What is considered a bad credit score
Covered in this article:
What is a credit score?
How is a credit score calculated?
What is considered a bad credit score?
How can your credit score affect you?
How can your credit score be improved?
Prepared by: Ellis Riles Edited By N Taylor
Whether you’re thinking of applying for a car, home loan, or simply just want to know for your own reference, you may begin to ask yourself a number of questions regarding your credit score. What is your score? How do you find out what your score is? Why is it important? and what is considered a bad credit score? are just a few that may spring to mind. Having financial knowledge around credit scores is extremely important in beginning a journey of financial understanding that can unlock many of your lifetime goals, such as homeownership, for example.
Whilst some people may gain their financial understanding after already accumulating a bad credit score, it is never too late to begin learning, improving, and gaining the credit score you need to help achieve your dreams. Expertise like ours at O’rise Finance Credit Repair can help individuals who are seeking a way to improve their bad credit scores but are unsure of exactly the best ways to do so. Beginning a journey of excellent credit begins with becoming informed. Read on for more information regarding credit scores and how to improve bad credit.
What is a credit score?
A credit score is a three-digit number that is calculated based on the history of your financial habits, in simple terms, how well you save, spend and pay your bills – as well as other financial histories like how many accounts you have open. It represents the creditworthiness of you as an individual. The information is usually sourced from credit scoring models and credit bureaus – more about those later. It is used by lenders such as banks or credit card companies to assess the potential risk posed by loaning you money. It is a good idea to keep track of your credit score as early as possible in order to make smart financial decisions.
How is your credit score calculated?
Within the US, there are three leading credit report agencies, Experian, Equifax, and Trans-union. These agencies report, update and store consumer’s credit histories. Between the agencies, there can be differences in the information that is collected, however, there are five main factors used to calculate your credit score.
1. Your payment history
2. The total amount of debts you owe
3. Length of credit history
4. Types of credit
5. New Credit
According to the FICO credit scoring system:
35% of a credit score is made up of payment history and is a demonstration of whether you pay your bills on time.
30% is made up of total amounts owed. This takes into consideration the percentage of credit available to a person and how much of that credit the person is choosing to use. This is called credit utilization.
15% of the credit score is made up of a length of credit history. Longer credit histories are considered less risky for lenders than short credit histories, as there has been more data collected to evidence how you control your finances.
10% is made up of the type of credit and displays if a person has a mixture of installment credit, for example, home loans or car loans, and/or revolving credit e.g. credit cards.
10% of the credit score is made up of new credit. These factors in things such as how many new accounts a person has, how many new accounts they have applied for recently. This will result in credit inquiries and look into when the most recent account was opened.
What is considered a bad credit score?
On the FICO credit score system scores range from between 300 – 850. Below is a table describing how they are ranked from very poor to excellent
300 to 579
580 to 669
670 to 739
740 to 799
800 to 850
It is worth noting 90% of credit checks use the FICO credit score system.
The Vantage Score system has the same range from between 300 to 850 but slightly different score rankings.
300 to 499
500 to 600
601 to 660
661 to 780
781 to 850
Considering both the FICO and Vantage Score system a score under 600 could be considered as having bad credit and maybe something you would want to rectify with careful financial decisions and expert advice.
How can a bad credit score affect you?
There are numerous ways in which having a bad credit score can affect your life and there are many reasons for wanting to change your credit score rating, to enable improvements to your day to day life. Here are some of the main ways that having a bad credit score can affect you.
Rejection for a loan / credit
Acquiring a bad credit score can lead to a reduced approval rate when you apply for a car loan, mortgage, or credit card. Many banks such as Bank of America, Citi, and Discover have high standards when choosing who is successful in securing a loan. This means that achieving many of your lifetime goals could be made extremely and unnecessarily difficult due to bad credit.
For example, if you wanted to remove yourself from debt using a balance transfer card, such as the Discover it® Balance Transfer, you would only be eligible to get the card if you have a good or excellent credit score.
Furthermore, if you are a jet setter who likes to earn rewards or become the recipient of luxury travel perks, it is near impossible to find a card that accepts bad credit. Cards such as the Capital One Savor Cash Rewards Credit Card offer 4% cash back on dining and entertainment, 2% on grocery stores, and 1% on other purchases. Bonuses also include one-time cash bonuses of $300 after $3000 has been spent in the opening three months of the account. These credit cards would not be available for someone with bad credit.
