Your credit score determines whether your credit is good or bad. This is a three-digit number and can be a FICO score or VantageScore. Most lenders use the FICO score to evaluate creditworthiness so that is the measure we will use in this blog.
What is bad credit?
Many people struggled to pay their bills in the last year and a half. The global pandemic put millions out of work. When economic times get tough, people often choose to spend their money on necessities and let their credit payments slide. This is reported to the credit bureau which can result in bad credit.
Your credit score determines whether your credit is good or bad. This is a three-digit number and can be a FICO score or VantageScore. Most lenders use the FICO score to evaluate creditworthiness so that is the measure we will use in this blog. Your credit score is determined by the information on the three main credit reports-Equifax, Transunion and Experian. Information found on these reports includes:
The amount you owe
The types of credit accounts you have
Your payment history
How long your accounts have been open
If there are any credit inquiries
Collections
Bankruptcies
What qualifies as bad credit?
Credit ratings are three-digit numbers that fall within a range of five categories. These categories tell the lender what kind of borrower you are. So, what credit score is bad and good?
Bad credit 300-579
Average credit 580-669
Good credit 679-739
Very good credit 740-799
Exceptional credit
800-850
Credit scores change as information on your credit report is updated. For example, if you open a new loan or mortgage, your credit score might decline in the short term. Making several payments on time will help your credit score to increase after several months. Before applying for credit, it's a good idea to check your score. If it needs improvement, find out what you need to do to bring your credit score up. This will help you when you apply for loans, credit cards, and mortgages.
What is a bad credit score?
A bad credit score is between 300-569. There are many reasons why you may have a bad credit score. If you have had a bankruptcy, judgment, charge off, or collection, you will probably have bad credit which means your credit score will be bad. If you have a lot of late payments, defaulted on a credit account, or had a property go into foreclosure, your credit score will be negatively affected. Any one of these things or a combination of these things can generate a bad credit score. Fortunately, this doesn't have to be a permanent situation. There are steps you can take to improve your credit score which will have a positive impact on your financial situation.
What credit score do you start with?
Like anything in life, a credit score is something you need to work for. Most in the U.S. will start with a credit score of 300, but this can vary depending on thes scoring system. A credit score is built up over time. Once a borrower has an account or two, it is reported to the credit bureaus and a score begins to develop. The score is based on the number of inquiries on the bureau, the length of time the account has been open, how much the borrower owes, if payments have been made on time, and the type of credit the borrower has.
Building credit from the ground up can be a bit of a challenge. The borrower may need to secure a credit card with cash or get a credit builder loan. A credit builder loan is a small loan that allows the borrower to make payments. Once it is paid in full, the lender releases the funds to the borrower. You can also apply for a department store credit card. They often have more relaxed requirements and it is easier to get approved. Once you have a credit card or credit-builder loan, you must manage it well. Keeping it under the limit and making your payments on time will go a long way to help you establish a good credit rating.
What's a great credit score?
A great credit score is a FICO score of 800 and above. The benefits of having an excellent credit score are that it's easier to get approved for credit and you will be offered the best rates for credit cards, loans, and mortgages.
There are a few ways to establish a great credit score. The first is to make all your payments on time. Keep your accounts open for a long time because older accounts generate a better rating than new accounts. Make your credit card payments in full if you can. The credit report looks at utilization. If you have maxed out your credit, it doesn't rate favorably. Avoid new inquiries too since they can cause a reduction in your score.
How do I know if I have bad credit?
There are usually one of three ways people find out if they have bad credit. People can check their credit rating and they will get their credit score. The credit score will tell the person what type of credit they have. Another common scenario is they apply for credit or a service like a new cell phone and are declined based on their credit rating. Lastly, if collection agencies are calling, the borrower will know they have bad credit because the account has gone into collection.
