What Is a Bad Credit Score?
by Christy Bieber | April 18, 2019
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A credit score is an extremely important financial metric as it is used for a lot of different things. Lenders use them to decide whether to give you a loan and how much interest to charge. Companies, including utility companies, use them to decide whether to do business with you and what kind of deposit will be required. Landlords use credit scores when deciding whether or not to rent to you, and employers sometimes check credit history when you apply for a job.
Because credit scores are so essential to so many aspects of your life, you need to understand how they work. And, the first thing to know is, there's not just one credit score, but many. In fact, all different kinds of financial institutions and credit scoring agencies can create their own scoring models.
The two most widely-used credit scoring models, however, are FICO and VantageScore. These two scoring models both have a range from 300 to 850 (although older VantageScores ranged from 501 to 990). Scores at the higher end of this range are considered good, but scores at the lower end of this range are considered to be poor.
When you're working to build credit, it's helpful for you to know what's a good credit score and what's a bad credit score. This guide will help you to understand what credit scores are considered poor, and will provide some tips on how to improve a bad credit score and what to watch out for if your credit score is poor and you're trying to borrow.
What is a bad credit score?
Generally, credit scores between 300 and 579 are considered to be "very poor." If your score is within this range, you will have difficulty finding most types of financing. In fact, you may not even be able to qualify for special mortgages, such as FHA mortgages with a 3.5% down payment, that are designed to make it easier for people to buy a home for the first time.
Credit scores within the 580 to 669 range, on the other hand, are considered to be "fair." This means your credit is just OK. You'll probably be able to get most types of loans, but you may pay a higher interest rate because of your lower score.
Your credit isn't considered "good" until you have a score of at least 670 -- and it's not considered "very good" until your score hits 740. Finally, the very highest credit scores, those between 800 and 850, are considered exceptional.
What can you do to improve your score?
Unfortunately, it doesn't take much to drop your credit score down into the fair range. In fact, even a single late payment could reduce your score by more than 100 points. Repeat late payments or a history of bankruptcy, foreclosure, or court judgements is likely to result in a "very poor" score. Having too little credit could also result in your score being low, because lenders want to see a history of responsible borrowing.
If your score isn't as high as you'd like it to be, there are steps you can take to try to improve it. These include:
- Obtaining credit and using it responsibly -- You need credit in order to earn a good credit score. If a poor score prevents you from qualifying for most types of financing, look for a secured credit card you can use to improve your score.
- Paying your bills on time -- Payment history is the most important component of your credit score. You need to always pay on time. If you build up a positive payment history and don't have any charge-offs or judgements against you, your score should improve quickly.
- Paying down debt and keeping credit card balances low -- Your credit utilization rate is also very important to your credit score. Using 30% or less of your available credit is essential to earn a good score. So if you have $1,000 in available credit, you shouldn't charge more than $300 on your card. The lower your utilization ratio, the better your score will be.
- Avoiding taking out too many new loans -- Each time you take out a new loan, you reduce your average age of credit. This hurts your score, because a longer credit history is better. Applying for credit also results in an inquiry on your credit report, and too many inquiries can reduce your score because lenders worry you may be borrowing too much and become unable to pay all you owe.
If you can stick with having a few different types of loans that you pay on time, you should be able to build up your credit score. While it can take as long as 7 to 10 years for negative information such as foreclosures, bankruptcies, and late payments to fall off your credit report, older negative events won't hurt your credit as much if your recent borrowing behavior is good.
What to watch out for if you have bad credit
When you borrow with bad credit, you need to watch out for people hoping to take advantage of the fact you're desperate for financing. Make sure you understand the terms of any loan you take out. You don't want interest-only loans, for example, because these will have low monthly payments but you'll never pay the balance down. Bad credit loans with very high interest rates may also be inadvisable, as the interest may be so high that you struggle to make payments and your credit only gets worse.
You should also watch out for credit repair scams. There's no easy, fast way to fix your credit and anyone who tells you differently is just trying to take your money. Don't give it to them, or you'll have nothing to show for it -- and they could make your situation worse if they engage in dishonest tactics such as encouraging you to apply for credit under a new tax ID number instead of your Social Security number.
Don't be discouraged if you have bad credit
If you have bad credit, you can work to improve it. You just need to pay bills on time and work on paying down debt. It may seem hard, but all it takes is a little time and effort. It's worth doing, because improving your credit will make your financial life a lot easier.
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About the Author
Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.
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