There is no strict definition of what constitutes a “bad” credit score, but it is generally considered to be any score that falls into the “poor” category, which is typically below 600. The exact range for “poor” credit scores can vary depending on the credit scoring model used, (FICO vs VantageScore). It’s important to note that different organizations and lenders may have their own specific thresholds for what they consider to be a “bad” credit score. Additionally, the definition of a bad credit score can vary due to lenders using different credit scoring models or having their own internal guidelines.
Poor credit scores from FICO
FICO is a leading provider of credit scoring models, which are used by many lenders to evaluate an individual’s creditworthiness. FICO scores range from 300 to 850, with higher scores indicating a lower risk of default. Scores below 579 are considered to be in the “poor” range.
FICO credit score ranges:
| Credit Score Range | Credit Rating |
|---|---|
| 300-579 | Poor |
| 580-669 | Fair |
| 670-739 | Good |
| 740-799 | Very Good |
| 800-850 | Excellent |
Poor credit scores from VantageScore
VantageScore is another credit scoring model that is used by some lenders to evaluate an individual’s creditworthiness. VantageScore scores range from 300 to 850, with higher scores indicating a lower risk of default. Scores below 600 are generally considered to be in the “poor” range and scores below 500 are considered “very poor”.
VantageScore credit score ranges:
| Credit Score Range | Credit Rating |
|---|---|
| 300-499 | Very Poor |
| 500-600 | Poor |
| 601-660 | Fair |
| 661-780 | Good |
| 781-850 | Excellent |
Factors that impact your credit score
There are several factors that can impact an individual’s credit score, including:
- Payment history: Payment history is perhaps the most important factor in credit scoring models. Late or missed payments can have a significant negative impact on an individual’s credit score. It is important for individuals to pay their bills on time in order to maintain a good credit score.
- Credit utilization: Credit utilization is the amount of credit an individual uses relative to their credit limit. Credit scoring models generally favor individuals who use a low percentage of their available credit. High balances on credit cards can indicate financial stress and increase the risk of default, which can negatively impact an individual’s credit score.
- Credit history: Credit history is another important factor in credit scoring models. Longer credit histories may be viewed as more favorable by lenders, as they provide a larger sample size of an individual’s financial habits.
- Credit mix: The variety of credit accounts an individual has (e.g., credit cards, loans, etc.) can also impact their credit score. A mix of different types of credit accounts may be viewed as more favorable by lenders, as it indicates an individual’s ability to manage different types of credit responsibly.
- New credit: Applying for new credit can also impact an individual’s credit score. This is because each credit application results in a hard inquiry, which can temporarily lower an individual’s credit score. It is important for individuals to be selective when applying for new credit in order to minimize the impact on their credit score.
- Public records: Public records, such as bankruptcies and liens, can also impact an individual’s credit score. These records indicate financial difficulties and may be viewed as a negative by lenders.
Causes of a bad credit score
There are several factors that can contribute to a bad credit score, including:
Late or missed payments
Missing payments or making payments late can have a significant negative impact on an individual’s credit score. Credit scoring models generally view late or missed payments as a sign of financial instability and may lower an individual’s credit score as a result. This is because payment history is a major factor in credit scoring models.
High credit card balances
Maintaining high balances on credit cards can also negatively impact an individual’s credit score. This is because credit utilization (the amount of credit an individual uses relative to their credit limit) is a factor in credit scoring models. Credit utilization is typically calculated by dividing the total credit card balances by the total credit limits. High balances on credit cards can indicate financial stress and increase the risk of default, which can lower an individual’s credit score.
Collection accounts
If an individual has an account that has been sent to collections, it can have a negative impact on their credit score. Collection accounts are typically created when an individual has failed to pay a debt and the creditor has turned the account over to a third-party collection agency. Collection accounts are viewed as a sign of financial difficulty and increase the risk of default, which can lower an individual’s credit score.
