Bad Credit Scores And How To Fix ‘Em
Your credit score is a trustworthiness rating, based on your credit report. It falls somewhere between 300 and 850 and is calculated by a credit scoring model (FICO and VantageScore are the most well-known). Equifax—one of the three major credit-reporting agencies—explains: “Lenders, creditors, and others often use credit scores to help them determine the likelihood that someone will pay back what they owe on transactions, such as loans, credit cards, mortgages, utilities, and even apartment rentals.” With a low score, you’re less likely to qualify for a personal loan, credit card, or any of these things.
Approximately 33% of consumers in the U.S. have a fair to poor credit rating, which has a significant negative impact on their financial and personal lives. Landlords may not rent to a tenant with poor credit, and some employers will check for a bad credit score before they offer you a job. These are just some of the reasons to keep your rating as high as possible or, if it’s low already, to take steps to improve your credit score.
What is a Bad Credit Score?
When someone has a bad credit score, it’s often because they’ve been paying bills late or have missed payments altogether on a loan or credit card. Also, you can end up with a low score if you simply don’t use the credit that’s available to you. Either way, you’re not demonstrating to lenders that you can borrow and repay money responsibly.
The various credit scoring models categorize “bad” credit score ranges differently. Generally, if you’re in the 300 to 670 zone, it could be harder for you to get approved when applying for a loan or credit than it is for someone with a higher score.
For example, let’s say you have a credit score of 580 and need a personal loan to cover a medical emergency. A loan company might reject your application because it thinks you’re less likely to pay back the money you want to borrow. And, if you do find a lender who accepts your application, you’ll probably pay a high-interest rate on your monthly repayments because the lender needs to cover the greater risk of taking you on.
How Credit Scores Are Calculated
Any time you borrow money, whether it’s an auto loan, mortgage, or on a credit card, the lender sends a report to one or more of the three major credit bureaus: TransUnion, Equifax, and Experian. From there, a credit-scoring model calculates your score based on a number of factors (we’ll look at these a little later).
Scores range from 300 to 850. The higher yours is, the more likely you are to get approval for new credit and to receive favorable interest rates and terms. FICO is the most widely recognized credit score model. Its credit ratings are as follows:
- Poor: 300–579
- Fair: 580–669
- Good: 670–739
- Very good: 740–799
- Excellent: 800–850
Most lenders rely on FICO, but another influential scoring model is VantageScore. Created in 2006 by the credit bureaus themselves, VantageScore is FICO’s competitor.
Here’s how VantageScore categorizes its credit ratings:
- Very poor: 300–499
- Poor: 500–600
- Fair: 601–660
- Good: 661–780
- Excellent: 781–850
What Affects Your Credit Score?
Credit ratings differ for each model and, in fact, you may even receive a slightly different score from each credit bureau. But the things that affect your credit score remain the same everywhere.
Here are the top five score-influencing factors:
Your payment history
This has the biggest impact on your credit score and makes up 35% of your rating. Credit-scoring models analyze your payment behavior to check whether you’re paying your bills in full and on time.
If your debts mount to the point where you can’t realistically manage repaying them, you may have to declare bankruptcy. This has a punishing effect on your credit score and could stay on your report for up to 10 years. If you’re in this situation, find out how to remove a bankruptcy from your credit report.
The amount you owe overall
Your debt accounts for 30% of your credit score. If you’re using a lot of credit, lenders may assume you’re overextended and more likely to miss payments. But, the mere fact that you owe a lot doesn’t automatically reduce your credit score: Your credit utilization ratio, which compares your total current balance to your total credit limit, is the determining factor.
Your credit history
Your credit history (how long you’ve used credit) affects 15% of your credit score. Scoring models analyze the age of your oldest and newest accounts and the average age of all your accounts.
If you don’t have any credit history, you’re considered “credit invisible.” About 26 million Americans fall into this category. This makes it difficult to establish new credit (lenders prefer to see a long history of responsible credit use), but there are ways to rectify this situation—we’ll discuss them later.
Your credit mix
The variety of the loans you’ve taken out makes up 10% of your credit score. Lenders like to see that you’re successfully making repayments on a mixture of debts that includes some installment loans (such as a student loan or mortgage) and some revolving credit from credit card issuers.
Recent credit applications
New credit accounts on your report influence 10% of your credit score. When you’re applying for a loan or a new line of credit, the lender runs what’s called a “hard inquiry” on your credit report. Each hard inquiry lowers your credit score. Furthermore, opening several accounts in a short period of time lowers the average account age on your credit history. This can reduce your credit score, too.
There is a silver lining. If a lot of hard inquiries appear on your account within 20 to 45 days, scoring models will merge them together so they appear as just one. This helps if you’re shopping around for a fair deal on a loan.
The Dark Side Of Credit—Cons
Very good or excellent credit scores lead to opportunities—they get you lower interest rates, higher credit limits, and better car insurance premiums. You may be surprised, on the other hand, by the many ways in which bad credit negatively impacts your financial goals and everyday life. Here’s what you may face with a bad credit score:
With a poor credit rating, you present a greater risk to lenders. You’ll pay higher interest rates on their loans so that they have some level of financial protection.
