Definition of bad credit
What is bad credit?
Bad credit refers to a person’s history of not paying their bills on time and the likelihood that they will not make the payments on time in the future. This often results in a low credit score. Businesses can also have bad credit depending on their payment history and current financial situation.
A person (or business) with bad credit will find it difficult to borrow money, especially at competitive interest rates, as it is considered to be riskier than other borrowers. This is true for all types of loans including secured and unsecured types although there are options available for the latter.
Key points to remember
- A person is considered to have bad credit if they have a habit of not paying their bills on time or if they owe too much money.
- Bad credit often results in a low credit score, typically below 580 on a scale of 300 to 850.
- People with bad credit will have a harder time getting a loan or credit card.
Unexpected things that lower your credit score
Understanding bad credit
Most Americans who have ever borrowed money or signed a credit card will have a credit report with one or more of the three major credit bureaus, Equifax, Experian, and TransUnion. The information in these files, including how much money they owe and whether they pay their bills on time, is used to calculate their credit score, a number that is intended as a guide to their creditworthiness. The most common credit score in the United States is the FICO score, named after the Fair Isaac Corporation, which designed it.
A FICO score is made up of five major elements:
- 35%: payment history. This is given the greatest weight. It simply indicates whether the person whose FICO score is paid paid their bills on time. Missing by only a few days can count, although the more overdue the payment, the worse it is considered.
- 30%: total amount that an individual owes. This includes mortgages, credit card balances, auto loans, collection bills, court judgments, and other debts. What is particularly important here is the person’s credit utilization rate, which compares the amount of money they have available to borrow (such as the total limits on their credit cards) with the amount they owe. at one point. Having a high credit utilization rate (say, over 20% or 30%) can be seen as a danger signal and result in a lower credit score.
- 15%: the length of a person’s credit history.
- 10% – mix of credit types. This can include mortgages, auto loans, and credit cards.
- 10% —new credit. This includes what someone has recently hired or requested.
Examples of bad credit
FICO scores range from 300 to 850, and traditionally borrowers with scores of 579 or less are considered to have bad credit. According to Experian, about 62% of borrowers with a score of 579 or less are likely to become seriously past due on their loans in the future.
Scores between 580 and 669 are considered fair. These borrowers are much less likely to become seriously delinquent on loans, which makes them much less risky to lend than those with bad credit. However, even borrowers in this range may face higher interest rates or have difficulty obtaining loans, compared to borrowers who are closer to the first 850 mark.
How to improve bad credit
If you have bad credit (or fair credit), there are steps you can take to get and maintain a credit score over 669. Here are some tips on how to do it, straight from FICO.
Set up automatic online payments
Do this for all your credit cards and loans, or at least sign up for the email or SMS reminder lists provided by lenders. This will allow you to pay at least the minimum on time each month.
Beware of advertised “quick fixes” for your credit score. FICO warns that there is no such thing.
Pay off credit card debt
Make payments above the minimum due whenever possible. Set a realistic repayment goal and work on it gradually. Having high total credit card debt damages your credit score, and paying more than the minimum owed can help increase it.
Check interest rate disclosures
Credit card accounts provide this information. Focus on paying off debt the fastest at the highest interest rate. This will free up the most money, which you can then start to apply to other low-interest debt.
Keep unused credit card accounts open
Don’t close your unused credit card accounts. And don’t open new accounts you don’t need. Either of these moves can damage your credit score.
If bad credit has made it difficult to get a regular credit card, consider applying for a secured credit card. It is similar to a bank debit card, in that it allows you to spend only the amount you have on deposit. Having a secure card and making timely payments can help you rebuild a bad credit score and eventually qualify for a regular card. It’s also a good way for young adults to start building a credit history.