Bankruptcy
Filing for bankruptcy can also have a significant negative impact on an individual’s credit score. Bankruptcy is a serious financial event that indicates significant financial difficulties and a lack of ability to pay debts. Bankruptcy can remain on an individual’s credit report for up to 10 years, depending on the type of bankruptcy filed, and can significantly impact their credit score during this time.
Foreclosure
Losing a home to foreclosure can also have a negative impact on an individual’s credit score. Foreclosure is a serious financial event that indicates financial difficulties and a lack of ability to pay debts. Foreclosure can remain on an individual’s credit report for up to seven years and can significantly impact their credit score during this time. In addition, losing a home to foreclosure may also result in a significant loss of equity and financial assets.
Other factors
There are also other factors that can contribute to a bad credit score, such as:
- Maxing out credit cards or using a high percentage of available credit
- Defaulting on loans or other debts
- Having a high number of credit inquiries (e.g., applying for multiple credit cards or loans in a short period of time)
- Having a limited credit history
It is important for individuals to be aware of these factors and to work to maintain a good credit score by paying bills on time, managing credit utilization, and avoiding unnecessary credit applications.
Consequences of a bad credit score
Having a bad credit score can have a number of negative consequences, including:
Difficulty obtaining loans or credit cards
Individuals with bad credit may have difficulty obtaining loans or credit cards. This is because lenders view individuals with low credit scores as a higher risk of default. As a result, these individuals may be required to pay higher interest rates or may be denied credit altogether.
Higher interest rates
Individuals with bad credit may also be required to pay higher interest rates on loans and credit cards. This is because lenders view these individuals as a higher risk and may charge higher rates to compensate for this risk.
Lower credit limits
Individuals with bad credit may also be offered lower credit limits on credit cards and other loans. This can make it more difficult to make larger purchases or to manage their finances effectively.
Negative impact on rental or employment applications
A bad credit score can also have negative consequences on an individual’s ability to rent an apartment or to obtain employment. Many landlords and employers may view a low credit score as a sign of financial instability and may be less likely to approve rental or employment applications.
Higher insurance premiums
Bad credit can also lead to higher insurance premiums. Some insurance companies may view individuals with bad credit as a higher risk and may charge higher premiums to compensate for this risk.
Limited credit card choices
Individuals with bad credit may also have limited choices when it comes to credit cards. Many credit card companies may not be willing to issue cards to individuals with low credit scores, or may only offer cards with high fees and interest rates.
Utility companies and cell phone providers deposits
Individuals with bad credit may also be required to pay deposits to utility companies and cell phone providers. This is because these companies may view individuals with low credit scores as a higher risk of default and may require a deposit to cover any potential unpaid bills.
Improving a bad credit score
While it may take time, it is possible to improve a bad credit score. Here are some steps that individuals can take to improve their credit score:
Pay bills on time
Paying bills on time is one of the most important steps individuals can take to improve their credit score. Late payments can have a significant negative impact on credit scores, so it is important to make sure all bills are paid on time.
Pay down credit card balances
Reducing the balances on credit cards can also help improve an individual’s credit score. This is because credit utilization (the amount of credit an individual uses relative to their credit limit) is a factor in credit scoring models. By reducing credit card balances, individuals can lower their credit utilization and improve their credit score.
Dispute errors on credit report
If an individual finds errors on their credit report, they should dispute these errors with the credit reporting agencies. Correcting errors on a credit report can help improve an individual’s credit score.
Seek professional credit counseling
Seeking the assistance of a professional credit counselor can also be helpful in improving a bad credit score. Credit counselors can provide individuals with advice and resources to help them improve their credit score and manage their finances more effectively.
Conclusion
In conclusion, a bad credit score can have a number of negative consequences and can make it more difficult for individuals to obtain loans, credit cards, and other financial products. However, it is possible to improve a bad credit score with time and effort. By paying bills on time, reducing credit card balances, disputing errors on credit reports, and seeking professional credit counseling,
