bad Credit

What Is a Bad Credit Score? | Credit Cards

It can be frustrating when you’re at the bottom of the credit ladder, but it doesn’t have to stay that way.

You can increase your bad credit score if you use the right methods and are persistent. And I promise you it won’t take the rest of your life to build a strong credit score either. So let’s get started.

What is considered bad credit?

Here’s a broad definition: A consumer with bad credit, also referred to as poor credit, has a FICO score of 579 or less. With a bad credit score, you may only be approved for credit cards, mortgages, or personal loans that come with high interest rates. But consider this a temporary problem. Once you start working on your score, your ability to get credit will improve.

Understanding how credit scores work can help you make better credit decisions. There are two types of credit scores that lenders use most often: FICO scores and VantageScores. FICO also has grading versions for various industries.

About 90% of lenders use a transcript of the FICO score to help determine an applicant’s creditworthiness. FICO Score 8 appears to be the most used version, but there are also newer versions, such as FICO Score 9 and FICO Score 10. Lenders take a long time to use a new score, which is why FICO Score 8 is still a collection.

FICO scores range from 300 to 850. According to myFICO.com, these are the values ​​for each credit score range:

  • Exceptional: 800 and above.
  • Very good: 740 to 799.
  • Good: 670 to 739.
  • Adel: From 580 to 669.
  • Weak: 579 and less.

As you can see, the FICO bad credit score range is 579 and lower. The average FICO score as of April 2021 is 716, which qualifies for good credit. The bad FICO score is slightly below average. Improving your score may seem impossible right now, but getting good credit will come in handy after you take the time to rebuild your credit.

Let’s take a look at the factors that make up the FICO score:

  • Payment date: 35%.
  • Amounts due: 30%.
  • Credit history length: 15%.
  • New credit: 10%.
  • Credit mix: 10%.

If you have a poor credit score, this means that the lenders think you have a high risk of default. In fact, about 61% of consumers with credit scores below 580 are likely to be behind on a credit-related account, FICO says. So it is difficult to get approved for credit without having to pay high interest rates.

VantageScore ranges from 300 to 850, just like the FICO score. But because VantageScore weighs the options a little differently, the FICO 700 can’t be compared directly to the 700 VantageScore. In addition, FICO scores have different ranges for each credit rating.

Here are the VantageScore ranges:

  • Excellent: 750 to 850.
  • Good: 700 to 749.
  • Fair: 650 to 699.
  • Weak: 550 to 649.
  • Very weak: 300 to 549.

As you can see, there are two categories that can be considered as part of the bad credit score range. With a VantageScore, poor credit is from 550 to 649. And very bad credit is less than 550. You’ll need a score of 650 to climb up the fair credit score range.

Rather than using percentages like FICO, VantageScore focuses on how each factor influences the algorithm. The factors that make up the VantageScore include:

  • Available Credit, Balances and Credit Usage: Very impressive.
  • Credit and experience combination: very impressive.
  • Payment history: moderate effect.
  • Age of credit history and new accounts: Less impact.

How bad credit affects you

The impact of a bad credit score can be substantial, regardless of the grade used. You will pay high interest rates when you apply for credit. This is assuming that you can get approved for credit at all. Bad credit can make it difficult to buy a home, rent an apartment, or even set up utilities.

Bad credit can also cause auto and health insurance rates to rise in some states. And if you apply for a job with an employer who wants to see your credit report, it’s likely that you have bad credit from the items on your report.

But there are ways to move forward in the way of getting good credit. It takes time, but persistence will help you get there.

How to fix bad credit

Now that you know more about how credit scores work, your short-term goal is to move to fair credit, which is 580 for FICO.

Your long-range goal? To get the lowest interest rates, you will need a FICO score of at least 760, which puts you in a very good FICO score range. This won’t happen right away, of course, but it’s a possibility if you use one or more of the following strategies.

Set up a budget and track spending. If you don’t have a budget, you need to set one up today. Once you address this situation, you also need to track your spending, which is easy to do with a free app or online money management tools.

It’s hard to stay within budget if you don’t know how much you’ve spent and where you’ve spent it. Getting into debt or increasing the debt you already have can make your credit score worse. So think of this as your financial foundation. A strong foundation helps you build good credit.

Get a secured credit card. With a bad credit score, you will have a hard time getting approved for a suitable credit card. Before you decide to get an unsecured credit card with a high annual percentage and monthly maintenance fee, take a look at secured credit cards.

You will have to make a deposit to secure the credit card. But you will get a plain looking credit card to use for purchases. These cards are listed on your credit report as a revolving credit account, and as long as your issuer reports your payment history to the credit bureaus, you will build a better credit score. That is, as long as you use the card responsibly.

Many people do not realize that this option exists. You can check with your local bank or credit union to see if credit building loans are offered. Each institution has its own set of rules and rates for building credit loans, but in general, a bank or credit union creates a locked deposit account that contains a small amount, such as $1,000.

Then you pay off the “loan” again in monthly payments. This type of loan is identified as an installment loan by the FICO score algorithm, which also gives you a small payment in the “credit mix” category.

You have the credit utilization ratio, which is the amount of credit used compared to the amount of credit available. If you carry balances on your credit cards from month to month, the percentage may be high.

A percentage exceeding 30% can lower your credit score. As you pay off debt, your credit score will start to rise. As already noted, the available balance is 30% of your credit score. To get the most positive impact on your score, keep your balances under 10%.

How to maintain a good credit score

If you make it a priority in your life to maintain good credit, you will reap a lot of financial benefits. You’ll get better interest rates, get approved for better credit cards and save money on mortgages.

  • Pay bills on time. Payment history is 35% of your FICO score. Be consistent with your timely payment habits, and you will see that they are reflected in your credit score.
  • Keep usage rates low. You learned about credit utilization ratios in the previous section. Once you pay off the debt, your percentage goes down, and that makes your score improve. Remember this: Debt reduction helps you fix a bad credit score. But even after you’ve paid off credit card debt, keeping the 10% on each credit card helps you turn a good score into a very good score.
  • Credit cards are not closed. Closing a credit card negatively affects your score. Here’s why: when you close the card, you lose the available balance. This makes your credit utilization ratio go up, which can lower your credit score.
  • Publish credit card applications. Every time you apply for a credit card, the issuer makes a difficult inquiry to review your credit report and score. Your score will likely fall between two and five points per application. A serious inquiry remains on your report for two years, but no longer has an impact on your score after it was on your report for 12 months. So wait about four to six months after applying for a credit card before applying for a new one.

It’s also important to stay out of credit card debt. It is very difficult to get a high credit score if your credit utilization is high due to debt. Have a budget amount for each credit card you use and pay the balance by the due date each month. Stick to your budget, and you probably won’t fall into debt.

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