A bad credit score can hurt your financial future. Therefore, making it harder to secure loans and credit cards. In this article, we will explain what it is, how it is determined, and how you can check it for free online.
We will also provide tips and strategies for improving your score. So, you can take control of your finances in the future and achieve your goals, whether you have a bad credit score or are simply looking to improve it. Or if you want to understand how the grading system works, this article is the right one for you.
What Is A Bad Credit Score?
A credit score measures an individual’s creditworthiness and financial history. It is generally considered bad if it falls below a certain threshold. This bad value is typically a score of 600 or lower on the FICO scale.
A good score can make obtaining cash advances or credit cards easier. That’s because lenders may view the individual as a high-risk borrower. Sadly, individuals with a bad number have prices to pay.
They may be charged higher APRs on loans or cards. This can result in them paying more money over time. It can also affect the ability to rent an apartment, get a job, or get a phone contract.
A bad figure makes it more difficult for individuals to access the resources they need, hurting their overall economic well-being.
FICO
A bad credit score is one that falls below a certain threshold, as determined by the Fair Isaac Corporation (FICO), one of the most widely used scoring models. A FICO score of 300 to 600 is considered bad. The lower the figure, the greater the risk the borrower poses to lenders.
A FICO score is calculated based on the information in a person’s credit report, including payment history, CUR, length of financial history, and types of debt. Payment history carries the most weight, accounting for 35% of the score.
Credit utilization, or how much of a person’s available credit they are using, accounts for 30%. Length of financial history, current debts, and types of advances used make up the remaining 35%.
It’s important to note that there are other models like VantageScore, but the FICO score is the most widely used.
Vantage
A bad credit score, as per the VantageScore scoring model, falls below a certain threshold. A VantageScore of 600 or lower is considered bad as well. VantageScore uses a different method than FICO, which ranges from 300 to 850.
It’s calculated based on the information in a person’s report, including their history, utilization, and recent financial behavior.
Repayment history carries the most weight, accounting for about 40% of the score. CUR, or how much of a person’s available credit they are using, accounts for about 20%. Credit mix and recent behavior make up the remaining 20% and 10%.
How Your Credit Score Is Determined
There are many steps involved in the determination of creditworthiness. Some of these can be regulated by the users. While others heavily rely on the actions of credit bureaus and other bank institutions. This dependence is why users can manage their figures to an extent.
Typically, the three bureaus calculate the score of every business and individual. The agencies then collate data for each individual. The data collation will then serve as a source of information to understand how users manage their finances. Some of the significant factors considered include:
Payment History
This is one of the most critical factors that determine a credit score. Late payments, missed payments, and defaulted amounts can harm you. On the other hand, consistent and timely payments can have a positive impact. Repayment history is also the most heavily weighted factor in determining the value, so it’s crucial to ensure all payments are made on time.
Account History
Account history, also known as Repayment history, is one of the most important factors determining a person’s score. The score reflects their creditworthiness and is used by creditors to assess the risk of lending money. A person’s account history records past payments and debts, showing how well they have managed their debts in the past.
A good account history, which includes on-time payments and a low CUR, can increase a person’s creditworthiness. In contrast, a poor account history, which includes late payments and high CUR, can lower a person’s chances.
Debt
Debt is a significant contributor to credit scores. That’s because the interest rate you repay your debts speaks a lot about your creditworthiness. How much you owe also speaks volumes about your economic situation. It’s why many financial counselors would always suggest a debt consolidation plan to keep your debts minimal throughout the repayment period.
Any user with a large debt can get a lower score. That’s because the bureaus would assume the user doesn’t need a reliable way to repay their debts.
Likewise, any user with a low debt profile will considerably increase their reputation.
Credit Utilization Rate
CUR is the amount of credit an individual uses compared to the total amount available. It is typically expressed as a percentage and is calculated by dividing the total amount used by the total amount available. For example, if an individual has a limit of $10,000 and a current balance of $2,500, their CUR would be 25%.
Having a high CUR can negatively impact an individual’s score. Lenders and debt management agencies view high utilization as a sign of financial stress and a higher risk of default. They like to see low utilization as it implies that the borrower is using their credits responsibly and can take on more.
Recent Inquiries
Another major determinant of your score is inquiry pulls. Every time a lender pulls an inquiry on your account, you’ll lose a certain number of points. This precaution keeps users from applying for too many cash advances at a time. If this happens, each inquiry will deduct your score. But if you stay away from it, you can increase value.
Credit Mix
Having multiple credit sources can be a good and bad thing for users. But it’s always suitable for users who consolidate their debts with various loans.
A mix of many credits, like installment loans, personal loans, etc., will allow you to maximize your loan offers. That way, you can easily get better APRs or repayment terms. Credit reporting agencies also look kindly at anyone using this method. So, you can boost your score with one.
How a Bad Credit Score Can Hurt You
A bad score can hurt a person’s ability to borrow money or secure loans, making them a higher risk to creditors. It can make it more difficult or expensive to get approved for a mortgage, card, or personal loan.
It can make renting an apartment or getting a job harder. To handle this situation, users are better off abiding by the rules. These can include checking reports for errors and paying bills on time. You can also handle the situation if you reduce your debt.
Other users also utilize their credit responsibly and consider counseling or debt management services. Either way, patience, and consistency are key for any borrower seeking a good record.
How To Check Your Credit Score
Here are some tips on how to check your credit score:
- Obtain your report from one of the three major bureaus, namely Equifax, TransUnion, or Experian. You can visit their website and request a report.
- Review the report for any errors or discrepancies. Make sure that all the information on the report is accurate and up-to-date.
- Check your credit score, which should be in the report. Each bureau may have different scoring models, so you may have different scores from each bureau.
It’s advisable to check your score at least once a year, which is usually at no cost. Websites like CreditKarma, CreditSesame, and Mint allow you to check your score without extra fees.
However, you should be aware that these sites may have limited information and may not include your full history. So if you require a more detailed report or frequent monitoring, you can consider paying for it from the bureaus or other monitoring services.
Can You Check Your Credit Score For Free?
Everyone can get 1 report for free per year from Experian, TransUnion, and Equifax – the three major bureaus. You can obtain your free report by visiting annualcreditreport.com, the official website, to place a request. It’s recommended to check your score at least once a year to ensure the information is accurate and to catch any potential errors or fraud.
Ways To Improve Bad Credit Scores
There are several ways to increase a bad figure. You might improve your creditworthiness by following some of the guides below. Some of these steps include:
- Paying bills on time: Late payments can hurt your value.
- Keeping balances low: High balances can indicate that you are overextended. So, keeping it low always helps.
- Disputing errors on your report: Incorrect information can negatively impact, too. Try to request corrections when necessary.
- Limiting new applications: Every time you apply for credit, it can harm you, so it’s advisable to tune down the number of applications.
- Building a mix of credit: A mix of mortgage, car advances, etc., can help increase your chances.
- Keeping it long: The longer the history, the better for your score.
- Pay off outstanding debts.
Conclusion
A bad credit score can make it challenging to qualify for various offers. It’s determined by factors like repayment history, CUR, length of history, and types of credit. To avoid getting a bad figure, making payments on time is crucial, as keeping CUR low and diversifying the funding sources.
Additionally, checking reports regularly and correcting errors can help maintain a good reputation. It’s also important to know that it’s not the only determining factor for approval and to explore other offers like co-signer, secured credit cards, and credit-builder loans.
