Have Bad Credit? Here’s What That Means and How You Can You Fix It
Bad credit is usually caused by some combination of two things. And if you’re going to improve your score, those two areas are what you’ll need to tackle.
A lot of people are vaguely aware that having bad credit is—well—bad. They know that it means being denied for personal loans and credit cards from traditional lenders. They know that it means trouble finding an apartment—or even sometimes a job. They know that if they need money in a hurry, they’ll likely have to rely on short-term bad credit loans or predatory no credit check loans (like payday loans, title loans, and cash advances) to make ends meet.
But there’s a lot of things that some people don’t know about bad credit. They don’t know what kind of scores are “bad” versus “fair” or “good.” They don’t know what kind of behavior led to them having a bad credit score in the first place. Most importantly, tons of folks with bad credit don’t understand the steps they need to take in order to fix their score. If you count yourself among their ranks, don’t worry. That’s why we’re here.
What is a “bad” credit score?
When we’re talking about credit scores, we’re most often talking about FICO scores. These are the most common type of credit score, and they are expressed on a scale from 300 to 850. The higher your score, the better your credit.
While there is no hard and fast line demarking “good” credit from “fair” or “bad” credit, there are general tiers of creditworthiness that are useful to know. The quality of your FICO score roughly breaks down along the following lines:
- Great Credit: 720-850
- Good Credit: 680-719
- Fair Credit: 630-679
- Subprime Credit: 550-629
- Poor Credit: 300-549
So if you have bad credit, that means that you have “subprime” or “poor” credit, which is a score between 330 and 629. A score in the “subprime” range will shut you out from most traditional financial products, especially loans, online loans, or credit cards that are unsecured by collateral. And the kinds of secured loans (like mortgages or auto loans) that you can qualify for will come with much higher interest rates.
If you’re wondering what the difference is between subprime credit and poor credit, it’s like the difference between having a few good financial options and having practically no good options at all. With a subprime credit score, you can still qualify for some reasonable and affordable bad credit loans—like certain bad credit installment loans—while a poor credit score under 550 means relying almost entirely on short-term no credit check loans like payday loans and cash advances.
How did your score get here?
Your FICO score is based on information in your credit reports, which are documents that track your history as a borrower and user of credit over the past seven to ten years. These reports are created and maintained by the three major credit bureaus: Experian, TransUnion, and Equifax.
There are five main categories of credit report information that are used to create your credit score. Those categories are your payment history, which makes up 35 percent of your total score, your amounts owed (30 percent), the length of your credit history (15 percent), your credit mix (10 percent) and your recent credit inquiries (10 percent).
As you can see from the previous paragraph, your payment history and your amounts owed make up almost two-thirds of your total score. So if you have bad credit, the answer almost certainly lies in some combination of those two areas: You’re not paying your bills on time, you’ve taken out too much debt, or both.
Here’s how you can fix a bad credit score.
Luckily, the fact that these two areas have contributed so greatly to your lousy credit means that the solutions for fixing your credit score are fairly clear. Simply put, you need to start paying your bills on time and you need to pay down your outstanding debt!
In order to do both of these things, you’re going to need a household budget in place. With a budget, you can manage your cash flow to ensure that you always have the money to pay your bills on time, and you can put aside extra funds to pay down your outstanding debts.
The two best methods of debt repayment are the Debt Snowball and the Debt Avalanche. Both methods involve putting all your extra debt repayment funds towards one debt at a time while making only your monthly minimum payments on all your other debts. The difference is that the Debt Snowball has you pay your debts off from smallest to largest while the Debt Avalanche has you pay off your highest interest rate first—saving you money in the long run.
When it comes to paying your bills on time, there’s less of a tried and true method. You just have to be extremely vigilant: Even one late payment can hinder your score for years to come. And the later a late payment is made, the longer it can negatively affect your score. If you have trouble paying certain bills on time because they’re all clumped together, contact your creditors and ask to have your due date changed. Set up automatic alerts so that you know when a bill is coming due.
Above all else, what you need is patience. Fixing bad credit takes time—especially bad credit that arises from a spotty payment history. While waiting for your score to improve, you should also focus on building an emergency fund. That way, your next unexpected bill or surprise expense won’t leave you scrambling to bridge a financial gap—possibly hurting your credit even further.
To learn more about improving your credit, check out these other posts and articles from OppLoans:
- How to Raise Your Credit Score by 100 Points
- Will Closing a Credit Card Affect Your Credit Score?
- How to Build Credit When You Have No Credit at All
- Why Do (Some) Credit Checks Lower Your Score?