Fewer favorable deals and offers on credit cards
Some credit card companies will automatically reject you if you have a bad credit score. If a credit card issuer does accept you despite a lower credit rating, you won’t receive the same rates, credit limits, and repayment terms (how long you have to pay the money back) that someone with a higher score would.
Extra utility deposits
Gas, electric, and water companies may require security deposits from customers with bad credit scores. Those with high credit scores typically don’t have to pay extra deposits.
If you have a lower credit rating, a landlord may charge you a higher deposit or require the first and last month’s rent on your contract as collateral. This can make moving into a new rental apartment or house impossibly expensive.
Fewer career opportunities
An employer’s background check may include a limited view of your credit score (although they should only do this with your permission). Hiring managers review credit reports and may consider bankruptcy or late payments to be red flags, especially if you’re applying to work in finance.
Tougher loan applications
Some loan and credit companies reject applications based on poor credit scores. Even if you qualify for a loan with a bad credit score, the terms and conditions are likely to be unfavorable.
Higher car insurance premiums
Some insurance companies review applicants’ credit reports to evaluate the risk of potential claims. If a driver has a low credit score, providers may charge higher rates. California, Hawaii, and Massachusetts have laws prohibiting this practice.
Denial of cell phone contracts
If you have a low credit score, you may have difficulty qualifying for a cell phone contract. There are prepaid phones and other options for working around this, but they’ll likely cost more.
A bad credit score restricts your freedom and ability to live life as you wish, but there are ways to improve your credit rating. One is DIY credit repair, which we’ll cover next.
How to Fix a Bad Credit Score
You can ask the credit bureaus to remove negative items from a credit report if those items are inaccurate (not simply because they’re undesirable). But, you won’t know whether there are damaging mistakes on your credit record unless you…
Monitor your credit score and report
Checking your credit score is the first step to improving your rating—there are multiple free score-tracking services available online. Also, set a reminder on your phone to check your whole credit report at least once a year. You can do this at AnnualCreditReport.com, a free program authorized by the federal government. You can also monitor your score and credit report through the TransUnion, Experian, or Equifax websites.
Look for inaccurate information and suspicious activity, such as a purchase you didn’t make, or an account you know you didn’t open or use. If something isn’t right, file a dispute with the relevant bureau yourself or hire one of the best credit repair companies to sort out what could be a frustrating and messy process—the DIY method takes a lot of work, patience, and determination.
If all the negative items on your report are justified, don’t give up! There are some sensible moves you can make to fix your bad credit score.
Commit to paying bills on time
When you don’t meet your repayment dates, your lenders notify the credit-reporting bureaus, and your score drops. Other lenders will assume you won’t pay your bills on time, which makes lending to you a risk. Ideally, you should pay the total balance of each debt on time, but even paying the minimum amount due helps bring up your score over time.
Start paying down debt
You can improve your credit score by paying down debt. There are many ways to do this. For example, if you have a lot of credit cards with high-interest rates, you may be able to merge them all onto a single balance transfer card with one rate. This is called debt consolidation and may make your bills more manageable. It also shows potential lenders that you’re working towards improving your financial situation.
Another means of paying down debt is the “avalanche method.” Make all the minimum payments on all your debts, then put any remaining funds towards the debt with the highest interest rate. During this period, aim to stop using your credit cards—or at least the ones with high-interest rates.
Avoid hard inquiries
While working to improve your credit score, try to avoid having any new hard inquiries on your credit report. Hard inquiries lower your credit score, especially if they’re done multiple times within a year.
Sometimes you may need a loan while trying to improve your credit score. In this case, narrow down your choice of lenders, before applying, to avoid multiple hard inquiries on your report, and look for those who offer soft pre-approvals that don’t affect your score. By researching the best bad credit loans, you can pinpoint lenders likely to approve you.
Good credit scores are built on a history of timely repayments and a low credit utilization ratio. Obviously, you should commit to paying bills on time and cutting down on spending.
There are several other ways to build credit, such as using and repaying a secured credit card, for which you have to put down a security deposit. You can also become an authorized user on someone else’s (well-established and responsibly managed) credit card account. Your credit report will reflect that card’s payment history even though the account isn’t in your name.
A secured credit card may be an option even if you have little to no credit history. Or you can apply for loans specifically created for consumers without credit. Credit-builder loans are another option—these are designed to help borrowers fill their credit reports with positive history and fix their scores.
As mentioned earlier, rebuilding a credit score yourself takes a lot of time and diligence. Credit repair companies do the work for you. They review your credit report and dispute inaccurate items. They may also try to get undesirable credit events deleted from your report.
Typically, credit repair companies charge their clients in two ways. A subscription-based option allows the company to review your report and have incorrect items removed monthly. This usually costs from $50 to $100 per month. The other payment method is pay-per-delete. If something inaccurate appears on your credit report, the credit repair company charges you only if they get the item deleted. Although credit repair can be expensive, improving your credit score may outweigh the cost.
Final Thoughts On Having A Bad Credit Score
A bad credit score restricts your personal and professional life. It’s frustrating to live with a poor credit rating, but it’s not impossible to turn things around. By consistently working through the steps outlined above, you’ll eventually improve your credit score.
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