Your credit score is a succinct way for both you and potential lenders to check in on your borrowing history. When you apply for a loan, move to a new apartment, or even search for a job, your credit report helps companies understand how you’ve handled credit and contracts in the past.
What happens when you’re hit with a lower score than you’d like, and what constitutes a bad credit score in the first place? Just like any report, credit scores change and refresh each time you take out a new loan, pay down your balance, or make a large life decision. This allows you to check in on your report and redirect your habits to potentially raise your score whenever you like. Reports alert you of fraudulent activity, forgotten bills, or accounts that weigh you down. Keeping your credit score in a healthy place opens doors to greater opportunities in the future.
How do I check my credit report? And what is considered a bad credit score? Many people wonder when they should take action on their credit health and when to consult a financial advisor for advice on how to handle a particularly troublesome credit history.
How Is Your Credit Score Determined?
Two common credit scoring systems determine your credit score by using a collection of data gathered by credit collection agencies. You may have heard the term FICO and VantageScore tossed around when speaking about credit reports. Though the two scores are similar, they are compiled by different agencies and feature a slightly contrasting scoring method. Both scoring systems range from 300–850, with 850 being the highest credit score possible. FICO scores are gathered by the Fair Isaac Corporation using information from the three most common credit data collection agencies — Experian, Equifax, and Transunion. VantageScores utilize internal financial data gathered by these collection agencies themselves. You can access your VantageScore through services provided by Turbo and Mint.
A “bad” score is never determined by the credit reporting agencies themselves. These agencies simply gather information from financial institutes that lend you money. Their systems collect important data from your credit card companies, banks, and public records to build a report readable by you and your potential lenders. The lenders themselves make the call on what is considered a good or bad credit score depending on your inquiry. The data is used to determine how likely and how quickly you’ll be able to pay back the requested loan.
Credit scores compile a range of information from your financial history, not only your balances and charges. Credit reports include:
- The age of each account and borrowing history
- Types and varieties of credit accounts — preferably a mix of revolving and non-revolving accounts
- History of bankruptcy, tax liens, or collection agency intervention
- Late or missed payments
- Credit card and loan utilization rates
- History of lawsuits or notable public records that could affect your creditworthiness
- Number of hard inquiries in the past three years
What Is a Bad Score?
When should you be concerned about a potentially bad credit score? After all, whether a score is considered “bad” or not is ultimately up to the lender. Let’s go through the different levels of FICO rankings and how each range affects your financial health.
FICO breaks down credit ratings in the following categories:
- 300-579 Very Poor
- 580-669 Fair
- 670-739 Good
- 740-799 Very Good
- 800-850 Excellent
Very Poor: If you find yourself in the lower credit score range, you may not qualify for the majority of standard credit cards, mortgages, or loans. If you do, you may have to a pay a deposit, annual fee, or agree to a high-interest rate for approval. It is possible to improve your credit score as you use these accounts, but it’s important to only apply for credit if you’re certain you’ll be able to make payments and pay off full amounts.
Fair: Though this range can still keep you from getting approval on a large mortgage or car loan, you may get approval for credit cards with similar caveats as above. Higher interest rates and fees ensure you’re more likely to only borrow what you’re able to return.
Good: A credit score of 700 is higher than nearly half of the borrowers in the US. You may not be approved for some of the most highly sought-after credit cards, but a high income and clean credit history paired with this score ensures many loan and account benefits otherwise.
Very Good: A score in the second-highest range depicts a clear and consistent payment history, manageable utilization rate, and solid credit account length. With this score, there may be stronger chances of receiving favorable interest rates, high-end credit cards with perks and signing bonuses, as well as impressing potential employers.
Excellent: Reaching this nearly perfect or perfect credit scores comes from diligent borrowing and repayment habits, a diverse collection of accounts, and proper management of your debt utilization. At this level, borrowers are often ensured the best rates and offers as well as high credit limits.
What Are the Consequences of a Bad Score?
Though it’s possible to improve a bad credit score, there may be some consequences before it rises to a higher level. Potential lenders, landlords, and employers check out your score to see how well you manage money and are able to stick to contracts. A low credit score may lead to being turned down for credit cards, car loans, and mortgages, keeping you from building up better credit in the first place.
If you’re renting a new apartment, landlords often check your credit score to ensure you’ll make rental payments on time. Bad credit scores may lead to rejection in a competitive neighborhood or require you to bring on a co-signer to the lease.
Credit scores can even affect the way prospective employers view those they’re considering for a job or second-round of interviews. A bad credit score in the finance or management industry could trigger a red flag for organization and management of company assets.
4 Ways to Improve Your Credit Score
Credit Building Loans
Smaller banks and credit unions offer what are sometimes referred to as “fresh start loans” for those with poor or little credit history. Smaller sums that fit within your monthly income are deposited into an interest-bearing savings account, barring you from access until you pay back the loan. Credit building loans are a way to prove that you can borrow money and pay it back on schedule. This, in turn, boosts your score and allows you to seek other means of borrowing in the near future.
Secured Credit Cards
Helpful for reestablishing credit or building up rapport for the first time, secured credit cards require the borrower to pay the requested amount in cash beforehand. This way, you can still use a credit card for things like renting a car or booking a hotel room, but the account is already backed by cash. Once you’ve proven you can pay amounts back regularly, the credit limit may rise along with your score.
Become an Authorized User
If someone in your family has strong credit habits, you can build your own score by becoming an authorized user on their account. This practice links you with their strong credit accounts, creating a trail of responsible spending and repayment practices until you’re ready to apply for your own card.
Smart Financial Habits
In the long run, creating healthy and sustainable financial habits is the best way to keep your credit score stable. Avoid applying for a loan or charging something to your credit card without a plan to pay off the amount in the immediate future. Savings and emergency accounts, however small, also keep you from having to reach for your credit card when surprise charges arise. Always keep on track with payments by designing a financial calendar with weekly alerts for staying on schedule or consider setting up automatic payments.
A good or bad credit score is determined by those looking to trust you with a loan, a line or credit, or even a new job. The FICO and VantageScore systems suggest brackets for different levels of credit, but each situation is unique. While a landlord may take other factors into account for renting out an apartment, a mortgage lender may put a larger weight on your credit score, especially when borrowing a large amount. It is always safest to strive for a higher score if you’re concerned about your history holding you back in making life decisions.
Most importantly, always strive to find the ultimate level of credit stability by improving the overall way you view borrowing money. Tools such as loan calculators can help create debt payoff strategies while credit-building loans and secured credit cards demonstrate good borrowing habits over a period of time. Credit scores are meant to fluctuate as borrowers improve their habits and find what systems work for them. Even if you find yourself with a lower credit score now, there are plenty of ways to set your score on the right track for tomorrow.