What Is Considered a Bad Credit Score?

Irina Tsymbaliuk
What Is Considered a Bad Credit Score?

Your credit score reflects your creditworthiness. Potential lenders rely on this data when deciding whether to approve you for a better card and determining your interest rates and other terms. A good score signals that you are reliable and that you are more likely to comply with the terms of your loan. But what is considered a bad credit score, and what does it mean for you?

A bad credit score is what makes you an undesirable borrower for lenders. Lenders try to avoid servicing such clients, and even if they agree to approve a loan, its terms will be very unfavorable. Last but not least, a bad rating not only affects your finances but also other areas of your life, such as renting a home or even getting a job.

However, you can always improve your credit score by taking a few simple steps. So, what is a bad credit history, and how can it influence your life? How do you improve your credit score, and what do you do to get a card with more favorable terms? Continue reading our article for answers to these and other questions.

Definition of Credit Scores

Definition of Credit Scores

Before we talk about what’s considered bad credit, let’s define what a credit score is in general. Credit scores stand for a rating of a borrower that evaluates creditworthiness, determines the likelihood of meeting debt obligations, and informs lenders about how risky a potential borrower is. They play a key role in deciding whether to give you a certain card and setting the terms of your loan — a higher score makes you a more desirable borrower and signals that you are expected to repay your loan on time and in full.

Typically, a credit score is a three-digit number calculated based on several factors and using different mathematical approaches depending on the specific scoring models (such as FICO or VantageScore) and the bureaus that evaluate the rating. The most popular bureaus are Equifax, Experian, and TransUnion — each creates a unique credit report based on information about how you use your accounts.

Although lenders use different scoring models, most rely on the FICO model. So, the key factors that the most common companies take into account are:

  • payment history (35%);
  • total debt (30%);
  • length of credit history (15%);
  • credit mix (10%);
  • new credit (10%).

Other scoring models consider similar factors but prioritize them differently. For example, according to the VantageScore model, credit utilization and account types play a larger role than payment history.

Although both FICO and VantageScore use a spectrum of 300 to 850, their credit score ranges are slightly different. So, what is a bad credit report? According to the FICO scoring model, a bad credit score is between 300 and 579, and according to the VantageScore model, borrowers with scores below 600 are considered to have a poor credit history.

In general, each lender determines the risks they are willing to take when approving loans. Some lenders only deal with those who have an excellent score, while others can provide loans even to borrowers who have a bad credit history. But in this case, you should be prepared for certain difficulties when obtaining a loan and not hope for favorable terms.

What is Considered a Poor Credit Score, And How Does It Affect You?

What is Considered a Poor Credit Score

If we talk about the impact of a low credit score, then it can play a key role if you are applying for a card or loan. As we've already mentioned, what is a bad credit score depends on the lender, but, in general, you can expect the following limitations if you have less than 600:

  • Difficulty getting a loan or card. A low rating significantly increases the chances of being denied a loan or a card. As a rule, credit institutions have strict standards when issuing loans and are more willing to serve clients who have a fair (~650), good (~700), very good (~750), or exceptional credit rating (>800).
  • Higher interest rates. Even if you manage to find a lender with more lenient requirements and get approved for a loan, you should not expect good and favorable terms. Borrowers with bad credit scores may only be approved for loans with higher interest rates and more restrictive terms. High interest, annual fees, and lower credit limits allow lenders to protect themselves and compensate for the risks they take when dealing with borrowers with a bad rating.
  • Limited housing and work opportunities. Your credit score affects not only how you get a loan but also other areas of your life. For example, landlords can request a renter creditworthiness check. Although they won’t know your score, they can access your credit report and see all the information regarding your financial capabilities. If you have a poor rating, you may become an unwanted renter. In addition, your credit score also has an impact on your career advancement, as employers may consider this information when hiring you.

How to Improve Your Credit Score

How to Improve Your Credit Score

A good credit rating allows you to feel secure not only in matters of lending but also in many other areas. If you are not satisfied with your score, and you feel like it might have a bad impact on your life, you can always improve it. Here are our best tips and tricks on how to increase your credit portfolio:

  • Avoid late payments and set up auto write-offs on your loans so you don’t fall behind on required payments;
  • Try to pay more than the minimum amount to reduce your total loan debt;
  • Research the interest rates on your loans and pay off the highest-interest debt first;
  • Don’t rush to close accounts you don’t use;
  • Monitor your reports carefully and immediately dispute any errors if you find them;
  • Don’t open too many accounts at once, and keep the number of credit requests to a minimum;
  • Reduce your credit utilization ratio and always leave some loan available. Try not to use more than 30% of it, and to further improve your score, use no more than 10% of your total credit.

Final Thoughts

A credit rating is a numerical expression of your creditworthiness, that is, what lenders rely on when deciding whether to grant you a loan. What is a bad credit score, and how can it affect your life? While the precise number can vary, the rule of thumb is that <600 is considered to be bad. It can cause you trouble applying for better loan conditions and cards, or even result in the rejection of your job application.

However, the most important thing is that you can always improve it. You can take a few simple steps to increase your score and become a more desirable borrower to lenders. Remember that a high credit score opens up more opportunities and provides additional financial benefits.