A bad credit score can limit your access to affordable credit options and may result in higher interest rates on loans or credit cards. But it’s not the end of the world, as there are actions you can take to improve your credit rating if it’s in the trenches.
Keep reading to learn more about the primary credit-scoring models, how credit scores are calculated, what’s considered a bad credit score and how to boost your credit health.
Understanding Credit Scores
Here’s an overview of what you need to know about credit scores and how they work.
Credit Scoring Models
There are several credit scoring models, but FICO is the most prevalent. It’s used by over 90 percent of lenders and creditors to make credit decisions. The VantageScore is another model you should be aware of as it’s gaining popularity.
What Makes Up a Credit Score
The FICO credit-scoring model is made up of the following:
- Payment history: 35 percent of your FICO score
- Amounts owed: 30 percent of your FICO score
- Length of credit history: 15 percent of your FICO score
- Credit mix: 10 percent of your FICO score
- New credit: 10 percent of your FICO score
The formula for VantageScore is slightly different:
- Payment history: extremely influential to your VantageScore
- Credit utilization, credit age and credit mix: highly influential to your VantageScore
- Amounts owed: moderately influential to your VantageScore
- Recent credit behavior and available credit: less influential to your VantageScore
Credit Score Ranges: What Is Considered Bad Credit?
Defining Bad Credit
Bad credit is a situation where your credit history reflects a pattern of late or missed payments, high debt levels or both.
FICO vs. VantageScore
Below are the credit-scoring ranges by model:
- Excellent FICO score: 800-850
- Very Good FICO score: 740-799
- Good FICO score: 670-739
- Fair FICO score: 580-669
- Poor FICO score: 300-579
- Excellent VantageScore: 781-850
- Good VantageScore: 661-780
- Fair VantageScore: 601-660
- Poor VantageScore: 500-600
- Very Poor VantageScore: 300-499
Keep in mind that both credit scoring models place significant importance on your payment history, credit utilization ratio and outstanding balances. Improving these factors can help improve your credit score, whether it’s calculated using the FICO or VantageScore model.
The Impacts of Having Bad Credit
Maintaining a healthy credit score is essential for various aspects of your personal and professional life. With bad credit, the road to financial success can be challenging, but taking steps to improve your credit score can help you overcome these obstacles.
How Bad Credit Affects Your Finances
When you have bad credit, it can hinder your ability to achieve financial milestones. Lenders often charge higher interest rates for individuals with poor credit scores, resulting in increased loan and mortgage repayment costs. Lower credit scores may also limit your access to certain credit products, making it challenging to build or improve your credit over time.
Personal Loans and Mortgages
With bad credit, you may face difficulty obtaining personal loans or mortgages. Financial institutions typically assess your creditworthiness to determine how likely you are to repay the loan. Bad credit scores may result in loan rejections or, if approved, significantly higher interest rates and less favorable loan terms than those with good credit scores.
Your credit score can impact your employment prospects, as employers may review your credit report during the hiring process. Poor credit history may be perceived as a sign of poor financial management. In certain sectors, such as finance or government positions, employers might view poor credit as a risk or deem you unsuitable for the role.
Renting and Insurance Rates
Having bad credit may also affect your rental applications and insurance rates. Landlords might deny you housing due to a low credit score, foreseeing a risk of late or missed rent payments. Furthermore, insurance companies often consider your credit score when determining premiums, which means bad credit could lead to higher insurance rates for your home or vehicle.
Starting a Business
Starting a business often requires a sizable amount of capital, and entrepreneurs with bad credit may struggle to secure business loans or attract investors. Even if you manage to obtain financing, the higher interest rates associated with bad credit can impact your business’s cash flow and overall profitability.
Common Warning Signs of Bad Credit
One major factor affecting your credit score is your payment history. Consistently paying your bills and debts on time demonstrates to lenders that you’re responsible with credit. If you start to notice more frequent late payments on your credit card bills or other debt obligations, this could indicate bad credit. Late or missed payments can harm your credit score and may eventually be reported to the major credit bureaus. Consequently, it’s essential to keep track of your payment due dates and ensure that you’re making timely payments to maintain a healthy credit score.
