Maybe you already know your credit score is lackluster, or maybe you’re dragging your feet to find out because you don’t want to know just how bad it is.
Before worrying about that dreaded three-digit number, find out just what a bad credit score is and what your financial options are if you have one. We’ll even give you a few tips on how to improve a bad credit score.
What are the different credit scoring models?
Before you can figure out what a bad credit score is, you need to understand credit score ranges. And that depends on which credit scoring model you use.
The most popular credit scoring model is the FICO score, which was created by the Fair Isaac Corporation. It’s used by the majority of lenders in the U.S.
FICO scores range from a low of 300 to a high of 850. The most influential factors are your payment history and the amount of debt you owe.
Together, these two categories comprise 65% of your FICO credit score. The remaining 35% is spread out amongst the length of your credit history, your credit mix, and new credit/inquiries.
An increasingly popular credit scoring model is called VantageScore, created by the three major credit bureaus. The older credit scores ranged between 501 and 990. However, the latest version, VantageScore 3.0, has a credit score range of 300 and 850, just like FICO.
This makes it easier for consumers and lenders alike to have the same base level understanding of a credit score regardless of which credit scoring model is used.
For VantageScore, the most influential information is your payment history. The next most important factors are the age and types of credit you have, combined with how much of your credit limit is in use.
The credit scoring model then considers your total balances and debt, followed by recent credit inquiries and your available credit.
Why does your credit score matter?
Your credit score isn’t just some arbitrary number that sits in a file somewhere. Instead, it’s constantly changing based on how you handle your finances.
When you pay your bills on time and don’t carry a lot of credit card debt, you should have a good credit score the next time it’s pulled. On the other hand, if one of your accounts has gone to collections, you can expect to see your credit score plummet.
All of this matters because lenders and other creditors use your credit score to determine how likely you are to repay a potential loan. If you have a good credit score, lenders determine that you are creditworthy, approve your loan application, and offer you favorable interest rates and terms.
However, if you have a bad credit score, you’ll be offered higher interest rates over longer periods of time, resulting in higher monthly payments and more money spent on interest. Alternatively, with bad credit, you might not even be approved for a loan at all!
But credit scores don’t just matter the next time you need a loan or a credit card. Many other situations in life require a decent credit history. Landlords, for instance, might request your credit score as part of the application process to check if you’re likely to pay your rent on time.
Even employers can pull your credit report if you’re applying for a job that requires you to handle money. When you have bad credit, it can negatively impact so many different areas of your life, so it’s best to avoid getting yourself into that situation in the first place. If you’re already there, now might be the right time to fix it.
So what is a bad credit score?
Most financial experts define a bad credit score as anything below 600, but each lender has its own standards when reviewing applications. The average American has a credit score of 716, which helps put the range into perspective.
If you have poor credit, you’ve probably had a combination of negative items on your credit report, like missed payments, delinquencies, or maybe even a bankruptcy or foreclosure.
You can always request a free credit report to figure out what exactly is keeping your credit score so low. We recommend checking your credit report every year.
Federal law allows you access to a free copy of each of your three credit reports every 12 months, so there’s no reason not to take advantage of this benefit. Just visit AnnualCreditReport.com to request your copies from Equifax, Experian, and TransUnion.
Where can I find out my credit score?
When you request a copy of your credit report, you’ll see your financial history listed out over several pages (or more or less, depending on how much payment history you have). However, you won’t get your actual credit score when you order your report.
Lenders look at both pieces of information to determine your loan offer, so it’s essential to know where you stand in terms of both your credit report and credit score. So how can you get your credit score?
Educational Credit Scores
Although many websites offer free credit scores, they are known as educational credit scores or even “FAKOs,” because they’re not your actual FICO score. So when it comes time to apply for a loan, you might be surprised to see a wide discrepancy between your free educational credit score and your FICO score.
Real FICO Scores
To find out your real FICO, you can purchase it from the company’s website. You can also sign up for a credit monitoring service if you expect to work on your credit over time and want to view your progress regularly. Just be sure to select a company that does indeed use the real FICO.
You can also check if you’re eligible to receive free credit score updates from one of your existing credit cards. Many companies now give this service away as a cardholder benefit. Check out this comprehensive listing of credit cards offering free credit scores and see if yours makes the list.
What credit score do I need for a personal loan?
A lot of different factors go into determining your eligibility for a personal loan. The type of lender you choose also affects whether or not you’ll be approved. Obviously, the better the credit score you have, the better your interest rate will be. But it’s important to know that some lenders specialize in offering loans for people with bad credit.
You’ll probably qualify for a smaller loan amount, but it can still be helpful if you need to finance a large purchase that you can’t handle with your regular cash flow.
You might also need to provide collateral for a personal loan since an unsecured loan represents more risk to the lender. Be sure to shop around for the best loan possible before making a final decision.
Can I get a mortgage with bad credit?
Most mortgage lenders have strict guidelines they must adhere to. Unfortunately, if you don’t meet their eligibility requirements, there’s not much you can do to get a home loan until you improve your credit score. But you do have a few mortgage options, even if you have a bad credit score.
A conventional loan typically requires a minimum credit score of 620.
An FHA loan allows borrowers to have as low as a 580 with just a minimum 3.5% down payment.
Technically, you could still qualify for an FHA loan with less than a 580, but you’d need to put down at least 10% of the home’s sales price.
Of course, you’ll also need to demonstrate other financial capabilities other than your credit score when applying for a mortgage.
For example, your monthly debts should be no more than 43% of your gross monthly income — this formula is known as your debt to income ratio. Lenders also look at your employment and assets.
See also: How to Get a Mortgage with Bad Credit
How can I fix my credit score?
Credit naturally repairs itself over time, usually within around 7 to 10 years. But there are several ways you can help expedite the process while waiting for those items to drop off on their own.
Start by making sure everything listed on your credit report is indeed accurate. If there’s an incorrect item, it’s relatively easy to dispute it with the credit bureaus. The Fair Credit Reporting Act states that any items that can not be verified must be removed from your credit report within 30-45 days.
Having many negative marks on your credit report is one of the main reasons people have bad credit. So it may be worthwhile to enlist the help of a professional credit repair service.
Work on Your Credit Utilization Ratio
Another easy idea is to work on paying off your debt to decrease your credit utilization. This helps both your credit score and your overall loan or credit application.
Get a Secured Credit Card
You probably won’t be approved for an unsecured credit card; however, some banks and credit unions offer secured credit cards. These credit cards allow you to put down a deposit that is equal to your credit limit. That way, the banks aren’t lending you money. You are actually kind of just borrowing from yourself. But, the payments get reported to the credit bureaus.
With a bad credit score, there are only so many quick fixes you can implement before hitting a wall with your progress. But a credit repair company can help you fully exercise your rights when it comes to removing negative accounts and fixing your bad credit.
Bad credit doesn’t have to make you feel like you’re backed into a corner. You may still have credit options available to you now, and there are also concrete steps you can take to get back on a better financial path.