Bad credit score is a person’s history with failing to pay their bills on time and the likelihood of them not making timely payments in the future. A low credit score often reflects this. Bad credit can also be a result of a company’s payment history or current financial position.
Bad credit can make it more difficult for a person or company to borrow money at competitive interest rates. They are also considered to be more risky than other borrowers. This applies to all types of loans, both secured and unsecure, even though options are available for the latter.
- If a person has a history of not paying bills on time, or owing too much money, they are considered to have poor credit.
- A low credit score is usually a sign of bad credit. It’s typically below 580 on a scale from 300 to 850.
- Bad credit can make it more difficult to obtain a loan or a credit card.
Understanding Bad Credit
The vast majority of Americans who have ever borrowed money, or signed up to credit cards will have a credit file at any one or more major credit bureaus. Equifax, Experian and TransUnion are the main ones. 1
These files contain information such as how much they owe, and whether they have paid their bills on time. This information is used to calculate their credit score.
It’s a number that’s meant to guide their creditworthiness. The FICO score is the most popular credit score in America. It was named after Fair Isaac Corporation.
This is the most weight. This simply shows if the FICO score indicated that they have paid their bills on-time. Even if the payment is late by a few days, it can still count. However, the worse the debt, the higher the score.
The total amount that an individual owes
These include mortgages, credit card balances and car loans. Any bills in collections, court judgements, or other debts. The credit utilization rate is particularly important. This compares the amount of money the person has available to borrow (such the credit card limits) and how much they owe. A high credit utilization ratio, such as above 20% or 30%, can be seen as a warning sign and lead to a lower credit score.
15% – The length of a person’s credit history.
- 10%–mixture of credit types. These can include mortgages and car loans as well as credit cards.
- 10%–new credit. This includes any credit that someone has applied or taken on.
Bad Credit Examples
FICO scores can range from 300 to 851. Borrowers with scores below 579 are typically considered to have poor credit. Experian estimates that 62% of borrowers who have scores below 579 will become serious defaulters on their loans in the future. 3
Fair scores are those with scores between 580-669. These borrowers are significantly less likely to default on loans and therefore less risky than those with poor credit scores.
Even though these borrowers are less likely to default on loans, they may still face higher interest rates and have difficulty securing loans than borrowers with better credit scores. 4
How to improve your bad credit score
You can take steps to improve your credit score, whether you have poor credit or fair credit. These are tips straight from FICO.
Automatic Online Payments
This applies to all credit cards and loans. This will ensure that you pay the minimum amount each month.
Credit Card Debt
When possible, make more than the minimum payment. You should set a realistic repayment goal that you can work towards slowly. High credit card debt can damage your credit score. Paying more than the minimum could help you raise it.
Check Interest Rate Disclosures
Credit card accounts provide these disclosures. Pay off your highest-interest debt first. This will allow you to free up cash that can be used to pay off other lower-interest debts.
Unused Credit Card Accounts Can Be Closed
Do not close any unused credit card accounts. Don’t open any new accounts you don’t use. Both of these moves can cause credit scores to plummet.
A secured credit card is a good option for those with bad credit. This card is similar to a bank credit card in that you can only spend the amount you have available for a deposit.
A secured credit card can help you build your credit score and allow you to qualify for a regular-sized card. This is also an excellent way for young adults to start making credit histories.
My Name is Jay has and I have a passion for financial writing. I am the chief writer on this blog. I do my best to verify all the information but if there is anything amiss please let me know and I will do my best to correct it.