FICO credit scores below 580 and VantageScores below 601 are typically considered poor or bad credit. Bad credit can prevent you from getting loans, credit cards, or even renting property. You can avoid bad credit status by using less than 30% of your total available credit and by consistently paying debt on time.
What Is Bad Credit?
There are three major credit reporting agencies that compile consumer information―Equifax, TransUnion, and Experian. These companies then assign you a score between 300 to 850 based on a credit scoring model. Bad credit is defined by having a credit score between 300 to 579 for FICO, and 300 to 600 for VantageScore.
Personal credit bureaus consider several factors when determining your credit score, including payment history, delinquent accounts, and credit utilization ratio. Creditors also use your credit scores to determine creditworthiness. However, bad credit signifies to lenders that you’re a risky borrower, making it less likely you’ll qualify for the best credit cards and loans at competitive interest rates. To build credit, you’ll need to keep track of your credit scores along the way.
Common Credit Scoring Models
Although there are multiple credit scoring models, the two most common models are FICO and VantageScore. The FICO scoring system was introduced in 1989 by the Fair Isaac Company, the first to do so. The VantageScore system was created and introduced by the three major credit bureaus in 2006. Lenders can use both scoring systems to determine your overall creditworthiness.
FICO Credit Score
FICO credit scores range from 300 to 850 with five categories highlighting the credit score level. These categories include poor, fair, good, very good, and excellent. A FICO credit score below 580 falls in the poor credit range and is considered bad credit. Alternatively, credit scores of 800 and above are considered excellent.
FICO credit scores fall in the following categories:
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 799
- Very good: 740 to 799
- Excellent: 800 to 850
FICO scores below 669 are considered below average, and consumers with these scores will have a smaller chance of credit approval. Most unsecured credit cards require a credit score of 670 or more for approval, but some credit cards will approve consumers with scores as low as 640. People with a credit score as low as 580 may qualify for a secured credit card with a cash deposit as collateral.
The VantageScore model uses a credit score that includes different status levels, much like FICO. The VantageScore lists credit levels as excellent, good, fair, poor, and very poor. A VantageScore typically ranges from 300 to 850 like FICO scores. The most recently released versions of VantageScore may have credit ranges that differ from previous versions.
VantageScores are separated into the following categories:
- Very poor: 300 to 499
- Poor: 500 to 600
- Fair: 601 to 660
- Good: 661 to 780
- Excellent: 781 to 850
VantageScore was created by the three major credit reporting bureaus－Experian, TransUnion, and Equifax. Unlike FICO, fair credit scores range from 601 to 660 under VantageScore. VantageScore’s worst categories are reserved for credit scores below 601. Lenders are more likely to approve loans with competitive rates for consumers with scores above 660.
The Impact of Bad Credit
No matter the credit scoring model, bad credit can have a significant effect on your financial well-being. Creditors review your credit profile to determine creditworthiness. Low credit scores indicate you may not be able to handle new debt responsibly. This is the case with most major purchases, including property purchases, leasing agreements, car loans, and student loans.
Bad credit can affect you in many areas, including:
- Home purchases: Mortgage lenders review your credit scores before approving or denying a home loan. Good credit can ensure a higher rate of approval while low credit scores can prevent you from buying a home.
- Housing rentals: Many property owners and landlords consider your credit scores along with rental and payment history. Bad credit can indicate to property owners that you’re too risky for a lease agreement, and you may be denied residency.
- Auto purchases: Bad credit can mean a denial for auto loans with the major banks offering the best rates.
- Interest rates: Interest rates on credit cards and loans are based, in large part, on credit scores. The lower the credit score, the higher the perceived risk, the more interest you’ll pay.
- Student loans: Although federal student loan qualification can be more lenient, private student loan lenders typically require a credit score of 670 or higher to qualify.
Even when you’re not looking to buy a home, bad credit can still impact you. Renters looking to lease apartments, condos, or houses will have a more challenging time getting approved with bad credit. If you expect to make a major purchase like a house or a car, you should improve your credit scores before applying to avoid denials and possibly get a better interest rate.
What Causes Bad Credit?
Multiple factors can impact your credit score, including payment history, number of accounts, and credit utilization ratio. When you don’t make payments on time, it will reflect in your credit score. Missed payments, using too much credit, and submitting too many applications for new credit can cause your credit score to drop significantly.
Here are the six factors that make up your personal credit score:
- Payment history: Whether you’ve paid your creditors on time, missed payments, or defaulted altogether. This accounts for 35% of your total credit score.
- Credit utilization ratio: The amount of credit you owe divided by your total available credit determines the percentage of credit you’re using. This ratio makes up for 30% of your credit score
- Credit history length: How long you’ve had a credit history. Accounts for 15% of total credit score
- Types of accounts: Whether you have revolving credit or installment loans, including home loans, credit cards, and auto loans. Accounts for 10% of total credit score
- New credit: Credit that’s been recently applied for or established. Accounts for 10% of your total credit score
Your credit utilization ratio and payment history make up 65% of your total credit score. Bad credit typically results from a credit utilization ratio of more than 30% and a history of late or missed payments. By paying your bills and reducing your credit utilization ratio, you can improve your credit.
How to Check Your Credit Score
Checking your credit score is easy and will not hurt your credit score since it’s a soft inquiry vs a hard inquiry. Some major banking institutions offer free credit score monitoring as a perk for being an account holder. Banks like Capital One, Citibank, and Chase are just a few of the banks that offer free credit scoring tracking services. However, whether or not you can see a FICO score will depend on the institution.
Consumers looking to check their credit scores can do so by going directly to the credit bureaus’ websites. Experian, Equifax, and Transunion allow you to request your credit report and credit scores for a fee. There are options to get your credit score free. However, if you do pay, it’s usually on a subscription-based plan. Although, these agencies often offer trial periods where you can view your credit score for a limited time without a fee.
Ways to Improve Your Credit
If you want to improve your credit score, you can make more frequent payments to pay down debt quickly. Start a payment plan that will work best for you, which can include making multiple payments to your highest annual percentage rate (APR) credit card. Disputing any inaccurate items on your credit report can also improve your credit score.
You can improve your credit by:
- Paying down credit card debt: Paying off your credit cards can improve your credit utilization ratio and increase your credit score. Paying off high APR credit cards can help you avoid large interest charges.
- Setting up automatic payments: Setting up autopay with creditors can help improve your payment history if paying your bills on time is a challenge.
- Making multiple payments: By making extra payments in a statement period, you can reduce the amount owed and increase your credit score quicker.
- Opening a secured credit card: Opening a secured credit card will require a security deposit, which will give you access to a new credit line. This can increase your available credit and boost your credit utilization ratio.
- Reporting credit errors: Report any discrepancies or inaccuracies on your bills and credit reports. Removal of incorrect credit items can increase your credit score.
Whether paying debts with the highest interest or the highest balance, you’ll accomplish more by setting a plan first. You can also apply for a credit card for fair credit or a secured credit card to start building credit responsibly. Plus, making timely payments and increasing available credit can boost your credit score.
There’s no arguing that bad credit can have a big impact on your life and financial prospects. Bad credit scores can prevent you from getting approved for credit lines, owning a home, or even renting. Low credit scores can mean that you have bad credit, but it doesn’t have to stay that way. There are practical ways you can improve your credit, but it will take some time and effort.