What's a Bad Credit Score?
You credit score is important. Even if you're doing your best to live a credit-free life, the lack of a strong credit history can be potentially disastrous to your finances if you suddenly need to secure a loan or other form of credit. Your credit score can influence your ability to secure loans, get favorable interest rates, and even impact your housing and job prospects.
We talk a lot about good credit and how to make it happen, but what exactly is a bad credit score, and when should you start being concerned about your own score?
What's a Credit Score?
If you're new to the credit game, a credit score is a numerical representation of your creditworthiness. It's a three-digit number that lenders use to evaluate your ability to repay borrowed funds. The higher the number, the more lenders may feel they can trust you with their money. And the more they trust you, the less they'll try to offset the risk of lending you money with higher fees and interest rates.
The most commonly used credit scores are based on the FICO (Fair Isaac Corporation) model, which ranges from 300 to 850. The higher your score, the better your credit.
There are many credit scoring models out there, and they're used for different purposes. So you don't just have one credit score, you have multiple credit scores. For the most part these scores will all be somewhat similar, but it's good to remember that the number you see through a site like Credit Karma or your bank may not be exactly the same number that a lender may see while processing your loan application.
What Constitutes a Bad Credit Score?
A "bad" credit score typically falls below 620 on the FICO scale. Here's a breakdown of the FICO score ranges:
Excellent: 800+
Very Good: 740-799
Good: 670-739
Fair: 580-669
Poor: 300-579
VantageScore is another popular credit scoring model, ranging from 300 to 850. Their scale typically looks like this:
Excellent: 781-850
Good: 721-780
Fair: 661-720
Poor: 601-660
Very Poor: 300-600
No matter what scoring model you're looking at all, the lower you are on the scale, the worse your credit. And, more important, the lower the number, the less lenders are going to trust you with their money.
Why is a Bad Credit Score a Problem?
In your day-to-day life, your credit score may have little to no effect on your comings and goings. After all, it's a number that other people are looking at primarily to determine if they should lend you money. If you're not applying for loans, credit cards, apartments, or utilities, your score may not make a difference.
The problem is this:
- Eventually, you may need to apply for loans, credit cards, apartments, or utilities; and
- Turning a bad credit score into a good credit score takes time.
When lenders, landlords and others are making potentially expensive decisions that hinge on the question, "Can I trust this person to fulfill their financial obligation to me?" the first bit of information they will most likely look for is your credit score.
Because a credit score is a theoretically unbiased distillation of your financial reliability, applications may sometimes have a credit threshold, where you won't qualify if your score is below a certain number.
How Do You Fix a Bad Credit Score?
Only time and responsible credit usage can improve your credit score. There are no quick fixes.
- Pay your bills when they're due.
- Reduce your total debt.
- Reduce balances on individual credit cards.
- Avoid opening too many new accounts too quickly.
The solution is ultimately simple, but not especially fast. That's why it's a good idea to start working on your credit immediately. Even if you don't plan on taking out a loan any time soon, check your credit reports and your credit scores. Focus on making consistent payments and reducing debt.
If you need more direct assistance understanding your credit report and coming up with a strategy to improve your credit, we offer one-on-one credit report reviews. Let an expert walk you through your report and provide explanations, education, and advice to help you reach your credit goals.
