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What is a bad credit score?

What Is a Bad Credit Score?

Updated on January 18, 2023


Having a bad credit score is not as bad as it may sound, but that doesn't mean you should live with it forever. Bad credit is a result of a bad credit report. If you keep track of your credit report, you might be able to take notice of even the slightest drop in your credit score and take immediate corrective measures. You can't wait to get an e-mail stating your loan application has been rejected because of your bad scores to know your actual credit scores.

If you want to learn what a bad credit score is, how you ended up with that score, and how you can turn a bad credit score into a good one, then this article is right for you.

What Is The Definition Of A Bad Credit Score?

A bad credit score means having a Fair Isaac Corporation (FICO) credit score under 670 or a VantageScore below 660. FICO Score and VantageScore are the two major credit scoring models which can generate two different credit scores from the same credit report. Also, there are three major credit bureaus (Equifax, Experian, and Transunion), and each maintains a separate credit report for you. The information on these reports can vary as some lenders and financial institutions may not report to all three credit bureaus. So, your credit score might change depending on which credit report is pulled, the credit scoring model is applied, and even the day your score is calculated.

To determine whether your credit score is good or bad, check the credit score ranges of the two popular credit scoring models- FICO and VantageScore. Although both scoring models range from 300 to 850, they are noticeably different.

Despite the difference in ranges and scoring models between VantageScore and FICO, you shouldn't worry about the slight variation in your scores. Some factors like your payment history can affect your credit score, both FICO and VantageScore, to a great extent. Concentrating on such influential factors can help prevent your credit score from dropping further. If not, in some cases, a bad credit score could still put you in a better financial position than having no credit.

Which Is Worse: Bad Credit or No Credit?

Bad credit or no credit can complicate your financial life. Having no credit means you have no record of any loan, credit card, or other forms of credit with any major credit reporting agencies—Equifax, TransUnion, and Experian. Since there is no information on your credit reports, there won't be any means for lenders to be able to check how likely you are to pay back borrowed money. The Consumer Financial Protection Bureau (CFPB) refers to consumers with no credit as credit invisible. Though having no credit history doesn't always mean that the consumer doesn't have a reliable income, it might still put you into a higher risk category when procuring any loan or finding a house for rent.

A bad credit standing, on the other hand, means you have a credit history with too many credit mistakes or errors you've made in the past, like late payments, foreclosures, charge-offs, and even bankruptcies. Major blemishes in your credit report like these can make lenders reluctant to lend you money. However, some of you might think you have bad credit, but that might not be due to a history of poor financial decisions, unpaid loans, defaulted and maxed credit cards, or unpaid utilities. If you're starting with no credit and building your score, it's best not to look at the credit score as bad.

Some lenders provide loans for people with bad credit, while some prefer working with those having no credit over those with a checkered past. This means that the answer to which one is better can be subjective to each lender. Fortunately, having no credit or bad credit are situations that can be fixed. You can learn about the factors that can negatively affect your credit score to improve a bad credit score.

What Factors Could Lead To A Bad Credit Score?

There are some common factors that most credit scoring models consider while calculating your credit score. Changes in any of these factors could cause your credit score to rise or fall.

Here are the key contributing factors to a bad credit score:

Payment History

It's the most important influential factor in determining your credit score in the VantageScore model and makes up 35% of your credit score in the case of the FICO credit scoring model. Your payment history can help lenders know how consistent you were in making your loan payments in the past and assess your ability to repay the loan without defaulting in the future. If you miss one or two payments, there may not be much difference in your credit score, but having too many missed payments or failing to pay off the loan will result in a bad credit score.

Amount Owed

The percentage of credit limit used or the total debt you owe significantly impacts your score. Your credit utilization ratio is one way that can tell lenders the percentage of total available credit that you're currently using. A higher credit utilization ratio can indicate that you're spending a significant portion of your available credit which can negatively impact your score.

