What Is Considered a Bad Credit Score?
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Credit can dictate a lot of things in our lives. It can mean the difference between being able to purchase things such as a car or home and not ever being able to get those things. Credit is what gives us the freedom that we desire in our lives.
Thankfully, even if you have bad credit there are ways to help. We can help to repair and restore bad credit, allowing people to get back on track and enjoy the lives that they desire. What’s important is that we all have a little bit of help sometimes.
But knowing what makes a credit score – what makes it good, what makes it bad, and what is considered to be a “bad” score – can go a long way, too. It helps you know what you need to improve on and where you went wrong.
So, before we get into the steps that you can take to make improvements, we must first understand what a bad credit score is, to begin with.
What Is a Bad Credit Score?
First of all, it is important to understand that there are five tiers of credit: poor, fair, good, very good, and exceptional. Credit can actually be a little confusing to understand because there are three credit bureaus that rate your credit as well as your FICO credit score.
The three national credit bureaus in the United States are Experian, Equifax, and TransUnion. They are similar in many ways, but they also have small differences that can make for slight changes in your score from one bureau to the next. For this piece, we will be going by FICO standards.
We will start at the top and work backward. According to FICO, a score of 800 to 850 is an exceptional score. Considering that 850 is the very highest that you can get, this means that you will qualify for just about anything under the sun and get great rates because of it.
An exceptional score is very difficult to get. There can be no collections, no late payments, an optimal debt-to-income ratio, a debt usage of under 30%, and a few other factors. It takes careful cultivation to get a score of 800 or better.
The next tier down is Very Good, which is for a score ranging from 740 to 799. Having a very good rating means you will qualify for most things and get a very good rate while doing so. Getting this kind of rate means much the same as an exception rate: your track record has to be very clean and optimal to obtain a credit score this good.
To fall into the category of good, you would need a credit score that falls in the 670 to 739 range. A good score is not perfect – debt-to-income or credit usage may be a bit high – but it is still likely to get you quality rates on a home, car, or credit cards.
The second tier from the bottom is fair. A fair credit score is not necessarily bad, but not necessarily good. This is in the range of 580 to 669 and is often what you need to even qualify for a mortgage in specific.
A fair credit score will get your foot in the door, but will likely mean higher interest rates and perhaps a more stringent look from lenders. It means that you aren’t totally reliable in the eyes of lenders, but you aren’t necessarily unreliable, either.
Lastly is the poor credit rating. This is the range from 300 to 579 and there is no going below this range. It does not matter if you are a 578; you are still considered to be among the least trustworthy that there is in the eyes of lenders.
Even still, only 4% of Americans have a credit score of 500 or below and it takes major events such as a foreclosure, repossession, or bankruptcy to dip that low.
If you don’t have a major event in your life like that and it just comes down to a few late payments or an item or two in collections, there is good news: Your credit score can be remedied. But what are the steps to improving and fixing your bad credit?
First, it is important to know exactly what bad credit can cost you.
What Impacts Can Bad Credit Have?
When it comes to having bad credit, there are a few potential roadblocks that can be presented. The first is obvious: potential rejections for lines of credit and loans. This includes major things such as car loans, mortgages, personal loans, student loans (both private and federal), and credit cards.
Those are major, major things in life to not be able to qualify for and can make things difficult enough. But there are quite a few other things that a bad credit score can really put a hamper on.
If you are renting, a bad credit score can make it difficult to get approved. Many landlords will run a credit check to evaluate your payment history. If you have a bad credit score – and one that is filled with late payments – you are unlikely to get approval.
Not only that, but it can also make your security deposits larger. This can be for the aforementioned landlords allowing you to rent a property or for utilities such as electricity, gas, and water when you move into a new home.
Having bad credit can even mean that you have issues during an employment background check. There are some employers that have a limited version of your credit report to see how dependable you are. They might not see your score exactly, but they will be able to see the behaviors that get reported. The strictest and most protective of businesses may not want to bring someone with a bad credit score on to their team.
