What is a Bad Credit Score?

Credit
Updated: 22nd Dec 2020
Written by Kim Pinnelli
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December 22, 2020
Written by Kim Pinnelli

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A bad credit score is more than a number. It’s a sign to lenders, employers, insurance companies, and more that you are a bad financial risk.

It’s not something you want to risk, but if it happened to you, here’s what you must know.

What is a Bad Credit Score?

A bad credit score is one lender look at and think you are a high risk of default. The actual credit score that lenders consider ‘bad’ varies, but even ‘fair’ credit scores make it hard (or expensive) to get new credit.

Learn More: What is a Credit Score?

What is a Bad FICO Credit Score?

The most common credit-scoring model is the FICO credit score. The credit scoring program has scores ranging from 300 – 850. With 850 the absolute best score (and pretty rare) and 300 the lowest (and worst).

Most lenders view any FICO credit score below 669 as a fair or bad credit score. This means you’ll have trouble getting a new credit card, mortgage, or checking account. And if you do get it, you will pay more for it in closing fees or higher interest rates.

What is a Bad VantageScore?

VantageScore is another model lenders use. It has a similar credit score range of 300 – 850 and a similar ‘bad credit score’ range. Any score lower than 660 is fair with scores below 600 considered ‘poor.’

How Does a Bad Credit Score Affect Your Life?

A bad credit score can affect you in more areas than you may think. Most people know how hard it is to get new credit with a low credit score, but other areas aren’t as well-known, including:

Higher Interest Rates

Lenders base your interest rates on your riskiness. A low credit score usually means you’re a high risk of default. Lenders typically charge higher interest rates to make up for the risk.

Limits Employment Opportunities

If you apply for a job with any financial responsibilities, you may have a harder time if you have a bad credit score.

Some employers even check your credit history if your job has nothing to do with money. Your credit history tells employers how responsible you are. If your credit history shows irresponsibility, it may hurt your chances of getting a job.

Harder to Get Approved for a Credit Card

If you have a poor history of managing your credit, most credit card companies won’t approve you for a credit card. If they do, it may be a secured credit card (you need a deposit), or one with a very low credit limit.

Denials for Credit

Many lenders will deny your credit application altogether if your credit score is too low.

Harder to Rent an Apartment

Landlords look at your credit before renting you an apartment. If you have a bad credit score, they may not approve you at all. If it’s ‘fair’ they may approve you but with a higher security deposit or other terms to make up for the risk.

How is a Bad Credit Score Calculated?

All credit scores are calculated the same way, but knowing what affects your credit score may help you understand how to improve it.

#1. Credit Utilization

Credit utilization is 30% of your credit score. Any outstanding credit beyond 30% of your credit line hurts your credit score. Keep your outstanding credit as low as possible to avoid damaging your credit score. If you overextend your credit, pay it down as quickly as you can.

#2. Credit Mix

If your credit history is heavy in one area of credit and not another, it could hurt your credit score as it makes up 10% of your credit score. This is especially true if you have a lot of revolving debt (credit cards) as that is risky for creditors.

#3. Length of Credit History

Short credit histories hurt your credit score. While nothing but time helps it, avoid taking out new credit unless it’s absolutely necessary. Your credit history makes up 15% of your credit score.

#4. Payment History

Making payments late hurts your credit the most. It makes up 35% of your credit score so even one 30-day late payment can hurt your score quite a bit.

#5. New Credit

Anytime you apply for new credit, you get hit for a credit inquiry. It’s usually only 5 points, but if you have multiple inquiries, it can hurt your credit score quite a bit. New credit accounts for 10% of your credit score.

Best Ways to Improve a Bad Credit Score (You’ve Got This)

If you have a bad credit score, it’s not the end of the world. With the right steps and some consistency, you can improve your credit score. It won’t happen overnight, but neither did your bad credit.

Here are a few ways to improve your credit score:

Pay on Time

Even if you fell behind, get back on track with your payments. The faster you make your payments on time, the quicker your credit score will improve.

Pay in Full

Don’t leave your credit balances outstanding. The faster you pay your balance in full, the quicker your credit score will increase. Leaving an outstanding balance will hurt your credit score considerably since it’s the second-largest factor of your credit score.

Get a Secured Credit Card

Even with a bad credit score, you can get a secured credit card. You make a deposit on the credit card equal to your credit line.

If you miss a payment, the credit card company keeps your security deposit. It’s a great way to build credit when you can’t get a traditional credit card or another loan.

Become an Authorized User

If you have a close friend or family member with good credit and a low utilization rate, ask to be an authorized user on their card.

You don’t have to use the card to get the good credit. Just being on the card (as long as the credit card company reports to the credit bureau) will give you the credit you need to build good credit.

Credit Builder Loans

Despite their name, credit builder loans aren’t actually a loan. The lender holds onto the loan amount, while you make principal and interest payments.

The lender reports your payments to the credit bureau to help you build credit. After you pay the loan in full, you receive the principal balance from the lender.

Credit Repair

If you have a lot of negative credit information that is inaccurate or unfair, let a credit repair company dispute the information for you. The experts know what information to dispute and how to go about it to make sure it is removed from your credit report.

Learn More: How to Repair Your Credit

Build Credit Responsibly

Don’t build credit just to build it. Do it responsibly. Only take the credit you need AND can handle. Don’t take credit just because it was offered to you. And certainly, do not take the credit if you cannot afford it. This will only lead to a bad credit score once again, leaving you in a perpetual cycle.

Learn More: How to Build Credit

Bottom Line: What Is a Bad Credit Score

A bad credit score isn’t a life sentence. It’s a reminder that you need to work on your financial responsibility and habits so that you can build good credit. With a low credit score, your options are limited or even nonexistent when it comes to getting new credit.

More Credit Resources:

Kim Pinnelli
Kim Pinnelli
Kim is a personal finance expert with a Bachelor’s degree in Finance from the University of Illinois at Chicago. She has been freelance writing for 13 years for a number of large publications. Kim thoroughly enjoys helping people take charge of their personal finances.