With multiple credit scoring models and agencies out there, it can be hard to answer a very important question: what is a bad credit score? And even more importantly: what can you do to fix bad credit if you have it?
If it turns out your credit score isn’t so great, the good news is there are steps you can take to improve it. Here’s what you can do to get that very important three-digit number back to where it needs to be.
What is a bad credit score?
Conversations around credit scores usually refer to the two most common ones: FICO Score and VantageScore.
- A FICO Score ranges from 300 to 850, or 250 to 900 for “industry-specific” scores.
- A VantageScore ranges from 300 to 850.
Essentially the higher your number is, the better your credit score is.
According to credit reporting giant Experian, a bad credit score for FICO is 579 and below. Scores in that range are ranked as “very poor,” while a “fair” credit score is 580 to 669. For VantageScore, a bad credit score is called “very poor” and is 549 or below, with “poor” as the next rung up at 550 to 649.
If you’re curious about how lenders process this information, consider these statistics. As of 2015, Experian reported the following:
- Approximately 61 percent of consumers with a FICO Score of 579 or less are likely to become seriously delinquent in the future.
- Approximately 27 percent of consumers with a FICO Score of 580 to 669 are likely to become seriously delinquent in the future.
In short, if you have what is considered bad credit (like a FICO Score of 580 or lower), then you indicate to lenders that you might be a risky borrower based on previous statistics of consumers with similar scores.
What bad credit means for you
Now that we know what is bad credit, what can we do about it? Well, first it’s important to understand the consequences of having bad credit before you can improve it.
Here are a few side effects of bad credit to keep in mind.
1. It’s harder to get approved for new credit
As stated previously, a credit score is considered a predictor of risk for lenders. Therefore, the lower your credit score is, the harder it will be for you to get approved for new credit.
So if your credit score is really low, you should start with a secured credit card before seeking approval from a lender for a traditional credit card. Secured credit cards require a down payment security deposit, which is why their easier to be approved for if you’re new to credit or have bad credit. Typically, after using a secured card for half a year or so, you can qualify for an upgrade to a traditional credit card. That upgrade is predicated on proper usage, though.
In other words, if you get a secured credit card, make sure you always pay on time and it won’t be too long before you can move up to a traditional credit card. And once you do, you’ll get your security deposit back if you don’t owe anything on the card.
Mortgages and auto loans could be totally out of reach until your score goes up since those require higher credit scores. The good news is, if you use a secured card regularly and always pay on time, your credit score can start to increase as you build your length of credit history and history of positive payments. This makes secured cards a great tool for rebuilding credit.
2. You’ll pay more for credit and possibly insurance
Although a bad credit score doesn’t always mean you can’t get approved for credit, it’s more likely that the credit you’re approved for will cost more.
To illustrate the difference, here’s an an example from MyFico of how one mortgage shakes out for two different credit scores. If you want a 30-year fixed-rate mortgage of $280,000 you will pay:
- 3.49% APR with a credit score of 760.
- 5.085 APR with a credit score of 620.
This might not seem like much of a difference at first until you see the actual payment breakdown.
- $1,256 per month with a credit score of 760.
- $1,517 per month with a credit score of 620.
The lower credit score costs an extra $261 per month or $3,132 per year.
And when you look at the difference in interest paid in 30 years, it’s just as significant.
- $172,131 in interest for 30 years with a credit score of 760.
- $266,055 in interest for 30 years with a credit score of 620.
In other words, the person with the lower credit score is paying an extra $93,924. That’s almost $100,000 more just for having a lower credit score.
As if that’s not bad enough, a 2016 study from Insurance Quotes found that someone with fair credit could pay “28 percent more for car insurance than a driver with excellent credit.”
What’s more, someone with poor credit could see a premium increase of 104 percent.
3. It could affect your future employment opportunities
There is the possibility that your credit report can affect your future employment opportunities.
While employers can pull your credit report, a study done for The National Bureau of Economic Research states, “Credit reports […] are of limited consequence for labor market outcomes, where employers rely on a much broader set of screening mechanisms.”
However, some states are banning this practice altogether, which you can read more about in Bloomberg.
The main thing to be aware of is bankruptcy filings and judgments because those remain on your credit report for several years. However, once they’re off your report, they no longer present an issue.
4. It might prevent you from getting housing
Landlords pull your credit score to see if they can trust that you’ll pay the rent. And even if you’ve never missed a rent payment in your life, a bad credit score could prevent you from getting an apartment.
Additionally, a bad credit score could prevent you from getting a mortgage. This is a loan that could cost hundreds of thousand of dollars and last for 30 years. It’s not something to enter into lightly and lenders want to see borrowers with strong and positive credit histories.
How you can improve your credit
The consequences of having bad credit are frightening, to say the least. But they’re not forever. If you start working on your credit diligently right now, then you will be able to see an improvement – and it won’t take five years to see it. ABC News has illustrations that break down how long it takes to see improvements in credit scores after various changes. Here are just a few examples they share:
- It could take three or more months to recover from maxing out your credit card or closing an account.
- It could take one to two years to recover from missed payments.
- The big one to worry about: it could take seven to ten years to recover from bankruptcy.
Here are four habits you can adopt to begin improving your credit and financial outlook:
1. Fix errors on your credit report
Don’t let credit reporting errors keep you from the credit score you deserve.
2. Start paying down debt
Thanks to something called credit utilization, a maxed out credit card can seriously hurt your credit score. The reason for this is credit utilization, which represents the amounts you owe on revolving credit in comparison to your credit limits, makes up 30 percent of your score.
The higher your credit utilization (or the closer your balances are to your limits), the worse your score. One easy fix for this is to increase your credit limit, but that’s not easy to do with bad credit.
Therefore, the best thing you can do is focus on paying down your debt. The more distance that grows between your balances and your credit limits, the better your score will be. The ideal credit utilization is 30 percent or lower – meaning your balances should not be more than 30 percent of your total credit limits.
3. Continually make payments on time
Your payment history makes up more than 30 percent of your credit score. And any late payment can be reported (including cell phones and library fines).
That’s why it’s important to make all of your payments on time. And if you can’t, talk to your creditor about setting up a payment plan or reviewing other repayment options they have before you go delinquent.
4. Keep old accounts open
The length of your credit history also factors into your credit score. So you can have an easy win in this category by keeping those old accounts open and in good standing as long as possible
5. Rinse and repeat
If you want to see your credit score go from bad to good, then it’s important to adopt all four of the above habits and keep at them for years to come.
A bad credit score isn’t forever
By staying on top of your credit score, you can rest assured that you’re giving yourself access to the best financial opportunities out there. If you know you have a bad credit score right now, don’t let that discourage you. Anyone can take their credit score to the next level if they diligently work at it.
Follow the best practices listed above, keep checking your credit report in case of any errors, and stay hopeful that you’ll see an improvement. It isn’t always easy, but you can move past financial missteps from the past to create a much brighter financial future.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.48% – 6.25%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|