Lastly, it can also have an impact on your insurance premiums depending on what state you live in. There are some car insurance companies that will use the information on your credit report – as well as your driving history – to assess the potential risk that you carry.
For drivers in Hawaii, Massachusetts, and California, your credit history cannot be factored into your insurance rates. Still, having a bad credit score can have serious ramifications on the rest of your life in nearly every imaginable way.
The Factors Behind Credit
While a credit score cannot change overnight, they are also not static. This means that they change when there is information in your credit report that changes. It also means that you can take control of your overall financial health and make the necessary moves that will have a positive impact on your credit scores going forward.
There are major factors that impact your overall score. Your payment history accounts for around 35% of your total score. This tells the bureaus if you are paying your bills on time or if you have late or missed payments both currently and in the past.
Your credit report also indicates not only how much credit you have available to you, but how much of it you currently have in use. This is known as your credit utilization rate and it accounts for 30% of your credit score. The credit bureaus generally want you to keep your credit utilization down to around 30% or so of your total credit line.
So, let’s say you have four credit cards open with a $10,000 limit between them. That would mean that your total balance used should be less than $3,000. That can mean that you have one card with $2,000, another at $200, another at $300, and so on. So long as the total is less than 30%, you are in good shape.
One factor that takes time and can’t be impacted instantly is how long you’ve been using credit. Your credit history is how long you have had open lines of credit and has a cumulative score. So, for instance, you could have two credit cards that you have had for two years and a car loan you’ve had for four. Your credit report would factor those into your total credit history.
Your credit report also looks at the types of credit that you have. This is the difference between loans (car, mortgage, or other), credit cards, and so on. It also takes into account what is known as hard inquiries. These are accounts that you’ve applied for (loans in particular) or applications that you have made for lines of credit.
How Do You Fix a Bad Credit Score?
Now that we know the factors, how can we fix a bad score? The first thing to know is your history. You can’t make improvements if you don’t know where those improvements need to be made. Maybe your debt-to-income ratio is too high or you’re using too much of your credit limit. You need to know what needs to change.
The second is one of the more obvious ones, pay your bills on time. Your payment is the single largest portion of your FICO score. Credit companies typically do not care why you are late, they just see that you are late. It doesn’t matter what circumstances there are.
Paying your bills on time, even for a few months in a row, establishes a positive trend that credit bureaus notice. They may not think of you in an exceptional way because you made four consecutive payments, but they will start to see a trend going in the right direction.
If you have creditors, being upfront with them can help. Things such as student loans can actually provide alternative payment plans so that you can pay a more reasonable amount each month. Even if they don’t offer you a different payment, communication is never bad when it comes to creditors.
Debt utilization is another huge part of it. Now, keep in mind, if you have a car loan out at the same time as your credit cards, the car loan is not counted in your credit utilization. This pertains to open lines of credit which are typically in the form of credit cards.
Ideally, you would pay off your credit card in full at the end of each month. But most people don’t operate on that kind of reality and they wind up paying a ton in interest fees. If you can’t totally eliminate your credit cards right away, try going for the highest-interest credit card first. The goal is to save yourself money in interest fees and going after the one with the highest rates is a good place to start.
Lastly, avoid those hard inquiries where you can. Again, this involves things such as applying for a new credit card or loan. Those applications for new credit accounts take up 10% of your score.
What you might not have realized is that there are “soft” inquiries. These happen when a credit card issuer or lender does a credit check for pre-approval purposes. Those are okay, though, because they don’t affect your credit score.
The credit game can seem like a confusing and complicated one, but it doesn’t have to be. Knowing what is impacting your credit score, what impacts your score will have in your life, and how to better manage those impacts can go a long way toward getting your score where you want it to be.
While you may not see your score on a daily basis, it is constantly changing and having an impact on the things in your life that you need: a car, a home, student loans, and so on. Don’t sweep your credit under the rug just because it isn’t where you want it to be.
Instead, do something to positively impact your credit and get it moving in the right direction. Because when you have quality credit, many more doors are opened to you than you would have previously imagined. Make your credit score what you want by taking these steps.
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