A credit score is a three-digit number ranging between 300 to 850 that indicates your creditworthiness. Credit scores are important because potential lenders decide whether to lend to you or not based on your score. The higher the number, the better the credit score and the higher the chances of getting credit. That’s why it’s always better to avoid coming in the low credit score range.
The bad credit score category varies as per FICO and VantageScore. FICO puts you in the “Poor” credit score range if your credit score is below 580. Conversely, VantageScore adds you to the “Poor” credit score category if your credit score is between 500 and 600 and in the “Very Poor” category if your credit score is below 500.
A credit score is a crucial indicator for both lenders and borrowers. The credit score helps the lender to make an aware and sound decision regarding extending credit by duly taking into account the creditworthiness and the presence or absence of associated risks. The credit score also helps the lender to determine the appropriate interest rate that is to be levied on the credit.
On the other hand, if the borrower lies in a poor credit score range, they will be well aware of the lower chances of getting credit and vice-versa. That’s because potential lenders perceive you as a risky borrower. If the borrower has a good credit score, they can get credit at a lower interest rate.
What is considered a bad credit score?
Although credit-scoring agencies use various formulas and models to determine low credit score range, there are some common evaluating factors that they use. That said, they calculate credit scores as per the information in credit reports. Among these, they consider your credit utilization ratio, account history, payment history, credit portfolio, recent inquiries, and debt ratio. More importantly, foreclosures, bankruptcies, and collection records are also considered to determine your credit score.
As per the Consumer Financial Protection Bureau (CFPB), FICO and VantageScore are the two most commonly used credit scoring models. Let us study how FICO and VantageScore determine what is a bad credit score below:
The FICO credit scores are as follows -
The FICO Score scale extends from 300 to 850. If you are wondering as per FICO, what number is considered a bad credit score, a score below 580 is discerned to be in the bad credit range. Any individual having a FICO score in the poor credit range is seen as a credit risk.
The VantageScore credit scores are as follows:
Similar to FICO, VantageScore credit scores fall between the 300 to 850 range. Though, this credit agency judges scores differently than FICO. Unlike FICO, VantageScore classifies between poor and very poor credit as well. Whereas the company keeps a credit score between 500 and 600 under the poor credit score range, it labels a score between 300 and 499 as very poor.
By and large, people having higher scores have an edge over those in the low credit score range. Be it low-interest rates or good repayment terms, they can have them all. Now that you know what is considered a bad credit score, you may want to avoid all such factors that can put you in a low credit score range.
ALSO READ: Good V/s Bad Credit Score
How Does One Get a Bad Credit Score?
After knowing what is considered a bad credit score, you may want to know how one gets a bad credit score:
According to the FICO model, your bill payment history constitutes up to 35% of your credit score. If you’ve consistently been making late payments, it brings down your credit score. No denying, that recent late payments have a greater impact as compared to the past ones.
Credit Utilization Ratio
Your credit utilization ratio is a measure between the amount of available credit and how much you are using currently. You can calculate your credit utilization ratio by dividing all your current credit balances by your total credit limit on all accounts. Ideally, your credit utilization ratio should be 30% for a good credit score. And, by keeping it below 6%, you come in the top credit score category.
Credit History Span
Your credit score goes up if you have old credit accounts. Also, this factor influences your credit score by up to 15%.
If you apply for multiple credit accounts, it indicates that you’re having financial issues. This factor can influence your FICO Score up to 10%.
If you have a good mix of revolving credit (such as credit cards: and installment credit like loans and mortgages), you will be perceived to be good at managing different credit accounts. Even so, avoid taking additional loans to improve your credit score.
ALSO READ: Things that hurt your credit score
How Does a Bad Credit Score Affect You?
The following are some consequences of having a bad credit score:
- Credit Cards - If you don’t have a good credit score or you lie in a poor credit score range, it can get difficult for you to qualify for a credit card
- Higher Fees and Lower Credit Limits - Even if you get a credit card, with a bad credit range you will have to bear higher annual charges for a relatively lower credit limit
- Loans and Mortgages - With a bad credit score, approvals for loans and mortgages can become a difficult process
- Interest Rates - People with a low credit score are charged higher interest rates than those with a good credit score
- Rental Applications - Your potential landlord will study your credit report before deciding whether to lease to you or not
- Employment Applications - Potential employers, conducting a background check on you, may require your credit reports
- Insurance Premium - Insurers will go through your credit history before issuing insurance plans to you
- Deposits - A high credit score lets you skip security deposits when registering with mobile operators and utility companies. People in the poor credit score range, on the flip side, do not enjoy such benefits
BONUS READ: What happens if you have a bad credit score?
Tips to Improve Your Credit Score
Over time and with responsible credit use, you can take up your credit scores. More on this below:
Reviewing your Credit Report
Start by reviewing your credit report to know the aspects that are leading to a bad credit score.
Paying your Bills on Time
The best way to improve your credit score is to make payments in a timely manner. Use the auto-payment option, for you can then be sure of never missing your deadlines.
Becoming an Authorized User
Becoming an authorized user for somebody else’s card helps your credit. Only you should not miss payments when doing so.
Using a Secured Credit Card
By getting a secured card for yourself, you can increase your credit score. To use a secured card, you have to pay a security deposit before starting to spend. Credit card companies report to the credit bureaus about your payment activity. So, if you’re getting a secured card, make sure to use it responsibly and make on-time payments.
Having Some Credit Available
If you do not want to come under the bad credit range, then maintain your utilization ratio within the 30% range across all your credit accounts.
A bad credit score indicates serious issues with your personal finances. This makes it important to study your credit report and know your credit score. The good news is that you have many options to improve your credit, out of which Azpire secured card is your best bet.
When you increase your credit score, you will witness the results soon enough. Also, it always helps to understand how credit scores are calculated and the causes of bad credit. When you start managing credit responsibly, you get several financial options to boost your credit score.
Frequently Asked Questions
What is a credit score?
A credit score is essentially a three-digit number that shows how strong your credit record is. It is an indicator of your creditworthiness. This three-digit number has a range that starts from 300 and goes up to 850. The higher the score, the better your creditworthiness.
What is a low credit score?
As per FICO, any credit score lower than 579 is considered very poor. A credit score between 580 and 669 is considered fair. If your credit score is fair, you can still get credit cards, possibly with high-interest rates. However, if your credit score lies in the range of very poor, it is very difficult to get a credit card.
What does a low credit score mean?
Your credit score reflects how financially sound you are. People with a bad scores are either new to credit or need to be more responsible with credit. If you have a good credit score, you will get loans easily and on good repayment terms. Unfortunately, you cannot enjoy such benefits if you have a bad credit score.
How to come into the good credit score category from the bad credit range?
You can improve your credit score by:
- Paying your bills on time
- Maintaining the percentage of your total credit availability within the low range
- Applying for credit at intervals
- Using eligibility checkers before applying to check if you qualify for the given credit product
Does a credit card help to get out of the poor credit range?
If you have a bad credit score, you should not assume that you will never get a credit card. Remember, lenders use different criteria to decide whether to lend to you or not. Although a bad credit score does not always mean your application will be rejected, it harms you by limiting your credit options.
The good news is that the Azpire secured card is a sure-shot way of attaining a good credit score. By using your secured card responsibly, you can improve your credit score. Just remember to always stick to your credit limit and pay your minimum balances on time. If you fail to do so, your credit rating goes down.