Length Of Credit History

Per the FICO scoring model, the length of your credit history makes up 15% of your score. The duration of your credit history or the age of your credit means the number of years since you opened your first credit account. This factor is directly proportional to your credit score, meaning the higher the length of your credit history, the higher your credit score can be.

Credit Mix

Using different types of credit options shows that you can handle multiple types of loan accounts at a time. A good credit mix usually includes a blend of both installment loans and revolving credit. This factor affects your credit score to a lesser extent, but in either case, you should never borrow more than the required amount or number of loans to improve your credit score.

New Credit

Getting new credit within a short period might make lenders think you're in financial trouble. Maintaining a reasonable duration between two loans is as essential for avoiding a bad credit score as maintaining a good credit mix. Both credit mix and new credit contribute 10% each to your FICO score.

How Can Bad Credit Scores Affect You?

A bad credit score can affect people differently. Before learning about the steps you can take to raise your credit score, you need to know some of the unfortunate ways a bad score can impact your life. They are as follows:

  • Traditional banks or lenders with stringent requirements may not consider your loan application.
  • You can get approved for loans and credit cards with higher interest rates and shorter repayment terms.
  • Some landlords may reject your tenancy applicants if your credit report shows that you're a credit risk.
  • You would probably be seen as a 'high risk' customer due to a bad credit score, making your insurance plans expensive.
  • A bad credit score can prevent you from getting a job if the employer reviews your credit report to make a hiring decision.
  • You may be charged a hefty security deposit to receive utility services if you have a bad credit history.

What Are The Ways to Improve Bad Credit Scores?

You can take proactive steps to avoid having a bad credit score. But even if you can't and end up with a poor credit score, you can always try to improve your credit scores. You can choose the most suitable solution to fix your bad scores according to your financial situation and the factor that dropped your credit score.

Here are some strategies to avoid or improve a bad credit score:

Review Your Report

Since your credit scores are calculated using the information on your credit report, you should make a point to check your report to avoid any mistakes or errors periodically. You can check your reports for free from without worrying about damaging your scores.

Timely Payments Of Bills And Clearing Overdue Bills

Your payment history is indispensable when calculating your credit score, whether through FICO or VantageScore credit-scoring models. Starting to make on-time payments and getting current on payments if you have fallen behind can help you help increase your credit score.

Improve Your Credit Utilization Ratio

The second most significant factor influencing your score after your payment history is your credit utilization ratio. You might be able to see your credit score improve over time if you make sure to use not more than 30% of your credit limit.

Avoid Opening Too Many Accounts

An inquiry can appear on your credit report whenever you apply for certain credit cards or loans. These inquiries can reduce your credit score to a great extent. By applying to limited lenders who only run a soft credit check and using the option to get pre-qualified for a loan, you can prevent hurting your credit score.

Use A Loan To Build Credit

Apart from following some good financial habits, you also have an option to take out a credit builder loan that is designed to help you build your credit. Credit builder loans work differently than your standard personal loan, where the borrowed amount is released after you pay off the loan.

The Bottom Line

We hope we've given you a good idea of what a bad credit score means and how you can take simple steps to improve your credit ratings. If you need to know how to get a loan with bad credit, don't despair. It is possible (and done all the time) to repair your credit rating and build it back up again. In the meantime, if you have bad credit, we can suggest some loan options for bad credit too. Since we specialize in dealing with customers with less than perfect credit ratings, we can together work to find the right loan for you when you need it.

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Harita Solanki

Harita Solanki is a passionate advocate for personal finance and believes in empowering individuals to take control of their financial lives.

Her expertise covers a wide range of personal finance topics, including budgeting, saving, credit, debt management, and retirement planning.

With over six years of dedicated experience in the finance industry, Harita has helped countless readers of CASH 1 Loans make informed decisions and achieve their financial goals.

As a dedicated writer, Harita has contributed to numerous financial publications, sharing her knowledge and insights to help readers navigate the complexities of personal finance.

Her writing style is approachable, concise, and tailored to the needs of everyday individuals looking to improve their financial well-being.