One of the most important numbers in personal finance is your Credit score. Good credit opens the door to numerous opportunities, while bad credit can become a massive roadblock to financial freedom.
So what is considered to be a poor credit score? A bad credit score is anything below 670 on the FICO credit scale.
Whether you’re looking for a new home, a car, or even a job, your credit score plays a pivotal role in determining the outcome.
In this guide, we’ll clearly define what bad credit is, its impact on your finances, and actionable steps to improve it.
Key Takeaways
- Your credit score is a vital indicator of your financial health, influencing major life decisions like buying a home or car.
- A score below the desired mark of 670 is considered a bad credit score can limit opportunities and result in unfavorable terms in financial agreements, like personal loans.
- Understanding the nuances of what causes bad credit is the first step towards improving it.
- This guide offers practical advice and strategies to help you navigate and elevate your credit score.
The Basics of Credit Scores
Credit scores are numerical representations of your creditworthiness, derived from many factors of your financial history.
Think of it as a financial report card, with numbers instead of grades.
There are three major credit bureaus in the U.S. – Equifax, Experian, and TransUnion. These credit bureaus compile your credit data and summarize it in a number. Each might have slightly different data, leading to minor score variations.
FICO is currently the most renowned credit scoring model, but VantageScore is another popular choice. Both range from 300 to 850, but their criteria for categorizing scores can differ.
As discussed previously, there are several factors that determine your credit score:
In this guide, we’ll clearly define what bad credit is, its impact on your finances, and actionable steps to improve it.
- Payment History (35%): Timely payments increases your score, while late payments, defaults, and bankruptcies harm it.
- Credit Utilization (30%): This represents the ratio of your current credit card balances to your credit limits. Lower utilization is better (try to keep your credit utilization under 30%).
- Length of Credit History (15%): A longer credit history can be beneficial, especially if it's a history of timely payments.
- Types of Credit (10%): A mix of credit cards, retail accounts, installment loans, and mortgage loans can be favorable, but only open new types of credit if it is necessary, don't open them only to increase your score.
- New Credit (10%): Opening several new credit accounts in a short time can represent higher risk, especially for those with short credit histories.
What is Considered a Bad Credit Score?
When discussing credit scores, terms like “good,” “fair,” and “bad” often come up. But what do these labels mean in the context of actual numbers?
A credit score below 670 is generally considered “bad”, however you can further categorize bad credit scores by how low the score is.
While this is a general benchmark, the exact number can vary based on the scoring model in use.
For instance, in the FICO scoring model, scores range from 300 to 850. Here’s a breakdown:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Very Poor: 300-579
VantageScore, on the other hand, categorizes scores as:
- Excellent: 781-850
- Good: 661-780
- Fair: 601-660
- Poor: 500-600
- Very Poor: 300-499
Having a “bad” credit score can have tangible consequences, especially when considering personal loans.
It might mean higher interest rates on loans, difficulty in securing housing rentals, or even challenges in certain employment opportunities.
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Why Do Credit Scores Matter?
Credit scores are more than just numbers; they’re a reflection of your financial behavior and trustworthiness.
Listed are a few reasons why your credit score is important:
- Loan and Credit Card Approvals: Lenders use credit scores to gauge the risk of lending to you. A higher score indicates a trustworthy borrower, leading to faster approvals. Even with bad credit, you can still find lenders that are willing to approve you for a loan if you do some research.
- Interest Rates: A better credit score can secure you lower interest rates, saving you significant money in the long run. Conversely, a bad credit score might mean higher rates, translating to more expensive loans.
- Renting: Many landlords check potential tenants' credit scores. A low score might make it challenging to rent a desirable place or might require a higher security deposit.
- Insurance Premiums: Some insurance companies use credit scores to determine premiums, especially for home and auto insurance. A lower score might mean you'll pay more.
- Job Opportunities: In some industries and states, employers check credit reports (though not scores) as part of the hiring process. A poor credit history might affect job prospects in sectors like finance and the military.
