring decisions, as well as when deciding who to promote and reassign. (This is especially true if the job entails significant financial responsibilities.)
- Insurance premiums could rise: Most states in the United States allow credit-based insurance scoring, which allows auto and homeowners insurance companies to consider your financial habits when determining your risk. A drop in your credit score will not automatically raise your premium, nor will it result in the cancellation of your policy if it falls below 600. However, a low credit score may prevent you from obtaining the best possible rate.
- More difficult time renting an apartment: Some landlords and property management companies are more stringent than others, but if your credit score is 700 or higher, you can rest easy. If you have bad credit, you may need to find a cosigner or pay a security deposit before signing a new lease. Renting an apartment with bad credit is not impossible, but it can be much more difficult.
- Difficult with utilities: When you have a bad credit score, utility companies can charge you a deposit. Some states provide safeguards against losing access to public utilities such as water, electricity, gas, and heat. If you are denied access to energy utilities due to poor credit, you may be able to pay a deposit or submit a letter of guarantee, which acts as a guarantor or co-signer agreement if you fall behind on your bills (read the FTC’s consumer information on utility services).
A bad credit score is defined as a FICO credit score of less than 670 and a VantageScore of less than 661. If your credit isn’t where you want it to be, keep in mind that a low credit score doesn’t have to hold you back. Fortunately, there are simple steps you can take to improve your credit, and you may even see results quickly. It’s worthwhile to put forth the effort because good credit can lead to more opportunities and financial benefits.
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