If you have bad credit, you know how it can get in the way of living a good life. Bad credit makes many common financial activities more difficult, whether you’re opening a new credit card or taking out a first mortgage. If you have poor credit, you might get stuck with lower credit limits and higher interest rates — and bad credit might even prevent you from getting that new job.
What is considered a bad credit score? Why do you have bad credit, and what can you do to fix it? Let’s take a closer look at how credit scores work, what factors go into a bad credit score and how you can improve your credit score and access better financial opportunities.
Learn more: How to check your credit score
What is a bad credit score?
Credit scores are ranked along the following metric: Excellent (sometimes called “Exceptional”), Very Good, Good, Fair and Poor.
Here’s how the FICO credit scoring system ranks credit scores:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
A bad credit score is somewhere between 300 and 579 using the FICO system, which is one of the most common credit scoring systems. In fact, according to myFICO.com, over 90 percent of top lenders use FICO to help them make lending decisions.
In 2018, the average FICO credit score was 704 points. If you have bad credit, your credit score is significantly lower than the average. However, that doesn’t mean that you have to let your bad credit hurt your finances long-term. Credit scores aren’t set in stone — and once you understand how to improve your credit, you can begin working your way toward a perfect credit score.
How does a bad credit score affect your credit?
A bad credit score comes with a high cost. If your credit score is below 580, it might be harder for you to open a new credit card, get a mortgage or rent an apartment. Poor credit could even hurt your chances of getting a new job if your employer runs a credit check as part of the hiring process.
In many cases, lenders will be less willing to offer loans or other lines of credit to people with low credit scores. If you do receive a loan or a credit card, you might end up paying higher interest rates than people with higher credit scores. That said, you still have options. You can apply for one of the best credit cards for bad credit or put a deposit on a secured credit card and begin rebuilding your credit score. If you need to take out a loan, here are some bad credit personal loans to consider — and if you’re shopping for a mortgage, here’s our advice on how to get a mortgage with bad credit.
How is a bad credit score calculated?
Your credit score is based on the information in your credit report. Each of the three major credit bureaus (Equifax, Experian and TransUnion) builds a unique credit report based on the way you use the various credit accounts under your name. If you pay your credit card bills on time every month, that shows up on your credit report — but if you miss a credit card payment, that shows up on your credit report as well.
Here are the five factors that make up your credit score, according to the FICO model:
- Payment history: whether you make regular on-time payments on your credit accounts (35 percent).
- Credit utilization: your debt-to-credit ratio, or your current credit balances compared to the amount of credit available to you (30 percent). To keep your credit utilization from negatively affecting your credit score, try to only use between 10 and 30 percent of your available credit.
- Credit history: the length of your credit history — that is, how long you’ve successfully maintained open credit accounts (15 percent). This is why it’s a good idea to keep old credit cards open, even if you’re no longer using them.
- Credit mix: the mix of credit in your account (10 percent). Having multiple types of credit under your name, such as a credit card and a car loan, can boost your credit score. Lenders like to see that you can manage both revolving credit and installment loans.
- Credit applications: how often you apply for new lines of credit (10 percent). Every time you apply for a credit card or loan, a lender does what’s called a “hard pull” on your credit report. This credit inquiry signals that you’re shopping for new credit — and if you’re shopping for too much new credit at once, it’s a signal that you might be planning to take out debts that you can’t pay off.
It’s possible to have a high credit score even if you are weak in one of the five factors. If you are relatively new to credit, for example, you might not have an extensive credit history — and you might only have one or two credit cards under your name, which means you don’t have much of a credit mix yet. However, if you make on-time payments, keep your balances low and avoid applying for too much credit at once, you can still build and maintain a good credit score.
How can you improve a bad credit score?
There are many ways to improve a bad credit score. Your first step? Making on-time payments on all of your credit accounts every month. Since payment history is the biggest factor that goes into your credit score, it’s important to prioritize those on-time payments — even if you can only make minimum payments right now.
Once you’ve gotten into the habit of making regular on-time payments, see if you can start paying off your balances. Getting out of debt can be hard, but any progress you make on your outstanding balances will lower your credit utilization ratio and help boost your credit score.
As your credit score starts to improve, you might want to consider asking for a credit limit increase or applying for a new credit card. Both of these options will increase the amount of credit available to you, lower your credit utilization ratio and help your credit score — as long as you don’t turn your new credit into new debt.
If you have so much debt that it feels overwhelming, you may need to ask for help. Look for a reputable credit counseling service that can work with you to create a plan to pay down your debts and get your credit score up.
Here’s one more tip: Some people with bad credit have what are called “derogatory marks” on their credit report. These represent major financial setbacks, such as bankruptcies or foreclosures. Derogatory marks can seriously hurt your credit score, but they don’t last forever. Most derogatory marks and old debts fall off your credit report after seven years, and you can start rebuilding your credit right away.
Now that you understand what a bad credit score is and what factors make up your credit score, you can use this knowledge to boost your credit score and begin your journey toward good credit. Bad credit can make it harder to complete everyday financial activities like applying for a new credit card, but a bad credit score doesn’t have to be permanent. Keep practicing good credit habits like making on-time payments, and you’ll likely start to see your bad credit score improve.