It's a good idea to check your credit score at least once a year. Information is updated regularly on your credit report and this will help you make sure that you are on track to building a good credit rating. When you check your credit report, you can see if there are any errors or things that should be on your credit report too. It's important to get these corrected since they can affect your credit rating.
Is 500 a bad credit score?
A borrower with a credit score of 500 has what is a bad credit score number. Anything under 580 is what is considered a bad credit score. A borrower with a credit score of 500 will have challenges getting credit. They may find themselves paying very high rates or having to turn to alternate sources for funds. In cases like this, if the borrower can wait, they should try to increase their credit score.
Is 600 a bad credit score?
A credit score of 600 is on the low end of a fair credit. The borrower will likely be able to find financing but may have to pay a high rate.
What is the average bad credit score?
Average credit scores vary. Many factors influence a credit score. Age and location play a significant role in determining an average score. If a borrower has a credit score of less than 579, the borrower has bad credit.
How can I get rid of a bad credit score?
It's a good idea to improve your credit rating since bad credit can affect you in several ways. You can be declined for credit, declined for a rental, have to put security deposits down on utilities, and possibly not be hired at a new job if you have bad credit.
There are many ways you can improve your credit rating. The first is to make your payments on time. This is extremely important since 35% of your credit score is based on the timeliness of your payments. Paying down the amount you owe will help improve your credit score too. Finally, avoid credit requests that do a hard inquiry on your credit report. A hard inquiry can drag down your score which is not what you want to accomplish. If you need credit, you can apply online using Acorn Finance which does a soft pull on your credit report. This will not impact your credit score at all and can pre-qualify you for multiple offers. With some time and effort, you should be able to improve your credit score significantly.
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As someone deeply entrenched in the realm of credit scores and financial well-being, let me dive into the intricacies of the concepts discussed in the article. My expertise stems from a comprehensive understanding of credit scoring models, financial markets, and the impact of economic shifts on individual creditworthiness.
First and foremost, the article delves into the pivotal role of credit scores, emphasizing the distinction between FICO scores and VantageScores. The majority of lenders rely on the FICO score to assess creditworthiness, and this is the metric highlighted throughout the blog.
The components influencing your credit score, as mentioned in the article, are drawn from the information present in the three major credit reports—Equifax, Transunion, and Experian. These reports encapsulate crucial factors such as the amount owed, types of credit accounts, payment history, account age, credit inquiries, collections, and bankruptcies.
The classification of credit scores into five categories, ranging from bad to exceptional, provides a clear understanding of where an individual stands in terms of creditworthiness. This categorization is essential for lenders to evaluate borrowers effectively.
The article elucidates on what constitutes bad credit, citing specific score ranges and the potential reasons behind a low credit score, including bankruptcies, late payments, and defaults. It also addresses the transient nature of credit scores, highlighting that responsible financial behavior can lead to improvements over time.
Initiating the credit journey is a challenging task, as discussed in the article. Individuals typically start with a credit score of 300, and the process involves building a credit history through accounts, payments, and strategic financial decisions. The role of credit builder loans and department store credit cards in this process is emphasized, offering practical insights for those venturing into the credit realm.
Moving on, the article outlines the characteristics of a great credit score (FICO score of 800 and above) and the associated benefits, such as easier approval for credit and access to the best rates on loans, credit cards, and mortgages.
It addresses common scenarios through which individuals discover their bad credit status, emphasizing the importance of regular credit score checks to track progress, identify errors, and ensure a positive credit trajectory.
The discussion around specific credit score ranges, like 500 and 600, provides clarity on the challenges individuals may face and the potential rates they might encounter when seeking credit.
Finally, the article offers valuable advice on improving a bad credit score, emphasizing timely payments, debt reduction, and caution regarding hard credit inquiries. Practical tips, like using services that perform soft pulls for credit checks, are shared to aid individuals in their journey toward credit score enhancement.
In essence, the article provides a comprehensive guide to understanding, managing, and improving credit scores—an indispensable resource for anyone navigating the complex world of personal finance.
