What Is a Bad Credit Score? [Definition & Tips to Fix One]

Having a poor credit score can be detrimental to your financial freedom. But what is a bad credit score? How does it come to the point that your poor credit score prevents you from taking out loans or even signing up for a credit card?

Read on to find out. Additionally, you’ll learn about the different credit scoring models and which ones are used regularly.

What Is Considered a Bad Credit Score? 

A credit score is considered to be bad if it’s below 660. Banks and other lenders refer to people with a low score as subprime which defines someone who they think will struggle to pay back loans.

Having a bad credit score means you may be a high-risk borrower. If you’ve failed to make repayments on loans or credit cards in the past your score will decrease.

Credit Score Definition

Are you struggling to understand your credit score’s meaning for your financial life? Many people struggle with the same issue, so you’re not alone. Essentially, a credit score refers to your financial performance. Lenders use a three-digit number to see if you qualify for credit. This credit can come in the form of a mortgage, loans, or even auto loans.

You can find your credit score in your credit report which is a full history of your financial standing and how you’ve dealt with your finances over the years. By looking at your report, lenders can see whether you have a bad or good credit score and decide whether to give you a loan or not.

If you’re struggling financially because of a poor credit score, you can search for good credit repair companies to assist you in fixing it.

Credit Scoring Models

There are two scoring models that lenders use to determine whether you have very poor credit or a good score. These two models are FICO and VantageScore. Although both of these scoring models are used, they are not the same. Below, we’ll explain the differences between the two credit score rating models.

FICO 

FICO is a data analytics company focused on credit scores. To determine whether you should be approved for a credit or not, a lender will look at your FICO score. This scoring system measures the following:

• How much credit do you have
• How long you’ve had credit
• How much of your credit is being used
• Whether you make your repayments on time

So what is a bad credit score range with FICO? If your FICO score ranges between 300 and 579, it’s considered to be very poor. Some people with this score may not get approved for new credit at all. Or they’ll have to pay a deposit before they can take out a loan.

FICO uses bureau-specific scoring. For example, there are three FICO Score 9 models for one of each of the major credit bureaus in the US:

• Experian
• TransUnion
• Equifax

If you want to apply for new credit and you have a low score, look up ways on how to get a loan with bad credit. There are credit companies that will accept an application even if you have a low FICO credit score.

VantageScore

VantageScore is another type of credit model that works similarly to FICO. The company also extracts your credit data to determine whether you’ll be approved for new credit. So how does the credit score model work with VantageScore? Well, it uses the same credit score ranges that FICO does. A score between 300 and 499 is considered poor. An excellent score is one between 700 and 850.

This credit scoring model has been created jointly by the three credit scoring agencies. If you have a poor credit score with VantageScore you’re not likely to get approved for new credit.

VantageScore will start recording your credit score after one month of getting new credit. Some scoring models such as FICO will only start recording after having six months of credit.

Which Is More Commonly Used?

The most commonly used credit score scale model is FICO. This is because 90% of the major lenders rely on the information extracted by FICO to determine how much of a risk an applicant is at when approving credit.

There are also industry-specific scoring models by FICO. For example, a FICO Auto Score is used if you want to buy a car using an auto loan. If you’d like to apply for a credit card, a FICO Bankcard Score between 2 and 8 is used.

So the reason FICO is used more often than VantageScore is that it has different models that specific industries use to determine your score.

How Is It Reported?

Information about your credit history is sent to the three major US credit report bureaus. This is done electronically for quicker results. The report contains everything from your payment history to your credit card and loan information.

Every time you take new credit or there are amounts owed it will be reported and kept in a file for future reference. When you want to apply for loans this report will be retrieved to see whether you have debt or whether you always pay your accounts on time. Based on this report you’ll either have an excellent or low score.

How Is a Credit Score Calculated?

FICO scores are calculated using the following data from your report:

• Amounts owed – 30%
• Length of credit history – 15%
• Payment history – 35%
• New credit – 10%
• Credit mix – 10%

The percentages shown above show how important each type of report is. These scores are calculated using positive and negative credit information. Your scores will be unique based on your history.

For example, if you fail to make repayments on loans, it will reflect badly on your payment history. On the other hand, if you have a longer credit history it can increase your credit score rating.

What Is the Average Credit Score? 

A FICO 580 credit score is considered average. With VantageScore, a credit score of 661 is considered an average rating. If you want to increase your credit score, a good place to start is to figure out how to get out of debt first.