- Security Deposits: Utility companies might require a security deposit if your credit history indicates you might be a risk for non-payment.
So now that you understand how your credit score can impact your life, let’s look at some ways you can improve your score if you have a bad credit score.
How to Improve a Bad Credit Score
Improving a bad credit score might feel like a long-shot, but with consistent effort and the right strategies, it’s entirely possible.
Here’s a step-by-step guide to help you navigate the path to better credit:
1. Obtain Your Credit Reports
Start by getting a free credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion.
Review your scores closely. Keep in mind that your score may vary slightly from each credit bureau.
2. Dispute Errors
If you find any mistakes on your credit reports, dispute them immediately. Incorrect information can drag down your score.
You can do this by calling the bureaus’ support line or through your bank. Do not procrastinate on this action as this will set you up for the next steps.
3. Prioritize On-time Payments
Your payment history is a significant factor in your credit score. Set up reminders or automatic payments to ensure you never miss a due date.
If you are going to set up automatic payments, make sure you have enough money in the account the payment is coming from to ensure you avoid overdraft fees from your bank.
You can set up reminders on your phone or computer to make sure you don’t miss the payment date. Our recommendation is to set the reminder for a few days before the payment is actually due to avoid any complications.
4. Reduce Outstanding Debt
Work on paying down your debts, starting with high-interest ones. Consider methods like the snowball or avalanche approach to tackle your debt systematically.
We know this step may seem obvious and we understand that it is not easy. More than likely, you have bad credit because you have too many payments to make on a loan balance that seems like it will never go down.
The road to reducing your outstanding debt is extremely challenging, but not impossible. Seek professional help, stay motivated, and stay focused. When you are in too much debt, your primary goal should be to pay it off as soon as possible.
5. Maintain Low Credit Utilization
Try to use no more than 30% of your available credit limit. For instance, if you have a credit card with a $1,000 limit, aim to keep your balance below $300 before you pay it off.
Since credit utilization makes up 30% of your credit score, this step is incredibly important. If you think you’re going to exceed 30% of your credit limit on a given month, pay off the balance before the month ends to avoid being penalized.
6. Avoid Unnecessary Credit Inquiries
Each time you apply for credit, a hard inquiry is made, which can temporarily lower your score. Only apply for credit when necessary.
When you decide to apply to credit, make sure you plan ahead and ensure you don’t have any other important financial events coming up that require a high credit score. For example, don’t open a credit card a month before buying a home and getting a mortgage.
7. Diversify Your Credit Mix
Having a mix of credit types, such as credit cards, retail accounts, and installment loans, can positively impact your score.
However, don’t open accounts just for the sake of diversifying.
8. Seek Professional Help
If you’re overwhelmed, consider working with a credit counseling agency. They can provide guidance and set up a debt management plan if needed.
Make sure you do your research on this step. Find a reputable company that won’t take advantage of your position for their gain.
9. Seek Professional Help
Regularly monitor your credit score and understand the factors affecting it. This will help you make informed decisions and track your progress.
10. Be Patient
Improving your credit score is a marathon, not a sprint. Improving from a bad credit score to a good score won’t happen over-night. Stay consistent, make informed decisions, and over
Remember, everyone’s financial situation is unique. What works for one person might not work for another. It’s essential to understand your financial habits, recognize areas of improvement, and take actions that align with your personal and financial goals.
Take Control of Your Credit Health
Your credit score is more than just a number; it’s a reflection of your financial habits and history. While a bad credit score can pose challenges in various aspects of life, it’s crucial to remember that it’s not a permanent label and it is not a reflection of the type of person you are.
With dedication, informed decisions, and the right strategies, you can rebuild and maintain a healthy credit profile.
Start by understanding the factors that influence your score and where you currently stand.
Regularly monitor your credit reports for inaccuracies and take steps to address any discrepancies. Adopt responsible financial habits, such as timely bill payments and prudent credit utilization. Seek guidance when needed, and remember that every positive step, no matter how small, brings you closer to a brighter financial future.
We wish you the best of luck in improving your bad credit score, we believe in you!