Poor loan terms and conditions
If you do manage to secure yourself a loan whilst having a bad credit score, you can expect the loan you gain to have worse terms and conditions in comparison to those applicants with good credit. This can include high-interest rates and larger annual fees.
An example of this is payday loans. They may be an easy way to acquire fast cash if you are really in need, however, they can come with terms that state that APR can rocket to sky-high rates as much as 400% all the way to 700%. A real-time example of this would be a choice between a $10,000 personal loan from Wells Fargo or a loan from ‘Smith’s title loan’. Reading the terms and conditions will make it extremely clear that a mainstream lender will give you a much better deal regarding interest and even payback time. Yet if you have bad credit, you may feel your only option is to accept these terms, which is not the case. A credit score can always be improved.
Another example would be home loans. Imagine you are applying for a home loan and you have a FICO of 620. For a $300,000 house, you might pay around 4.8% in interest with the current rates. A potential buyer with a score that is considered to have good or excellent credit (scoring between 760 and 850) would be offered APR at around 3.2%. This is only a 1.6% difference and may appear to only affect the house buyer slightly. This is not the case. A lower credit score would increase your home loan payments by around $275 per month – that equates to $99,000 over a 30-year term. A large difference!
Insurance premiums increase
If you do become a car or homeowner, you will want to take out an insurance policy. Across most states in America, credit-based insurance scoring is allowed, and this means that a bad credit score could increase the amount you pay for your premium. To check your credit-based insurance score, request a report through LexisNexis
Limited credit card choices
As highlighted earlier, having a bad credit score also means that the range of credit cards you can qualify for is limited. The main options for cards that you will have will be secured cards e.g. Discover it® Secured or the Capital One® Secured Mastercard®. This can help individual rebuild credit, but you are required to make a security deposit – which is usually around $200. This allows you to receive an equivalent line of credit.
Bad credit scores do not mean you will not be able to get a credit card. Some issuers look at wider factors than just score, taking into consideration different factors like income and monthly house payments.
Difficulties in renting an apartment
According to Experian for the most part, a credit score of 620 is the minimum you need to qualify for an apartment.
This obviously varies between landlords and property management companies but knowing you have a score over 700 means you can feel relief when trying to find an apartment to rent. If you do have a bad credit score, you will always have the option of a co-signer or paying a security deposit. It is not impossible to rent an apartment with bad credit, but it will make it much easier with a good credit score.
All of these factors delay building wealth and even may lead to stopping you achieve your financial goals. Improving your credit score is the best option you have in order to aid long-term financial security.
How can your credit score be improved?
Once you are aware of how your credit score can affect your life, you may feel the need to improve your bad credit score. Here at O’rise Finance Credit Repair, we welcome customers who feel they would like to gain professional help in improving their bad credit, but here are some tips to start you off on your journey towards excellent credit.
Review your credit score.
If you are aware of your bad credit score, make the effort to check your score and identify why is rated this way. Perhaps you have some outstanding payments or carried a bill over its due date. Also, make sure there are no mistakes made on your record that could affect your score.
To build up a fair, good, or excellent credit score you need to ensure you:
Always pay on time.
As seen in the chart earlier, when on-time payments contribute most to creating your credit score, you need to ensure you always make on-time payments. If you are likely to forget opt for reminders through your card issuer or cell phone calendar.
Pay in full.
Allowing your bills to be paid in full and not just scraping the minimum payment consistently (every month) will reduce your utilization rate. This is the percentage of your total credit limit you are using. If you are wanting to calculate your utilization rate, divide your total credit card balance by your total credit limit.
Limit the number of accounts you open at any one time.
Every time you apply for credit, be that in the form of a loan or credit card, and regardless if you are then approved or denied, an inquiry appears on your credit report. You may not know this, but inquiries temporarily reduce your score by around 5 points. These will rebound but it may take a few months. It is better to search the marker with prequalification tools that don’t create any effect on your credit score.
Keep credit cards that are unused open.
Go online to access and check each of your cards. For each, ensure that there is no balance and that your address, email address, and other contact information are up to date. Make sure there are no autopay plans set up on any of the cards. Set yourself a reminder to check all cards every six months or every year to make sure there have been no charges on them and that nothing unusual has happened.
Finally, take the first step in improving your credit score by checking what exactly that score is. There are dozens of free credit score services available that offer your free FICO Score or Vantage Score. Here are five of the most popular.
Experian (FICO Score)
Discover Credit Scorecard (FICO Score)
Credit Wise from Capital One (Vantage Score)
Annual credit report