What Exactly Is A “Bad” Credit Score?
There’s no single definition as to what makes a “bad” credit score—but we can provide some handy signposts to help you decide whether your credit’s in trouble.
On this blog, we write a lot about how bad credit negatively affects people’s lives, and what these folks can do to improve their scores. We write about bad credit so much, in fact, that it’s easy for us to forget this very simple fact: Lots of people don’t know what a “bad” credit score is.
Like most things, we can tie this back to TV. Here’s an exchange from the beloved cult sitcom Brooklyn Nine-Nine:
Jake: But look at this credit score! 100!
Victor: Out of 850.
Jake: No, really?!
Obviously, that’s exaggerated for comedic effect— for instance, you can’t have a credit score below 300—but the point still stands. You can’t fix your bad credit if you don’t understand that you have bad credit in the first place.
Luckily, that’s where we come in. So sit back, relax, and enjoy this primer on what exactly constitutes “bad” credit.
How do credit scores work, again?
Your credit score is a three-digit number that expresses your creditworthiness. It’s the number that lenders, landlords, and other companies will pull in order to determine whether or not they should do business with you.
By looking at your credit score, these parties can determine how likely you are to pay them back. The better your score, the more personal loans and credit cards you will be approved for. Additionally, you’ll be able to score higher principals (or credit limits) and lower rates.
The most common type of credit score is the FICO score, which was introduced by Fair, Isaac and Company in the 1980s. (The company now just goes by FICO.) Your FICO score exists on a scale of 300 to 850. The higher your score, the better.
Your score is drawn from information on your credit reports, which contain records of your history as a borrower. Most of that information dates back seven years, but some info—like bankruptcies, for instance—stays on your report for longer.
And how do credit reports work?
Your credit reports are compiled by the three major credit bureaus: Experian, TransUnion, and Equifax. They consist of information reported to the bureau by lenders, landlords, utility, companies, debt collectors, and also information that’s on the public record. Not all of these parties report to all three credit bureaus, which means your info can vary from one report to another.
Those three bureaus keep records on hundreds of millions of Americans, which means that mistakes can and do happen. A mistake on your account could dramatically affect your credit score, so you’ll want to check your reports regularly and contest errors when you find them. Luckily, you can request a free copy from each of the bureaus once a year, just visit www.AnnualCreditReport.com.
If you think of your credit report as a test, then your credit score is the final grade you receive. Information about whether you pay your bills on time, how much you’ve borrowed, how long you’ve been borrowing for, and how many hard credit checks you’ve had is fed into the credit scoring formula to produce a single three-digit number that summarizes your creditworthiness.
Okay, so what is a bad credit score?
The reason that many folks don’t know what constitutes a “bad” credit score is that, well, there isn’t a hard and fast line between a “good” and a “bad” score. And while some definitions don’t make room for credit that’s neither good nor bad, we don’t believe in that. You’ll see below that we have a tier for “fair” credit, a range that some would simply write off as bad credit.
Phew. Okay. All that having been said, here are the five basic credit score tiers:
You can haggle over any of these designations. Some will tell you that “great” credit starts at 750, not 720; others will insist that any score below 650, or even 680 is “bad” credit. But while a score under 680 certainly qualifies as “subprime” credit, we believe that there’s enough of a difference between scores in this range and scores under 630 to classify them separately.
Anyway, there you have it: a bad credit score is a score between 550 and 629. Really, there is very little difference between having “bad” and “awful” credit. One way they do differ: Folks with bad credit can generally access bad credit loans and credit cards, while those with awful credit often have to rely solely on no credit check loans like payday loans, title loans, cash advances.
There’s a difference between bad credit and no credit.
In 2017, the average credit score in the United States was 700, but there are still over 100 million Americans with scores that are either subprime or worse. Having been locked out from traditional lenders, people with bad credit often have to rely on predatory lenders just to get by. Even those with fair credit can find borrowing from a traditional lender difficult.
There is, however, an important difference between people who have bad credit and those who have no credit. Simply put: Bad credit means you have a history of using credit poorly, while no credit means you don’t have enough credit history to build an accurate score. While both can result in very low credit scores, having no credit can just as easily result in no score at all.
The length of your credit history is one of the five main factors used in creating your credit score. And it makes sense: The longer your track record of using credit responsibly, the more likely you are to use it responsibly in the future. If you have no credit, getting a secured credit card and using it to slowly build your credit history is a great strategy to establish better credit.
How can you improve a bad credit score?
We mentioned in the previous section that the length of your credit history was one of the five main factors used in creating your credit score. The other four factors are payment history, amounts owed, credit mix, and new credit inquiries.
Of those five factors, your payment history and your amounts owed are by far the most important. Payment history makes up 35 percent of your score, while your amounts owed makes up 30 percent. Together, these two factors comprise 65 percent (almost two-thirds) of your total credit score!
So if you’re looking to take your score from bad/awful to fair/good/great, there are two things you need to do above all else: Start paying all your bills on time and pay down your outstanding debts. If you take care of those two things, everything else should fall into place.
Easier said than done, right? We know. To read more about how you can dig yourself out of debt, check out these related posts and articles from OppLoans:
- Financial Priorities: Which Debts Should You Pay Off First?
- Are Balance Transfers a Good Way to Pay Down Debt?
- Sweep Away Your Debt With a Debt Avalanche