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If you have bad credit, you know how it can get in the way of living a good life. Bad credit makes many common financial activities more difficult, whether you’re opening a new credit card or taking out a first mortgage. If you have poor credit, you might get stuck with lower credit limits and higher interest rates — and bad credit might even prevent you from getting that new job.
What is considered a bad credit score? Why do you have bad credit, and what can you do to fix it? Let’s take a closer look at how credit scores work, what factors go into a bad credit score and how you can improve your credit score and access better financial opportunities.
What is a bad credit score?
Credit scores are ranked along the following metric: Excellent (sometimes called “Exceptional”), Very Good, Good, Fair and Poor.
Here’s how the FICO credit scoring system ranks credit scores:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
A bad credit score is somewhere between 300 and 579 using the FICO system, which is one of the most common credit scoring systems. In fact, according to myFICO.com, over 90 percent of top lenders use FICO to help them make lending decisions.
In 2018, the average FICO credit score was 704 points. If you have bad credit, your credit score is significantly lower than the average. However, that doesn’t mean that you have to let your bad credit hurt your finances long-term. Credit scores aren’t set in stone — and once you understand how to improve your credit, you can begin working your way toward a perfect credit score.
How does a bad credit score affect your credit?
A bad credit score comes with a high cost. If your credit score is below 580, it might be harder for you to open a new credit card, get a mortgage or rent an apartment. Poor credit could even hurt your chances of getting a new job if your employer runs a credit check as part of the hiring process.
In many cases, lenders will be less willing to offer loans or other lines of credit to people with low credit scores. If you do receive a loan or a credit card, you might end up paying higher interest rates than people with higher credit scores. That said, you still have options. You can apply for one of the best credit cards for bad credit or put a deposit on a secured credit card and begin rebuilding your credit score. If you need to take out a loan, here are some bad credit personal loans to consider — and if you’re shopping for a mortgage, here’s our advice on how to get a mortgage with bad credit.
How is a bad credit score calculated?
Your credit score is based on the information in your credit report. Each of the three major credit bureaus (Equifax, Experian and TransUnion) builds a unique credit report based on the way you use the various credit accounts under your name. If you pay your credit card bills on time every month, that shows up on your credit report — but if you miss a credit card payment, that shows up on your credit report as well.
Here are the five factors that make up your credit score, according to the FICO model:
- Payment history: whether you make regular on-time payments on your credit accounts (35 percent).
- Credit utilization: your debt-to-credit ratio, or your current credit balances compared to the amount of credit available to you (30 percent). To keep your credit utilization from negatively affecting your credit score, try to only use between 10 and 30 percent of your available credit.
- Credit history: the length of your credit history — that is, how long you’ve successfully maintained open credit accounts (15 percent). This is why it’s a good idea to keep old credit cards open, even if you’re no longer using them.
- Credit mix: the mix of credit in your account (10 percent). Having multiple types of credit under your name, such as a credit card and a car loan, can boost your credit score. Lenders like to see that you can manage both revolving credit and installment loans.
- Credit applications: how often you apply for new lines of credit (10 percent). Every time you apply for a credit card or loan, a lender does what’s called a “hard pull” on your credit report. This credit inquiry signals that you’re shopping for new credit — and if you’re shopping for too much new credit at once, it’s a signal that you might be planning to take out debts that you can’t pay off.
It’s possible to have a high credit score even if you are weak in one of the five factors. If you are relatively new to credit, for example, you might not have an extensive credit history — and you might only have one or two credit cards under your name, which means you don’t have much of a credit mix yet. However, if you make on-time payments, keep your balances low and avoid applying for too much credit at once, you can still build and maintain a good credit score.
How can you improve a bad credit score?
There are many ways to improve a bad credit score. Your first step? Making on-time payments on all of your credit accounts every month. Since payment history is the biggest factor that goes into your credit score, it’s important to prioritize those on-time payments — even if you can only make minimum payments right now.
Once you’ve gotten into the habit of making regular on-time payments, see if you can start paying off your balances. Getting out of debt can be hard, but any progress you make on your outstanding balances will lower your credit utilization ratio and help boost your credit score.
As your credit score starts to improve, you might want to consider asking for a credit limit increase or applying for a new credit card. Both of these options will increase the amount of credit available to you, lower your credit utilization ratio and help your credit score — as long as you don’t turn your new credit into new debt.
If you have so much debt that it feels overwhelming, you may need to ask for help. Look for a reputable credit counseling service that can work with you to create a plan to pay down your debts and get your credit score up.
Here’s one more tip: Some people with bad credit have what are called “derogatory marks” on their credit report. These represent major financial setbacks, such as bankruptcies or foreclosures. Derogatory marks can seriously hurt your credit score, but they don’t last forever. Most derogatory marks and old debts fall off your credit report after seven years, and you can start rebuilding your credit right away.
Now that you understand what a bad credit score is and what factors make up your credit score, you can use this knowledge to boost your credit score and begin your journey toward good credit. Bad credit can make it harder to complete everyday financial activities like applying for a new credit card, but a bad credit score doesn’t have to be permanent. Keep practicing good credit habits like making on-time payments, and you’ll likely start to see your bad credit score improve.
3 credit habits that you need to break
Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.
Habit 1: Pushing the limits
The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.
The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?
To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.
In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.
Habit 2: Paying the minimum
You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.
Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.
So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.
Habit 3: Using it for every single expense
You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.
You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.
So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.
Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.
Free credit reports have been extended; here’s why it’s important to check yours regularly
Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.
Credit reporting companies Equifax, Experian and TransUnion are all offering free credit reports weekly through April 20, 2022.
The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.
Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
Free credit reports for all?
The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.
To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).
Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.
Protect yourself from identity theft
There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.
“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.
Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.
“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”
More reasons to check your credit
Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.
If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.
You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.
“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”
Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.
Set up a monitoring service, too
Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.
If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Do Personal Loans Have Penalty APRs?
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”
Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.
Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.
Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.
Other common personal loan fees include:
- Interest: The monthly charge you pay to borrow money
- Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
- Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
- Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)
As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.
None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.
Find the best personal loans
For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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