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Based on the FICO® Score☉ range of 300 to 850, a credit score below 670 is considered to be either fair or bad. Lenders often refer to this group as "subprime," which indicates borrowers who may have a hard time repaying a loan.
A bad credit score can be compared to a bad grade in school, a failing grade on a driving test, or getting bad results for any other type of assessment that uses a numerical ranking to judge performance. Getting the news that your credit scores might be less than stellar can be disheartening, but the good news is you are not stuck with your bad credit scores. Make improvements to a few key credit management habits, and over time, your score will improve.
What Is a Bad or Poor FICO® Score?
A FICO credit score is a number between 300 and 850 designed to indicate the likelihood that a consumer will repay a loan on time. The higher number, the greater the consumer's creditworthiness. This number is created from account and payment information on a user's credit report. A score between 300 and 579 is considered to be very poor, while one that's between 580 and 669 is considered fair.
|Credit Score||Rating||% of People||Impact|
|300-579||Very Poor||16%||Credit applicants may be required to pay a fee or deposit, and applicants with this rating may not be approved for credit at all.|
|580-669||Fair||18%||Applicants with scores in this range are considered to be subprime borrowers.|
|670-739||Good||21%||Only 8% of applicants in this score range are likely to become seriously delinquent in the future.|
|740-799||Very Good||25%||Applicants with scores here are likely to receive better than average rates from lenders.|
|800-850||Exceptional||20%||Applicants with scores in this range are at the top of the list for the best rates from lenders.|
What Is a Bad or Poor Vantage Score?
VantageScore is another credit scoring model that also uses data from consumers' credit history to help predict their likelihood of repaying a loan. Like FICO scores, VantageScores also generally use the range of 300 to 850. With the newer VantageScore models, a score of 601 to 660 is considered to be fair, while a score of 500 to 600 is poor. Scores between 300 and 499 are very poor.
|Credit Score||Rating||% of People||Impact|
|300-499||Very Poor||5%||Applicants will not likely be approved for credit.|
|500-600||Poor||21%||Applicants may be approved for some credit, though rates may be unfavorable and with conditions such as larger down payment amounts.|
|601-660||Fair||13%||Applicants may be approved for credit but likely not at competitive rates.|
|661-780||Good||38%||Applicants likely to be approved for credit at competitive rates.|
|781-850||Excellent||23%||Applicants most likely to receive the best rates and most favorable terms on credit accounts.|
What Affects Your Credit Score
There are many—in fact, hundreds—of credit scores that lenders use to help make lending decisions. Several factors affect those credit scores. But in almost all credit scores, the two factors that affect your credit scores the most are your payment history and credit utilization rate.
- Payment history: With the FICO credit scoring models, your bill payment history makes up 35% of your credit score. Consistently making payments on time helps your score, while missing payments will hurt it. Furthermore, the longer your payment is late, the more your score will suffer. And recent late payments have a greater effect than those that happened further in the past.
- Amounts owed: FICO scores consider how much of your available revolving credit you're using at any given time, also called your credit utilization ratio, for 30% of your score. Your credit utilization ratio is based on the amount you owe on revolving credit such as credit cards compared with the total amount of credit that you've been extended. To calculate your ratio, divide all your revolving credit balances by your total credit limits on those accounts. The more you owe relative to your total credit limit, the more it could lower your credit score. In general, always try to maintain a ratio of 30% or less to avoid hurting your score. For top credit scores, keep your utilization under 6%.
There are three other factors that affect your credit score to a lesser degree.
- Length of credit history: This factor makes up 15% of your credit score and is based on the average length of time your accounts on your credit report have been open. The older your credit accounts are, the better it will be for your credit score.
- New credit: When a consumer applies for many new credit accounts in a short period of time, it can be seen as an indication of possible financial problems. This factor makes up 10% of a FICO score.
- Credit mix: The FICO scoring models also consider the different types of credit used by a consumer. A good mix of installment credit (such as home mortgages, student loans and auto loans) and revolving credit (such as credit cards and lines of credit) shows that you can manage different types of accounts, and this usually helps your credit. However, FICO doesn't recommend that consumers take out additional types of loans in an effort to improve their scores.
Finally, certain types of negative information can adversely affect a credit score, such as bankruptcies, foreclosures and collections.
How a Poor Credit Score Can Affect You
Having a bad—or low—credit score can affect you in several ways:
- Higher interest rates: Because lenders see those with bad credit as a higher risk, they'll charge interest rates accordingly. Having a poor credit score will result in a higher interest rate on your home mortgage, for example, which can cost you tens of thousands of dollars over the life of the loan.
- Trouble getting a mortgage: Mortgages are very large loans, so understandably, lenders want to be confident you will not default on them. While some will simply charge higher interest rates, others may reject your application altogether.
- Risk of being denied credit: Lenders are more likely to reject your loan application if you have a history of managing credit poorly.
- Difficulty getting approved for an apartment or cellphone contract: Again, it all comes back to risk. Providers don't want to lose money by taking on a risky customer.
- Risk of being turned down for a job: While employers can't access your credit score, they can request your credit report, and having negative information there could put you at risk for being turned down for a job. That's particularly the case for positions that have financial responsibilities.
- Difficulty obtaining a small business loan: If you run a small business, having poor credit could make it difficult or impossible to borrow money to help your company.
Finally, those with bad credit will likely have difficulty obtaining a conventional car loan and may have to utilize alternative, and more expensive, financing options.
How to Improve Bad Credit
There is not a simple answer to this question because every person's situation is unique. But under most circumstances, if your scores are low but you start to take some positive action, you can see results in about two to three months. Here are some ways to improve your credit scores:
- First, check your credit score to see where it actually is. Experian offers you a FICO® Score for free so you can see how you might look to a lender.
- Pay all of your bills on time. Your payment history is the most important factor in your FICO® Score, so making sure you pay all of your bills on time should be the highest priority. Try setting up automatic payments and payment reminders to help you to avoid late payments.
- Pay down revolving debt such as credit cards. This decreases your credit utilization rate and could help your scores.
- Become an authorized user on a family member's credit card. You will have to find a trusted partner for this, as the account owner is responsible for paying the bill for this account.
- Get a secured credit card. A secured credit card requires you to deposit money into an account which is used as collateral for a credit card and typically serves as your credit limit. The benefit for you is that most secured cards report your payment history to the three national credit reporting agencies—Experian, Equifax and TransUnion (confirm this with the card issuer when you're researching secured cards). If you maintain a positive payment history, this account will help you build your credit history and likely improve your credit score.
- Try Experian Boost™† . This free program can help improve your FICO® Score by allowing you to add positive payment information from the utility and telecom bills you pay every month to your credit report, often immediately boosting your scores.
- Apply for a short-term loan. A short-term loan is an unsecured loan that typically needs to be paid back in less than a year. Short-term personal loans are available in a variety of packages, and the devil is in the details with payment terms. Read agreements carefully.
- Apply for a credit-builder personal loan. A personal loan is an installment loan that typically has a lower interest rate than credit cards and can help you make a big purchase or it can be used to consolidate multiple credit card debts into a single, lower-cost monthly payment. A credit builder personal loan requires a refundable security deposit.
- Try to fix errors in your credit report. If there is fraudulent or inaccurate information on your credit report, then you can dispute it with the credit bureaus.
The Bottom Line
Having bad credit presents serious problems with your personal finances, so it's important to know your credit report and credit score. Thankfully, there are many steps you can take to improve your credit, and you can start to see results within just a few months. By taking the time to understand how credit scores work, and what causes bad credit, you can manage your credit responsibly and enjoy additional financial opportunities as you improve your credit score.