A bad credit score can have serious consequences for your financial health. For example, it makes it more challenging for you to qualify for competitive terms on loans and credit card products. The good news is having less-than-perfect credit isn’t the end of the world, and there are a few ways in which you can fix it.
What Is Considered A Bad Credit Score?
There are two primary credit scoring models – FICO and VantageScore. FICO is used by 90 percent of potential lenders and creditors when evaluating applications for debt products. VantageScore isn’t as prevalent, but it’s helpful to familiarize yourself with what your score means.
FICO Score Credit Score Range
Your FICO® Score is a three-digit number ranging between 300 and 850. Your FICO credit score is considered “poor,” and you pose more of a credit risk to lenders if it’s below 580. Here’s a breakdown of the ranges:
- Poor credit score: 300 to 579
- Fair credit score: 580 to 669
- Good credit score: 670 to 739
- Very Good credit score: 740 to 799
- Exceptional credit score: 800 to 850
VantageScore Credit Score Range
The VantageScore® also ranges between 300 and 850, but anything below 601 is classified as “poor” credit. The chart below demonstrates how VantageScores are classified:
- Very Poor credit score: 300 to 499
- Poor credit score: 500 to 600
- Fair credit score: 601 to 660
- Good credit score: 661 to 780
- Excellent credit score: 781 to 850
What Affects Your Credit Score?
Your credit score is composed of these components:
- Payment history (35 percent): Do you pay your bills on time? Late or missed payments, collection accounts, charge-offs, tax liens, bankruptcies and public records can significantly damage your credit score.
- Amount owed (30 percent): What’s your credit utilization rate or the amount of your credit limit that’s currently in use? Ideally, you want to keep this amount at or below 30 percent to preserve your credit rating. So, if you have three credit cards with $500 limits, the total balance between accounts shouldn’t exceed $450.
- Length of credit history (15 percent): Have you been using credit for some time, or are you a credit newbie? It could take some time to build up your credit rating if you recently started using credit.
- Credit mix (10 percent): What types of credit are you currently using? Creditors and lenders like to see a healthy mix of revolving (i.e., credit cards) and installment (i.e., car loans, student loans, personal loans, mortgages) accounts on your credit report.
- New credit (10 percent): Each time you apply for credit, a hard inquiry is generated. It could ding your credit score by a few points, but several applications for credit or new accounts in a short period could have a greater negative impact.
How A Bad Credit Score Can Hurt You
Harder To Qualify For Loans
People with lower credit scores have trouble qualifying for loans and credit cards. Or you may have to bring a co-signer on board to strengthen your approval odds.
Less Favorable Loan Interest And Terms
If you’re approved for a loan or credit card with less-than-perfect credit, you’ll likely receive higher interest rates and unfavorable loan terms. Even worse, you could pay several hundred or thousands more in interest than you would if your credit score was higher.
Difficulty Renting An Apartment
When applying for an apartment, you’ll often find that landlords also conduct credit checks. If what they find in your report is unsatisfactory, you could be denied housing.
Some May Require A Security Deposit From You
If you are approved for an apartment with a subpar credit history, you may have to pay a higher security deposit.
Problems Getting New Accounts And Contracts
A lower credit score can also cause problems when you attempt to open new accounts. Whether it’s a contract for a new cell phone (and service), a utility account, a cable/internet service connection request or other financial products not listed here, you could get denied if your credit score is low. Or the service provider may require you to make a large security deposit to start service.
Higher Insurance Premiums
In many states, insurance providers assess the information in your credit report (along with your driving history) to decide if you’re a good candidate for coverage and how much you’ll pay for coverage. However, be mindful that this practice is prohibited in California, Hawaii and Massachusetts.
How To Fix A Bad Credit Score
Pay Your Bills On Time
Since payment history accounts for the largest percentage of your credit score, paying your bills on time is important and can help improve a bad credit score. In addition, you’ll avoid late payment fees, penalties, collection activity and adverse credit reporting. (Quick note: creditors and lenders generally don’t report late payments until accounts are 30 days past due).
Consider enrolling in automatic payments if you have trouble keeping up with due dates. Another option is to request new dates that work better for your pay schedule. You can also use the bill pay service offered through your financial institution (if applicable) to stay on top of your monthly payments and avoid late payment penalties and negative credit reporting.
If any of your accounts are past due, reach out to your creditors or lenders promptly and request a payment arrangement. The lender may agree to accept reduced payments or suspend payments altogether for a short period. Furthermore, doing so could help stop adverse credit reporting and get you back on track sooner than later.
Pay Your Debts
Credit utilization is the second-largest component of your credit score. So, you want to assess your spending plan to identify areas where you can cut back and free up funds to pay down credit card debt. Doing so helps lower your credit utilization, which could help improve your credit score.
As mentioned above, an optimal credit utilization ratio is at or below 30 percent if you’re looking to improve your credit score. However, get this percentage at or below 10 percent, if possible, to see an even greater impact.
If you’ve had trouble paying down credit accounts in the past, consider implementing a strategy to make the process easier. Start by calculating how much extra funds you can afford to allocate toward your debt each month. The next step is to select a method you’ll follow to pay off your outstanding balances.
Two popular options are the debt snowball and debt avalanche. The debt snowball calls for you to focus on the debt with the smallest balance first and build up momentum as you go along. By contrast, the debt avalanche attacks the debt that’s costing you the most (or with the higher interest rate) first.
Regardless of which method you choose, be sure to pay at least the minimum on all your debts each month to keep them current and in good standing. Otherwise, you risk doing even more damage to your credit score by focusing solely on one debt and ignoring the others.
Avoid Hard Inquiries
Only apply for credit as needed while working to improve your credit rating. Otherwise, a hard inquiry will be added to your credit report each time you apply for a new account and could impact your credit score by a few points. Even though the impact is minimal and your credit score will likely rebound within just a few months, several hard credit inquiries in a short period can mean bad news for your credit health.
If it’s a must that you secure a new credit card or loan, ask the lender if you can get pre-qualified before submitting a formal application. Doing so gives you an idea of your approval odds and helps you avoid excessive hard inquiries.
Boost Your Credit Score
Use a free service, like Experian Boost, to potentially raise your credit score instantly. You’ll get credit for payments made to eligible service providers from utility, phone and streaming services by connecting your bank account(s) used to pay bills and selecting the positive payment history you want to be added to your Experian credit profile.
It’s included as a part of the free CreditWorksSM Basic membership, and you’ll also get access to your Experian credit report, FICO score based on Experian data, credit monitoring and alerts, a dark web surveillance report and more. Visit Experian’s website to learn more about Experian Boost, learn more about other products, sign up for a free account or get your free credit score. You can also sign up for a plan that gives you insight on credit scores from the other major credit bureaus – Equifax, Experian and TransUnion.
Become An Authorized User
A family member or friend can add you as an authorized user to their account to help improve your credit rating. The account will need to have impeccable payment history and a low utilization rate to be effective, though. Also, keep in mind that becoming an authorized user does not guarantee that your credit score will improve.
Furthermore, the cardholder doesn’t have to give you a card to use, and you won’t be liable for any of the charges made to the account. You can also request that the credit card company remove you from the account at any time.
Monitor Your Credit Score
Stay abreast of what’s happening in your credit profile and monitor your credit score. You can enroll in Experian’s free credit monitoring to receive real-time alerts whenever there are changes to your credit report or score. It’s easy to sign up, and you won’t have to put a credit card on file.