If you have bad credit, you know how it can get in the way of living a good life. Bad credit makes many common financial activities more difficult, whether you’re opening a new credit card or taking out a mortgage for the first time. If you have poor credit, you may be stuck with lower credit limits and higher interest rates – and bad credit may prevent you from getting that new job.
What is considered a bad credit score? Why do you suffer from bad credit, and what can you do to fix it? Let’s take a closer look at how credit scores work, the factors that go into a bad credit score and how you can improve your credit score and access better financial opportunities.
Learn more: How to check your credit score
What is a bad credit score?
Credit scores are rated on the following scale: excellent (sometimes called “exceptional”), very good, good, moderate, and poor.
Here’s how the FICO credit score system ranks:
- Exceptional: 800-850
- very well: 740-799
- Hassan: 670-739
- Justice: 580-669
- poor: 300-579
A bad credit score is between 300 and 579 using the FICO system, one of the most popular credit scoring systems. In fact, according to myFICO.com, more than 90 percent of top lenders use FICO to help them make lending decisions.
In 2018, the average FICO credit score was 704 points. If you have bad credit, your credit score is well below average. However, that doesn’t mean you should let your bad credit hurt your money in the long run. Credit scores are not static – and once you understand how to improve your credit, you can start working toward an ideal credit score.
How does a bad credit score affect your credit?
Bad credit comes at a high cost. If your credit score is less than 580, it may be difficult to open a new credit card, get a mortgage, or rent an apartment. Poor credit can hurt your chances of getting a new job if your employer runs a credit check as part of the hiring process.
In many cases, lenders will be less willing to offer loans or other lines of credit to people with lower credit scores. If you receive a loan or credit card, you may end up paying higher interest rates than people with higher credit scores. However, you still have options. You can apply for one of the best credit cards for bad credit or make a deposit on a secured credit card and start rebuilding your credit score. Check out our CardMatch feature to see if you pre-qualify for a card without affecting your credit score.
If you need to get a loan, here are some bad credit personal loans to consider – and if you’re shopping for a mortgage, here’s our advice on how to get a mortgage with bad credit.
How is a bad credit score calculated?
Your credit score is based on the information on your credit report. Each of the three major credit bureaus (Equifax, Experian, and TransUnion) generates a unique credit report based on how you use the different credit accounts under your name. If you pay your credit card bills on time each month, it will show up on your credit report — but if you miss a credit card payment, it will show up on your credit report as well.
Here are the five factors that make up your credit score, according to the FICO model:
- Payment Date: Whether you make regular payments on time to your credit accounts (35 percent).
- Credit use: Your debt-to-credit ratio, or current credit balances compared to the amount of credit available to you (30 percent). To prevent your credit usage from negatively affecting your credit score, try to use only 10 to 30 percent of your available credit.
- Balance date: Length of your credit history – the length of time you’ve successfully held credit accounts open (15 percent). This is why it’s a good idea to keep your old credit cards open, even if you no longer use them.
- credit mix: The credit mix in your account (10 percent). Having multiple types of credit in your name, such as a credit card and a car loan, can boost your credit score. Lenders want to see that you can manage both revolving credit and installment loans.
- Credit requests: The number of times you applied for new lines of credit (10 percent). Every time you apply for a credit card or loan, the lender does a so-called “pull hard” on your credit report. This credit inquiry indicates that you’re shopping for new credit – and if you’re shopping for new credit a lot at once, it’s an indication that you may be planning to take out debt that you can’t pay.
It is possible to have a high credit score even if you are weak on one of the five factors. If you’re relatively new to credit, for example, you may not have an extensive credit history — and you may only have one or two credit cards in your name, which means you don’t have much of a credit mix yet. However, if you make payments on time, keep your balances low and avoid applying for large credit all at once, you can still build and maintain a good credit score.
How can you improve a bad credit score?
There are many ways to improve a bad credit score. Your first step? Make timely payments to all of your credit accounts each month. Since payment history is the biggest factor that goes into your credit score, it’s important to prioritize these payments on time — even if you can only make minimal payments at the moment.
Once you get used to making regular payments on time, see if you can start paying off your balances. Getting out of debt can be difficult, but any progress you make on your outstanding balances will lower your credit utilization and help boost your credit score.
As your credit score begins to improve, you may want to consider asking for a credit limit increase or applying for a new credit card. Both options will increase the amount of credit available to you, lower your credit utilization ratio and help your credit score — as long as you don’t convert your new credit into new debt.
If you have so much debt that you feel overwhelmed, you may need to seek help. Find a reputable credit counseling service that can work with you to develop a plan to pay off your debts and raise your credit score.
Here’s another tip: some people with bad credit have what are called “offensive marks” on their credit report. These represent major financial setbacks, such as bankruptcies or foreclosures. Offending marks can seriously damage your credit score, but they don’t last forever. Most humiliating signs and old debt fall off your credit report after seven years, and you can start rebuilding your credit right away.
Now that you understand what a bad credit score is and the factors that make up your credit score, you can use this knowledge to enhance your credit score and begin your journey toward good credit. Bad credit can make it difficult to complete daily financial activities such as applying for a new credit card, but a bad credit score does not have to be permanent. Keep practicing good credit habits like making payments on time, and you’ll likely start to see your poor credit score improve.