Updated: Jan 18
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?
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 Vantage Score has a credit score range of 300 to 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.
“There has been plenty of talk about good and bad credit scores in the news lately. It is no secret that there plenty of people who have come to the realization that their credit scores are holding them back. The bad credit score is holding them back from owning a home, going to college or eve buying a car. So what is a bad credit score? The terms have changed quite bit over the last decade or so. What used to be considered good has been bumped down to the fair category making it much more difficult for people to obtain prime interest rates on loans.”
Here are 5 things you should know about scores and how to determine what is a bad credit score versus a good score.
· A bad score is somewhat subjective depending on the type of credit a person is applying for. Home loans have some of the strictest credit standards while department store credit cards have fairly lax standards. Home loans will typically consider anything under 640 as a bad score, but that doesn't necessarily mean it is impossible to get a home loan under some programs.
· Credit card companies will often offer credit lines to those with scores ranging in the high 500s and low 600s, but the interest rates will be less than prime. There may be additional fees tacked on as well.
· When talking about what is a bad score, it is important to understand that scores under 500 are considered very bad. People with scores that low will struggle to get unsecured loans or credit lines. However, it isn't the end of the world. It is possible to raise a credit score.
· Unfortunately, it doesn't take much to knock a credit score down. One late payment, bankruptcy, or medical bill sent to collection can reduce a score by double digits. It takes very little time, a matter of months, in fact, for a score to be negatively impacted, but it can take several months, if not years to repair.
· Consumers with scores that fall into the bad credit range will pay close to double the interest rates compared to those with scores above 640. It is very costly to get an auto loan with interest rates that are essentially punitive. Many consumers would be better served to save the cash in a bank and buy what they need outright rather than take out a high-interest loan.
Understanding how scores impact interest rates for loans and credit cards is an important step to rebuilding credit. Before applying for credit, consumer must have a firm understanding about what is a bad credit score. Never make assumptions about whether a score is good or bad until you have the facts. Choose wisely when it comes to applying for new credit. Don't get sucked into cards with steep interest rates that will cost you more money and drive you further into debt, effectively hurting your credit score more than it already is.