Denied Credit Applications
If you apply for credit—such as a new credit card, personal loan, or mortgage—and your application is denied, or you’re offered less favorable terms, this could be a warning sign of bad credit. When you apply for credit, lenders typically review your credit report and score to assess your creditworthiness. If they find that you have poor credit, they may decline your application or offer higher interest rates and less favorable terms to account for the perceived risk. If you’ve been denied credit or are experiencing multiple declines, take a step back and assess your credit situation before applying again.
High Credit Card Balances
Keeping a high balance on your credit cards can be another warning sign of bad credit. A high credit utilization rate, which is the percentage of your total available credit that you’re using, can negatively impact your credit score. A lower utilization rate is generally better, as it indicates that you’re using credit responsibly and not overextending yourself financially. To maintain a healthy credit score, aim to keep your credit card balances below 30% of your overall credit limit.
Collection accounts are another serious warning sign of bad credit. If you’ve missed multiple payments on a loan or credit card and it gets sent to a debt collection agency, the debt collection attempts will likely be noted on your credit report. Additionally, the original creditor may report the account as a charge-off, which can stay on your credit report for up to seven years and significantly impact your credit score. If debt collectors are contacting you, addressing the outstanding debt as soon as possible is crucial to minimize the damage to your credit report.
How to Improve Your Bad Credit
As mentioned above, a bad credit score isn’t the end of the world. If you’re ready to improve your credit health, here are some proven strategies to get started.
Steps to Overcome Bad Credit
To improve your bad credit, it’s essential to understand what factors contribute to a bad credit score. By addressing these factors, you can take steps to improve your credit over time. Here are some steps to help you start working on fixing your bad credit:
- Step 1: Review your credit reports: Obtain your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion). This allows you to identify any errors or discrepancies that may be affecting your credit score negatively. (Note: You can access free weekly credit reports at AnnualCreditReport.com through the end of 2023).
- Step 2: Dispute inaccurate information: If you find any errors in your credit reports, submit a dispute with the respective credit bureaus. They are required to investigate and correct any inaccuracies.
- Step 3: Pay your bills on time: Your payment history is a significant factor in your credit score. Make sure to pay all of your bills on time to demonstrate a consistent payment pattern.
- Step 4: Reduce your credit utilization: Keep your credit card balances low in relation to your credit limits. High credit utilization can negatively impact your credit score.
- Step 5: Avoid applying for unnecessary credit: Each time you apply for credit, it generates a hard inquiry on your credit report, which can lower your credit score. Limit the number of applications you submit, and only apply for credit when you genuinely need it.
- Step 6: Establish a good credit mix: Having a blend of installment and revolving credit accounts can help improve your credit score over time.
Getting Help from Professionals
If you’re crunched for time or struggling to improve your credit on your own, consider seeking help from professionals. They specialize in helping consumers improve their credit by analyzing their credit history, identifying negative items and disputing inaccuracies with the credit bureaus.
Make sure to research several providers before choosing one, as some may be more reliable and effective than others. Keep in mind that reputable companies will not guarantee specific results, but they can provide you with guidance and support throughout the process.
By taking a proactive approach to improving your bad credit and potentially seeking help, you can set yourself on the path toward a better credit history. Plus, you could position yourself to get approved for more attractive financial products or access other opportunities.
Seeking the assistance of experienced professionals, such as The Credit Pros, can significantly expedite the process of improving your credit score. With their in-depth knowledge and expertise, they can provide you with personalized solutions to address your specific needs and challenges. Take the first step towards a better financial future by contacting The Credit Pros today. Get a free consultation with no obligation to sign up and learn how they can help you improve your credit. Get fast and effective results or get your money back with their 90-day guarantee. Call (888) 558-1602 or fill out a form to get started today.