What Is a Bad Credit Score?

Credit scores are an essential part of our financial lives, and having a poor credit score can significantly affect your ability to secure loans, credit cards, and other forms of financing.

Understanding what a bad credit score is, the implications it carries, and how you can work towards improving it is a crucial aspect of managing your financial health.

What is considered a bad credit score?

The term “bad credit score” can lead to a fair amount of confusion and anxiety. You might be fully aware that your credit score is not up to par, or perhaps the mere thought of discovering how bad it truly is deters you from investigating further.

Before we delve into specific numbers and their implications, let’s clarify what a bad credit score means and examine your alternatives if you happen to have one. Furthermore, we will provide some strategic tips on how to enhance a poor credit score.

A Brief Overview of Credit Scoring Models

To thoroughly understand what a bad credit score is, it’s imperative first to comprehend the concept of credit score ranges. These ranges can vary depending on the credit scoring model you refer to. In the world of credit scores, two models predominantly used are FICO and VantageScore.

FICO: The Widely Accepted Credit Scoring Model

The FICO score, created by the Fair Isaac Corporation, is the most popular credit scoring model. It’s used by a majority of lenders in the U.S. to assess a borrower’s creditworthiness.

FICO scores range from a low of 300 to a high of 850. The most influential factors that contribute to your FICO credit score are your payment history and the total amount of debt you owe. These two categories collectively contribute to 65% of your FICO score. The remaining 35% is spread out among the length of your credit history, your credit mix (the types of credit you use), and recent credit inquiries or newly opened credit accounts.

What is a bad FICO score?

The term “bad” when referring to a FICO credit score generally implies anything below 580. This score is typically considered poor and could lead to challenges when seeking approval for loans, credit cards, and other types of financing.

VantageScore: An Emerging Contender

The VantageScore is an increasingly popular credit scoring model created by the three major credit bureaus: Equifax, Experian, and TransUnion. While older versions of VantageScore ranged between 501 and 990, the latest iteration, VantageScore 3.0, has a credit score range of 300 to 850, mirroring FICO’s range.

The alignment of ranges between VantageScore and FICO makes it simpler for consumers and lenders to have the same baseline understanding of a credit score, regardless of the scoring model used. For VantageScore, the most influential information is your payment history, followed by the age of your credit accounts, the types of credit you have, and the percentage of your available credit that you’re using.

What is a bad VantageScore credit score?

A VantageScore credit score below 600 is generally classified as bad. Scores falling below 500 are considered “very poor” and can significantly limit your financial opportunities.

Why does your credit score matter?

Your credit score isn’t a static number buried in a file; instead, it’s a dynamic figure that fluctuates based on your financial behavior. By responsibly managing your finances – such as paying bills on time and not carrying excessive credit card debt – you can maintain or improve your credit score.

Conversely, if you have a credit account that has gone to collections or experience other financial missteps, your credit score can drastically drop.

Your credit score’s importance lies in its ability to influence lenders and other creditors in their assessment of your financial reliability. It is a numerical representation of your likelihood to repay potential loans. Therefore, a good credit score signifies creditworthiness, making lenders more likely to approve your loan application and offer you favorable interest rates and terms.

So, what is a bad credit score?

Most financial experts define a bad credit score as anything below 600. However, 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. These can be 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 your credit reports from each of the three credit bureaus every twelve 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.

Consequences of Having a Bad Credit Score

Bad credit scores can lead to higher interest rates over longer periods, resulting in higher monthly payments and more money spent on interest. In some cases, a poor credit score might result in your loan application being rejected altogether.

Your credit score doesn’t only affect your ability to secure loans or credit cards; it can impact various other areas of your life as well. For instance, landlords may request your credit score as part of the application process to assess if you’re likely to pay your rent on time.

Certain employers might also review your credit report if you’re applying for a role that involves handling money. In essence, having bad credit can negatively influence many aspects of your life, making it crucial to avoid falling into this predicament. However, if you’re already there, it’s not the end of the road – there are steps you can take to start mending your credit health.

How can I find out my credit score?

Upon obtaining your credit report, you’ll see your financial history spread out over several pages. However, your actual credit score is not included when you order your report. Both your credit report and credit score are crucial pieces of information that lenders use to determine your loan offers. Therefore, knowing where you stand in terms of both is vital.

Educational Credit Scores vs. Real FICO Scores

Although numerous websites offer free credit scores, some of these are known as educational credit scores because they’re not your actual FICO score. Therefore, when applying for a loan, you might be surprised to see a wide discrepancy between your free educational credit score and your FICO score.

To find out your real FICO score, you can purchase it directly from the company’s website or sign up for a credit monitoring service, especially if you anticipate working on improving your credit over time. This allows you to view your progress regularly. Just ensure you select a company that does use the actual FICO.

Many credit card companies now offer free credit score updates as a cardholder benefit. Check to see if your card is one of them.

Can I get a personal loan with a bad credit score?

Many factors go into determining your eligibility for a personal loan. The type of lender you choose also affects whether 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. However, 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.

See also: Best Personal Loans for Bad Credit for 2023

Can I get a mortgage with a bad credit score?

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.

FHA Loans

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 besides 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.

Dispute Inaccuracies

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 cannot be verified within 30 – 45 days must be removed from your credit report.

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.

A secured credit card is a type of credit card that requires a security deposit to be placed with the issuing bank. The deposit serves as collateral for the credit line and helps the bank mitigate the risk of extending credit to those with poor credit histories.

The credit limit is usually equal to the amount of the deposit but can sometimes be less. The cardholder is then able to use the card as they would any other credit card, making purchases and paying the balance in full or over time.

The bank reports the cardholder’s payment activity to the credit bureaus, helping to build credit history. When the cardholder is ready to close the account, the bank will return the security deposit minus any outstanding charges.

See also: Best Secured Credit Cards

Take Out a Credit Builder Loan

A credit builder loan is a type of loan that helps build credit. These loans are typically offered by online lenders, credit unions, or community banks.

Credit builder loans are designed to help individuals build their credit history by making timely payments each month. With a credit builder loan, the borrower receives the loan amount in a savings account, and makes monthly payments towards the loan.

As the borrower makes their payments on time, the lender reports to the credit bureaus, which helps build the borrower’s credit score.

See also: Best Credit Builder Loans

Bottom Line

While a bad credit score can limit your financial options and create obstacles, it’s not a permanent situation. Credit repair companies can help you exercise your rights when it comes to removing negative credit accounts and improving your credit health.

Remember, bad credit doesn’t have to feel like a dead end. You may still have credit options available to you now, and there are actionable steps you can take to navigate back onto a healthier financial path.