How to Get a Free Credit Score Report 

There are free credit score services available to you if you’d like to know your score before applying for credit. Take a look at these options below:

• Experian (FICO Score): According to federal law, you are allowed to request an online free credit report from Experian annually. Visit www.AnnualCreditReport.com to request your free digital report. The FICO Score is used to check your credit rating with this service provider.
• Discover Credit Scorecard (FICO Score): If you are a Discover Credit user, you can visit the company’s website to check up to a year of recent scores online for free. Additionally, members can see their score on statements.
• CreditWise from Capital One (VantageScore): To request a free credit report from Capital One you can phone 1-877-322-8228 or visit www.AnnualCreditReport.com. Additionally, you can check your score through TransUnion anytime using CreditWise.
• Chase Credit Journey (VantageScore): To get your free credit report from Chase Credit Journey you can sign up on the company’s website to get started. You don’t have to be a Chase account holder to check whether you have a good or bad credit score.

How a Poor Credit Score Can Affect You

In this section, we’ll discuss some of the negative effects that a low credit score can have on your financial life.

Higher Interest Rates

Credit score lenders view those who have poor scores as a liability. They see you as someone who doesn’t take their loans and credit card obligations seriously. You may still get approved for credit with a poor score. However, some companies will then charge you higher interest rates on installment loans for bad credit. This method is used to prevent you from taking out more loans than you can handle.

Trouble Getting a Mortgage

You may struggle to buy a house if you have a low credit score rating. For most lenders, the average score to buy a house is 620. If you have more than 700, you’ll get lower interest rates when you take out a mortgage for a house.

There are companies that offer bad credit home loans but you may have to pay higher interest rates.

Risk of Being Denied Credit

Most lenders won’t approve your application if you have a credit score of 300 or below. If you apply for credit cards, loans, and auto loans, your application may get denied due to your low credit score.

If you want credit, you must make sure that you do everything you can to improve your credit score. Don’t take out too many loans and make sure you avoid late payments. And, if you have bad credit, you can use Credit Saint’s restoration services to fix it.

Difficulty Getting Approved for an Apartment or Cellphone Contract

You may not get approved to rent out an apartment if you have a history of late payments. Not paying rent is a huge liability for property owners so you may struggle to find someone who is willing to give you a chance.

So what is a bad credit score for renting? Well, the minimum credit score is between 600 and 620 for renting an apartment.

You may also struggle to get a cellphone contract with a poor credit score. Cellphone companies will check your credit report when you sign up for their services. These companies need to know how reliable your repayments will be before they approve your application, so we advise you to look into some ways to fix your credit score along the way.

If you have poor credit, you may have to sign up for a prepaid cellphone or a month-to-month contract.

Risk of Being Turned Down for a Job

There are certain jobs especially in finance or higher managerial positions that require you to have an excellent credit score before you can get approved for a job. If you have outstanding bills or you’re on the brink of bankruptcy, you may get turned down for the job you applied for.

Employers will check your credit report for this information not to see whether you have a good or low credit score but to see whether you are responsible with your finances.

Difficulty Obtaining a Small Business Loan

Do you want to start a business? You may need to obtain a business loan to get started. However, most lenders won’t give you credit if you have a poor score. Or it could result in only a small loan. With a decreased credit limit you may not be able to start your business.

Difficulty Obtaining a Conventional Car Loan

You may struggle to get a car loan if you have a poor credit score. So what is a bad credit score for buying a car? For a new car loan, you’ll need an average score of 721. If you want a loan for a used car you’ll need a credit score of 657.

Some auto loans will approve applicants that have a score of 500 but you may pay higher interest rates on repayments.

What Not to Do If Your Credit Score Is Bad

There are companies that offer bad credit loans with guaranteed approval. But choose them wisely. Be especially careful if you’re applying for a car loan or secured cards for credit, as these often come with unreasonably high fees and interest rates.

If you already have a bad credit score then you should avoid doing the following:

• Don’t close existing credit cards.
• Don’t open too many new accounts at once.
• Don’t apply for too many loans or credit cards (each hard credit check will further hurt your score).
• Don’t fail to make repayments on your accounts.
• Avoid using your credit card to decrease your credit utilization. Being an inactive card user will hurt your credit score.
• Don’t only use credit cards. Try to diversify your credit file with other types of loans.

Conclusion

So let’s recap on what is a bad credit score. If you have a credit score of 300 or below, you have a very low score, and you may not be approved for loans or credit cards.

You could have a poor credit score if you haven’t ever signed up for a loan or credit card. Or you could have a low score because you’ve fallen into debt and you’ve failed to make repayments on loans and credit cards. You may want to contact a debt consolidation company or search for another way to get out of debt with no money and bad credit.

If you have no credit at all, there are ways you can build it up. There are credit card companies that will accept applications with low credit scores. To ensure that you never fall into a financial trap, don’t take out too many loans. Always make sure you pick a credit lender that offers low-interest rates if you do apply for credit and always pay your accounts on time.