What is a Bad Credit Score?

Banks Editorial Team · December 2, 2018

A bad credit score is a nightmare for your financial dreams. Maintaining a minimum score of 630, below which you are deemed risky, is very important to enjoy the benefits of the social structure and to lead a smooth life. Several benefits, ranging from credit card to home insurance, require you to make sound financial decisions to refrain from falling into the bad credit score zone. In case of a bad score, you can improve it through hard work and determination. Start by finding out what your current credit score is:

 

Why a Bad Credit Score Matters

A credit score is a crucial metric in your financial life. It determines if you are a worthy candidate to lend money. The credit score is a constantly changing number and it can increase or decrease based on your everyday financial decisions. A bad credit score typically describes your past failures in keeping up with the payments and impairs the approval of the lending companies for your new credits. Although variations exist, generally, a bad credit score falls below 630, based on FICO and VantageScore – the two most widely used credit measures. Below the 630 level, there are three categories – Low credit score (580 to 629), Poor credit score (500 to 579) and Bad credit score (300 to 499).

The negative implications of a bad credit score are numerous. If your score is below 600, it means the lending agencies will not take any extra effort to attract you as a customer. They will reject your application outright. Even if you manage somehow to get the loan approved, in most cases, you won’t be receiving a single digit interest rate on that mortgage or an interest-free credit card. Check your credit score for free to see where you stand:

The Cost of a Bad Credit Score

In addition to that, financing a car or a house will cost you more because of the subprime rates on those finance. Besides finance, insurance cost for the car and the house will be higher as well. Some specific expense like utility deposits, which are usually skipped by people with a credit score greater than 700, must be paid when your credit score is bad.

The main factors affecting your credit score are your payment history, debt utilization ratio, credit history length, credit mix and frequency of new credits. Your payment history contributes to 35% of the credit score, the debt utilization ratio – 30%, the length of your credit history – 15% and credit mix and new credit – 10% each. A person with bad credit score must have underperformed in some or all of the above factors.

If you’re unsure of calculating yourself your credit score, you can use this online credit score calculator to estimate how bad or good your present credit score.

The Average Credit Scores Across the Country

The average credit score of the Americans has been on the rise for the past few years. This proves that the economy of the United States is swinging up. In 2018, the average credit score of the age group 33 to 52 years is 655. A study by WalletHub shows that the average age for a bad credit score is 52 years. This figure, however, is contrary to the general thought of younger people defaulting more than the experienced.

Geographically, Mississippi has the lowest average credit score of 642 points.

Improving Your Credit Score

Your credit score doesn’t have to follow you throughout your life. Most delinquent marks in your credit history will cease to appear after about seven years, although some might take longer. But the new markings will have to be positive, in order to boost your score. Through hard work, determination and following some improvement measures like paying off debt on time, utilizing debt to the minimum and maintaining a longer credit history, you can come out of the vicious circle and have a good credit score. Monitoring your credit regularly is a great way to ensure the health of your credit.

 

To wrap up, when the credit score falls below 630 points, it is considered risky and the lending agencies will reject your applications outright. Other negative implications include disapproval of interest-free credit cards, additional charges on insurances and some specific deposits. However, through determination and prudent financial decision, you can improve the bad credit score to the status of good or even excellent.

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