What is considered a bad credit score: How to improve your credit

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Where having strong credit can unlock benefits like lower interest rates and better terms when you borrow money. Bad credit has the opposite effect. It can create significant financial challenges and make life more expensive than it needs to be. This is especially true if you need to borrow money, get approved for a job, or rent an apartment. 

But poor credit doesn't have to be a life sentence. There are steps you can take to rebuild your credit and improve your score over time. 

The first step to boosting your credit is knowing where you fall in the credit score range. Knowing what a bad credit score is and what factors affect your score can help you start rebuilding your credit. 

What is a bad credit score? 

A bad credit score generally falls below 600 on a scale of 300-850, depending on the credit scoring model. 
Bad credit is often used interchangeably with a “poor” credit score. According to credit bureau Experian, 12.6% of consumers have a poor FICO score. The average credit score is 717.

But keep in mind that your credit score from these models is just a guideline. Each lender has its 
criteria for what’s considered a bad credit score. You may get denied for a loan or credit card even if you have a score that falls within the acceptable range for applicants. 

Understanding credit score ranges

The two most common scoring models are FICO and VantageScore, though FICO is used by 90% of lenders. Both scoring models provide valuable insights into someone’s creditworthiness.

FICO scores range from 300 to 850. Here's a breakdown:

• Poor: 300-579
• Fair: 580-669
• Good: 670-739
• Very Good: 740-799
• Exceptional: 800-850

VantageScore also ranges from 300 to 850, though the ranges are slightly different:

• Very Poor: 300-499
• Poor: 500-600
• Fair: 601-660
• Good: 661-780
• Excellent: 781-850

Both models use similar factors to determine your credit score. Factors include payment history, the amount of money owed, length of credit history, number of new credit applications, and number of credit accounts.

What causes a bad credit score? 

Several factors can contribute to a bad credit score. Understanding these factors can help you take steps to rebuild your credit.

Late or missed payments

Payment history is the most significant factor in determining your credit score, accounting for 35% of your FICO score. Late payments, or payments made 30 days or more past the due date, can really damage your credit score. The longer a payment is delinquent, the more severe the impact on your score.

Missed payments, or those not made at all, can have an even more detrimental effect on your credit score. Late or missed payments can lead to default, collections, or even legal action, all of which can severely damage your credit for years.

If you want to keep your credit accounts in good standing, it’s essential to pay your bills on time and in full each month. 

High credit utilization

Credit utilization is the amount of credit you're using compared to your credit limits. It's another important factor in your credit score. High credit utilization can negatively impact your score. 
Maxing out cards or consistently carrying high balances can signal to lenders that you may be overextended and at a higher risk of default. To maintain a healthy credit score, it's generally recommended to keep your credit utilization below 30%. The lower your credit utilization, the better.

Collections, charge-offs, or bankruptcy 

Your debt may go to collections if your lender sells your defaulted debt to a third-party collection agency. Charge-offs happen when a creditor writes off a debt as uncollectible after a prolonged period of non-payment, typically 180 days. Bankruptcies are legal proceedings that allow individuals to seek relief from their debts.

All of these events are red flags to lenders and can make it extremely difficult to obtain credit in the future. If you have any of these marks on your credit report, it's essential to work on rebuilding your credit as soon as possible.

All of these events are red flags to lenders and can make it extremely difficult to obtain credit in the future. If you have any of these marks on your credit report, it's essential to work on rebuilding your credit as soon as possible.

Limited credit history

Having a limited credit history can also contribute to a lower credit score. This is often the case for young adults or those who have never used credit before. Without a track record of responsible credit management, lenders may view you as a higher risk.

Building a positive credit history takes time and consistent effort. Start by opening a credit account, such as a secured credit card or a credit-builder card, and use it responsibly over time. As you establish a pattern of on-time payments and low credit utilization, your credit score should gradually improve.

Frequently applying for new credit

Applying for new credit frequently can also hurt your credit score. Each time you apply for credit, the bank will run a hard inquiry, which can temporarily cause your score to drop.

A single hard inquiry may only have a minor impact on your score. However, multiple inquiries in a short period can be a red flag to lenders, suggesting that you may be taking on more debt than you can handle.  
Avoid applying for new credit unless necessary. Space out new credit applications to minimize the impact of hard inquiries. 

Consequences of bad credit 

Having a bad credit score can have far-reaching consequences, including:

• Higher interest rates on loans and credit cards that result in increased borrowing costs over time.
• Difficulty getting approved for credit, such as mortgages, auto loans, or personal loans.
• Potential impact on employment opportunities
• Challenges in securing housing, as landlords may run credit checks to assess potential tenants' financial stability.

Why? Your credit score can help indicate how likely you are to pay back your loan on time and in full. According to FICO, 61% of consumers with scores below 579 are likely to become delinquent on a loan. To make up for this additional risk, lenders may charge more interest and fees.

How to improve a bad credit score

A bad credit score can cost you a significant amount of money over time. If you have a poor credit score, it’s a good idea to start working to improve it as soon as possible.

Dr. Peter Earle, senior research fellow at the American Institute for Economic Research, and Daniel Cohen, consumer protection lawyer at Consumer Attorneys, offer some tips to boost your score.

• Review your credit reports: Start by reviewing your credit reports from the three main credit bureaus (Equifax, Experian, and TransUnion). Most bank accounts also allow you to view and track your credit score for free. Look for any errors that could be hurting your score and dispute them, says Earle.
• Catch up on past-due accounts: If you have past-due accounts dragging your score down, bring them up to current as soon as possible. You may be able to set up a payment plan with your creditor. Consider working with a credit counseling agency if you need extra guidance. 
• Pay down high-interest credit card balances: Cohen says high credit utilization can significantly impact your credit score. Work on paying down your card balances, aiming to keep your utilization below 30% across all your accounts.
• Apply for a secured credit card: If you have trouble qualifying for a traditional credit card, consider a secured credit card, says Earle. "They require a cash deposit that serves as collateral and tend to come with low credit limits," he explains. “By using a secured card responsibly and making timely payments, individuals can demonstrate their creditworthiness.”
• Be patient and consistent: Rebuilding your credit won't happen overnight. Focus on making on-time payments, keeping credit utilization low, and avoiding new debt. As you establish a positive payment history and show responsible usage, your score should slowly improve.

The bottom line 

A bad credit score could make your life more expensive in the long run, but only if you let it. By paying down your debt, making your payments on time, and looking into credit-building products like secured credit cards, you could be on a path toward improving bad credit in no time. Remember, improving your credit score is a marathon, not a sprint.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.