Published in: Banks | April 18, 2019
By: Christy Bieber
A credit score is an extremely important financial metric as it is used for a lot of different things. Lenders use them to decide whether to give you a loan and how much interest to charge. Companies, including utility companies, use them to decide whether to do business with you and what kind of deposit will be required. Landlords use credit scores when deciding whether or not to rent to you, and employers sometimes check credit history when you apply for a job.
Because credit scores are so essential to so many aspects of your life, you need to understand how they work. And, the first thing to know is, there's not just one credit score, but many. In fact, all different kinds of financial institutions and credit scoring agencies can create their own scoring models.
The two most widely-used credit scoring models, however, are FICO and VantageScore. These two scoring models both have a range from 300 to 850 (although older VantageScores ranged from 501 to 990). Scores at the higher end of this range are considered good, but scores at the lower end of this range are considered to be poor.
When you're working to build credit, it's helpful for you to know what's a good credit score and what's a bad credit score. This guide will help you to understand what credit scores are considered poor, and will provide some tips on how to improve a bad credit score and what to watch out for if your credit score is poor and you're trying to borrow.
Generally, credit scores between 300 and 579 are considered to be "very poor." If your score is within this range, you will have difficulty finding most types of financing. In fact, you may not even be able to qualify for special mortgages, such as FHA mortgages with a 3.5% down payment, that are designed to make it easier for people to buy a home for the first time.
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Credit scores within the 580 to 669 range, on the other hand, are considered to be "fair." This means your credit is just OK. You'll probably be able to get most types of loans, but you may pay a higher interest rate because of your lower score.
Your credit isn't considered "good" until you have a score of at least 670 -- and it's not considered "very good" until your score hits 740. Finally, the very highest credit scores, those between 800 and 850, are considered exceptional.
Unfortunately, it doesn't take much to drop your credit score down into the fair range. In fact, even a single late payment could reduce your score by more than 100 points. Repeat late payments or a history of bankruptcy, foreclosure, or court judgements is likely to result in a "very poor" score. Having too little credit could also result in your score being low, because lenders want to see a history of responsible borrowing.
If your score isn't as high as you'd like it to be, there are steps you can take to try to improve it. These include:
If you can stick with having a few different types of loans that you pay on time, you should be able to build up your credit score. While it can take as long as 7 to 10 years for negative information such as foreclosures, bankruptcies, and late payments to fall off your credit report, older negative events won't hurt your credit as much if your recent borrowing behavior is good.
When you borrow with bad credit, you need to watch out for people hoping to take advantage of the fact you're desperate for financing. Make sure you understand the terms of any loan you take out. You don't want interest-only loans, for example, because these will have low monthly payments but you'll never pay the balance down. Bad credit loans with very high interest rates may also be inadvisable, as the interest may be so high that you struggle to make payments and your credit only gets worse.
You should also watch out for credit repair scams. There's no easy, fast way to fix your credit and anyone who tells you differently is just trying to take your money. Don't give it to them, or you'll have nothing to show for it -- and they could make your situation worse if they engage in dishonest tactics such as encouraging you to apply for credit under a new tax ID number instead of your Social Security number.
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If you have bad credit, you can work to improve it. You just need to pay bills on time and work on paying down debt. It may seem hard, but all it takes is a little time and effort. It's worth doing, because improving your credit will make your financial life a lot easier.
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