What you need to know about bad credit

Man with credit card at laptop

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Whenever the terms “good credit” or “bad credit” are discussed, it’s in reference to credit scores. One popular type of credit score — known as a FICO score — ranges from 300 to 850. Scores on the higher end of the scale are considered good to excellent, while scores on the lower end of the scale are fair to poor.

Still, there’s a lot of gray area when it comes to good credit, average credit and poor credit.

What is a bad credit score?

According to myFICO.com, FICO credit scores are grouped into five different categories:

  • Exceptional credit: 800+
  • Very good credit: 740 to 799
  • Good credit: 670 to 739
  • Fair credit: 580 to 669
  • Poor credit: 579 and lower

Recent data from credit reporting agency Experian shows that the average FICO credit score among American consumers is 703 for the second quarter of 2019. This means the average person has good credit according to most lending standards.

However, the average FICO score varies greatly based on the age group. Recent stats report the following average scores this year:

Age group Average FICO score
20 to 29 662
30 to 39  673
40 to 49 684
50 to 59 706
Ages 60+ 749

How bad credit affects interest rates and loan terms

If you think your credit score is just a number, think again. Bad credit can come with real consequences that translate into higher interest rates and potentially missing out on life’s biggest milestones.

For example, say you have bad credit and want to get a loan. You’ll likely be stuck paying the highest interest rate available as well as additional fees. If you want to purchase a home or rent an apartment, bad credit could prevent you from even being approved.

Bad credit loans, which are geared to consumers with poor credit, come with lower odds for approval and extremely high rates and fees. Depending on where you get your personal loan, you might have to pay an APR as high as 35.89 percent, as well as an origination fee as high as 6 percent of your loan amount.

The same applies when it comes to credit cards for bad credit. Not only do cards for bad credit come with few perks or benefits, but you may be required to pay extra in application fees and interest as high as 26.99 percent

If you have bad credit and need an auto loan, you’re bound to encounter more of the same. Although auto loan rates for consumers with good credit can be as low as 4.19 percent, rates can skyrocket up to 20 percent for consumers with lower credit scores.

Which is worse — bad credit or no credit?

If you don’t have any credit history at all, you may be wondering how this will affect various aspects of your life. The reality is, having no credit puts you in a similar position to someone with poor credit.

With no credit history to speak of, you’ll have trouble being approved for any type of unsecured loan or credit card. If you do manage to get approved for a credit card or loan, you probably won’t be approved to borrow very much and will likely receive a high interest rate.

Fortunately, there are ways to start building credit from scratch, including signing up for a secured credit card. With a secured credit card, you’ll put down a cash deposit that secures a new line of credit in the same amount. From there, you’ll be able to make purchases and monthly payments toward your balance with the added benefit of having your activity reported to credit bureaus. As you build up a credit history with responsible credit use, your score should improve over time.

Will bad credit show up on a background check?

Some consumers with bad credit wonder if their shaky financial past will show up in background and employment checks. Unfortunately, they’re right to worry.

While employers are able to check your credit, they are not able to see your actual credit score. Instead, they see a version of your credit report that lists information such as the amounts you owe and your payment history.

How to repair bad credit

If bad credit is weighing you down, there are some steps you can take to fix past credit mistakes and set yourself up for a brighter financial future. Here are some moves to consider making right away:

  • Apply for a secured credit card that will report your activity to the three credit reporting agencies. You’ll normally need to put down a cash deposit as collateral, but your deposit will be returned to you when you close your account in good standing or upgrade to an unsecured credit card.
  • Apply for a personal loan for bad credit. While you’ll pay a higher interest rate, you’ll have the opportunity to make on-time payments and prove your creditworthiness over time.
  • Finally, make sure to look over your credit report for errors and incomplete information. If you find incorrect information, disputing the data with the reporting agencies can make a huge difference in your score. You can get a free copy of each of your reports once per year from AnnualCreditReport.com. (See also: Millions of Americans have errors on their credit reports, do you?)

The bottom line

Bad credit isn’t a life sentence. If you’re willing to do the work, you can improve your score. Figure out how you wound up with bad credit in the first place and commit yourself to changing your score’s course.

Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson began her career working in the funeral industry, which may make you wonder why she works in personal finance now. Yet, the funeral industry taught the author everything she needs to know about the value of one's money and time. Johnson left the mortuary business a decade ago in order to explore her passion for personal finance and travel the world, and since then, she and her husband have built a debt-free lifestyle that has them on the path to retire very wealthy in their 40s. Holly's love of budgeting also led to the creation of her debt payoff book, “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love."