The American credit system was designed to determine which American citizens manage their money responsibly and provide them with additional rewards and benefits based on their performance. As such, it’s not inherently bad. However, along the way, he became quite ruthless. This can be very limiting and it is not easy to improve your credit situation if it deteriorates too much or if you do not have a credit score to start with.
But what does it mean to have a bad credit rating? Well, to put it simply, the FICO credit score is considered bad if it falls below 670, which would put it in the fair or poor credit range, depending on what the actual number ends up being. Another model called the VantageScore model considers it bad if your credit score is below 661, with the categories below being fair, poor, or very poor.
Financial service providers in the United States, such as lenders, consider these scores to be subprime scores, and those with poor credit scores might find it difficult to access certain benefits and benefits. Not to mention that it is not easy to access credit with more advantageous conditions. With bad credit, day-to-day financial activities become difficult and things that many of us take for granted become unachievable privileges.
For example, opening a new credit card seems like something that should be available to everyone. However, if you have bad credit, you simply won’t inspire enough trust for card issuers to give you their credit card. Even if you can get a credit card, you’ll likely have low limits, higher interest rates, and other inconveniences. Today we wanted to dive deeper into this topic and see what affects your credit score and how you can improve it if you find it on the wrong end of the spectrum.
What is a bad credit score?
To understand what a bad credit score is, we must first talk about the two different models that are used to measure your credit. These are the FICO score and the VantageScore. Both of these models use the same credit spectrum, which ranges from 300 as the absolute worst to 850 as the absolute best score. However, the way they measure what is good and what is bad is slightly different.
The FICO credit score, for example, uses the following rankings:
- 300-579 is considered bad credit
- 580-669 is considered a fair credit rating
- 679-739 is considered a good credit rating
- 740-799 is considered a very good credit rating
- 800-850 is considered an outstanding credit score
So to put it simply, if your credit score is 800 or above, all doors will be open to you, whereas the situation is completely different for those with a score below 579. Last year in 2021, the Average FICO credit score was estimated at 716, which is considered good. However, if you find yourself below 670, in the Fair or Poor category, the score is considered below average and, therefore, bad.
VantageScore has its own ranking which looks slightly different.
- 300-499 is considered very bad credit
- 500-600 is considered bad credit
- 601-660 is considered a fair credit score
- 661-780 is considered a good credit rating
- 781-859 is considered an excellent credit score
It’s immediately clear how different the two are, and in 2021 the average VantageScore was 698. That’s deep in the good credit score range, but anything below 660 is considered bad, in overall, with three different categories determining how bad the situation is.
What factors affect credit rating?
It helps to identify your credit score as good or bad because now you know what to expect from various financial institutions. However, to start repairing bad credit, you must first understand what is impacting it and how.
The first thing to understand is that your credit score is calculated based on your credit report. There are three main credit bureaus, including Experian, Equifax and TransUnion. The financial institutions you contact then report to these bureaus and use your information to calculate your credit score.
This information includes the following:
- Credit applicationswhich is determined by how often you apply for new lines of credit, and it carries 10% of your credit score.
- Composition of credit, which represents the composition of credit within your account. The ability to manage multiple credits, such as car loan, credit card, revolving credit, installment loans, etc., is beneficial to your overall score. This brings another 10% to your overall credit score.
- credit history, which represents the length of your involvement in open credit accounts. This represents 15% of your credit score.
- Use of credit, which is your debt-to-equity ratio, or current balances compared to the amount of credit you have. It is an important factor which accounts for 30% of your credit score.
- Payment history, which represents your payment history and schedule. It is the most important factor which accounts for 35% of your credit score.
Thanks to the fact that there are five different factors, you can still have a good credit score even if one of these factors is low. For example, if you are new to credit, your credit history will not be extensive enough for the credit bureaus to have a clear picture of your habits and performance over time. Or, if you have made a late payment in the past, this will also negatively affect your credit score.
What if you have bad credit?
So if we assume that your credit score is not so good, what will the real consequences be? How can this impact your life? Well, it turns out the impact can be quite severe, which is why it’s extremely important to maintain your credit score as much as possible.
One of the negative consequences will be the difficulty of getting approved for a credit card. The reason is that lenders view borrowers with bad credit as a risk, so they are less likely to approve their credit applications. The requirements for qualifying for products from most banks and financial institutions can be quite stringent, so if your credit score is poor, it will negatively impact your chances of getting the approvals you need.
Another negative consequence is obtaining higher interest rates and more restrictive credit card or loan conditions. There are different types of lenders with different rules and requirements. Some might not be willing to give you a loan at all if your credit score is too low, while others might do it anyway, but the lower credit score will require higher collateral and interest rates. higher.
If your credit score is bad, you may also have to pay higher insurance premiums because most states allow home and auto insurance companies to see your credit score and include it in their to analyse. So if your credit score is bad, they consider it an indication of higher risk, which could significantly increase your premium.
You might face a number of other issues, such as difficulty renting an apartment, difficulty advancing your career, or even having to make deposits for utilities. These aren’t just potential issues – many people with bad credit have to deal with these issues on a daily basis, so it’s important to understand that your credit score needs to be as high as possible in order to access the benefits and privileges. necessary to lead a normal life today.
How to improve a bad credit score?
If your credit score is already bad enough that you are suffering from the previously mentioned problems, know that there is still a chance to regain control and improve your credit score. This will take effort and careful planning, but it is possible in many ways.
Your first step will be to get your free credit report and score from each of the three major bureaus and identify the negative information that lowered your score in the first place. If there are errors in the reports that could be responsible for your poor score, you should report them to the offices and dispute them. Then, you must also avoid making late payments. As we mentioned earlier, payment history makes up more than a third of your overall credit score, so paying bills and debts on time is crucial to building a good foundation for your credit score.
Next, you should try to lower your credit utilization rate. This is another important factor, and experts recommend using only 30% of your credit limit. Of course, the less you use the better, and the best credit scores would use 10% of their credit limit or less, but if you can limit yourself to 30%, that will definitely help your situation a lot.
Another thing to try is to become an authorized user of someone else’s credit card. This will require a lot of trust from the person you are asking, so family or close friends are your best bet. You can try explaining to them that you won’t even be using their credit card account, but just being selected as an authorized user will improve your credit score.
One last thing you might try to do is get approved for a secured credit card. It’s pretty much the same as a regular credit card, but with a few drawbacks. You must pay a deposit for it to be issued, and the amount of the deposit is usually your credit limit. You’ll also likely have to pay an annual fee and get fewer benefits than a regular credit card offers. But, using this card sparingly and carefully can do wonders for your credit score, so think about it.
We offer a list of the best secured credit cards you should consider, another option is to simply go to a credit card issuer that focuses on issuing credit cards to users with low or bad credit . We offer a list of the best Bad Credit credit cards for users who have bad credit scores.
Ultimately, a bad credit score, whether with FICO or VantageScore, can make your life quite difficult, with many benefits out of reach. However, all is not lost, as you can bounce back if you work hard to prove your reliability to the credit bureaus. We’ve told you what to do, how to do it, and all you have to do is take the necessary steps.