Explaining Bad Credit
A credit score below 580 is typically regarded as having bad credit. If you have bad credit because you owe a lot of money or have a history of not paying your payments and debts, you are viewed as a risky borrower.
Bad Credit: Definitions and Examples
When you have bad credit, your credit history reflects negative items that show you’re a risk borrower. Bad credit can be caused by a number of things, such as recent bankruptcies, excessive debt amounts, and past delinquencies.
Low credit scores, which are a numerical summary of the data in your credit report, are typically a sign of bad credit. One of the most popular credit scores is the FICO score. They vary from 300 to 850; better scores are preferred.
Five ratings make up the FICO credit score range:
- Excellent: 800 or higher
- Very good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 5801 or less
How Poor Credit Operates
Five variables combine to form your credit score. Each is given a unique weight. They are all capable of causing bad credit.
Payment history (35 percent): Your credit score may suffer if you have a history of unpaid credit cards, late payments, or outstanding obligations.
Owing a lot of money is a common cause of having a low credit score (30%). The less likely that you will be able to pay off new debt, the more debt you already have.
Length of credit history (15%): If you have a long track record of on-time debt repayment, you are a less hazardous borrower. A lower credit score is the result of a shorter credit history. How long each of your individual credit accounts has been open also has an impact on this.
Credit mix (10%): Having a range of credit accounts, including credit cards, retail cards, mortgages, personal loans, and/or auto loans, raises your credit score. It will be lower if you simply have one type of credit account.
Individuals who open a large number of new credit accounts in a short period of time are statistically riskier borrowers.They are more susceptible to having poor credit. 2
You don’t necessarily need to examine your credit score to see whether you probably have bad credit; rather, your credit score gives you and lenders a quick indicator of your credit standing.
A few indicators of bad credit include being turned down for a loan, credit card, or apartment, as well as having your credit limits unexpectedly reduced. You risk having your current accounts’ interest rates increased and getting correspondence from one or more debt collectors.
If you’ve paid a credit card or loan more than 30 days past due or have several credit cards that are at their maximum limit, your credit score has probably suffered.
One of the best ways to verify your present credit standing is to order your credit score from myFICO.com. You can also use a number of free credit score services to check at least one of your credit scores from the three most popular credit bureaus—Equifax, Experian, and TransUnion.
FICO scores aren’t always offered by free credit score agencies. They frequently offer a very constrained view of your credit. Only Experian can provide you with a credit score; neither Equifax nor TransUnion can.
To find out exactly what’s hurting your credit score, look at your credit report. All of the data necessary to calculate your credit score is contained in this document.
What Are the Consequences of Poor Credit?
If you have bad credit, it may be more difficult to be approved for new credit cards, a mortgage, or other loans. If you are accepted, you could be given a high interest rate or other unpleasant conditions.
Your life may be affected in different ways if you have bad credit. It’s possible that landlords won’t accept you as a tenant or that they’ll only do so with a cosigner. If your future employer examines your credit score as part of the hiring process, having bad credit can even make it more difficult for you to find employment.
A high credit score demonstrates your reliability as a borrower, which encourages creditors to work with you and extend your credit. Consumers with excellent or very good credit scores are more likely to be approved for loans, rentals, and mortgages. They have access to more credit card and loan options with more enticing interest rates.
How to Fix a Bad Credit Score
Bad credit is not a state that lasts forever. By erasing bad information and raising each of the five factors that make up your credit score, you can raise your score and show that you’re a trustworthy borrower.
Examine and amend your credit report.
Start by carefully going over your credit report. Examine any inaccurate information to see if there are any settled bills that are still labeled as delinquent or accounts that you never opened. Directly disputing these errors with the credit reporting agency is possible by submitting a letter outlining any discrepancies.
Look for data that ought to have been deleted. Negative information can only be included on your credit report for a maximum of seven years, with the exception of bankruptcy. Negative things that haven’t expired can be disputed.
If you discover any items or accounts in your credit report that you don’t remember opening, you might be a victim of identity theft. To fix the problem, you might need to put in place a fraud alert or credit freeze, let your bank and credit card issuers know, or even file a complaint with the FTC.
How to Boost Your Credit Score
Negative information removal is only one step in the process. Additionally, you should provide good information by raising your credit score in as many areas as you can.
To increase your credit age, keep your oldest credit account open and in good standing. Your credit score benefits more from having had credit for a longer period of time.
To alter your credit mix or the quantity of new credit, avoid taking on additional debt or closing credit cards. When you suddenly close credit accounts, your debt-to-available-credit ratio will increase. It can have a negative effect on your credit score.
Improve your payment history and reduce the amount you owe by putting your attention there. These are the two main causes of a low credit score. Work on paying down large balances and bringing past-due payments current. Continue paying all of your loans on time while concentrating on clearing your bigger obligations.
I occasionally open new accounts. Only take on as much debt as you can manage. Make payments on time. Keep your credit card balances low, and use a free credit score calculator to track your advancement.
When you’re current on your payments and good things start to appear on your credit report, you will see an immediate improvement in your credit score. Depending on how low your credit score was to begin with, it may take several months to a few years to fully repair your bad credit.
- Due to their high debt loads or track record of unpaid obligations and invoices, consumers with bad credit are viewed as hazardous borrowers.
- Bad credit might make it difficult to obtain a credit card, a mortgage, a vehicle loan, permission for rental housing, or even a job.
- A FICO credit score below 580 is typically regarded as having bad credit.
- By clearing up any inaccuracies on your credit report, paying off debt, and keeping your credit card balances low, you can repair damaged credit.