How Bad Is My Credit Score?

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How Bad Is My Credit Score?

You probably already know whether you have extremely terrible or incredibly excellent credit. However, there is a large gap in the center where your score is too low to get you the best deals. If you want to apply for a new credit card, obtain a vehicle loan, acquire a mortgage to purchase a home, or borrow money for any other reason, the quality of your credit score is critical.

Key Takeaways

  • If you have a low credit score, you will normally pay higher interest rates on loans and credit cards, and you may be denied altogether.
  • A poor credit score may also boost your insurance prices and make it difficult to rent an apartment or find work.
  • A variety of things influence your credit score, the most essential of which is whether you pay your payments on time.

Why Credit Scores Matter

Few banks will take a risk on you if you have a low credit score. Those that do will almost certainly just give you their highest prices. Even a fair credit score may result in higher rates than those available to persons with exceptional credit.

A poor credit score may potentially raise your insurance prices or force insurers to refuse you entirely. It may stand in the way of you renting an apartment. Negative things on your credit record might even damage your job application.

Let’s look at what constitutes a poor credit score, how you got there, and what you can do to improve it.

Do You Have a Good or Bad Credit Score?

Credit scores, which may vary from 300 to 850, include five elements to assess your creditworthiness: your payment history, current amount of indebtedness, categories of credit utilized, length of credit history, and new credit accounts. 1

A terrible credit score is one with a FICO score between 300 and 579. (FICO is an abbreviation for Fair Isaac Corporation, which developed the most extensively used credit scoring system.) Some score charts split that range, designating “poor credit” as 300 to 550 and “subprime credit” as 550 to 620. With a credit score of 620 or below, you may have difficulty obtaining a decent interest rate or perhaps securing a loan at all. An great credit score, on the other hand, lies between 740 and 850. 2

Things That Can Hurt Your Score

Borrowers with poor credit are more likely to have one or more of the following negative entries on their credit reports:

  • Delinquent payments
  • Charge-offs
  • An account in collections
  • A foreclosure
  • A real estate short sale, such as a house.
  • A deed in lieu of foreclosure
  • A bankruptcy
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Because your payment history accounts for 35% of your score, skipping payment due dates has a significant negative impact on your score. 3 However, being 31 days late is not as awful as being 120 days late, nor is failing to pay for so long that your creditor sends your account to collections, charges off your debt, or agrees to settle the obligation for less than you owe.

Another significant aspect, accounting for 30% of your score, is the amount you owe in relation to the amount of credit you have available. 3 Assume you have three credit cards, each with a $5,000 credit limit, and you have exhausted all of them. Your credit usage rate is 100 percent. Borrowers with a ratio of 20% or less are favored by the scoring methodology.

To maintain a credit usage percentage of 20%, someone with $15,000 in available credit should keep their debt under $3,000.

Your credit history accounts for 15% of your overall score. 3 You have little control over this component. Either your credit history is many years old or it isn’t.

Because the amount of new credit accounts you have contributes for 10% of your score, asking for new loans to transfer your debt around may harm your score. 3 On the other hand, if shifting your debt results in a reduced interest rate and makes it easier to get out of debt, new credit may eventually increase your score.

The remaining 10% of your score is determined by the sorts of credit you utilize. 3 If you have an auto loan, a mortgage, and a credit card—three forms of credit—you may have a higher credit score than if you simply have credit cards. Again, don’t be too concerned about this one. Applying for various sorts of loans in an effort to boost your credit score will have no influence and will just get you further into debt—not what you want if your credit is less than fantastic. Instead, concentrate on paying off your debts and making your payments on schedule.

Things That Won’t Directly Affect Your Score

You may be relieved to learn that the following things have no direct influence on your credit score:

  • Your earnings. It makes no difference if you earn $12,000 or $120,000 per year as long as you make your payments on time. A low income does not have to imply poor credit.
  • Where you reside. Living in a poor area will not give you a low credit score, and living in a nice neighborhood will not give you a good score. If you own a property, the value has no bearing on your credit score.
  • Taking part in a credit counseling program. Signing up for bill-paying assistance has no effect on your credit score. The particular measures you take as part of that program will determine how you rank.
  • It’s your race. Even if someone might estimate your race based on your name, FICO does not consider race when calculating your credit score.
  • Your marital situation. Your credit report does not indicate if you are married or divorced, and it does not affect your credit score. Marriage may indirectly result in a positive credit score if having two salaries makes it simpler to pay expenses you were having trouble paying—or it may result in negative credit if you marry someone who is financially reckless. Divorce may have an indirect impact on your credit score if it harms your finances, but married status will not directly effect your score.
  • The interest rate on any loans or credit cards you have. The scoring methodology doesn’t care whether you’re paying the default interest rate of 29.99% on a credit card or a special introductory rate of 0%.
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Does No Credit MeanBad Credit?

Having no credit history and no credit score—as you may have if you’re fresh out of college or new to the United States—doesn’t imply you have “poor” credit. Even so, it may make renting an apartment, opening a credit card account, or getting a loan more difficult. In many circumstances, you may compensate for your lack of a score by demonstrating your financial responsibility in other ways.

If you wish to get a mortgage, for example, you may include a record of on-time rent and utility payments with your application. If you aren’t qualified for a traditional credit card, you may apply for a secured credit card, which may qualify you for a traditional one after a certain length of time.

3 Tips for Improving a Bad Credit Score

Here are some easy things you may do to enhance your score over time.

1. Make at least the minimum payment on all accounts on time, every time. You may not have the funds to completely pay off your obligations or even make a significant difference in them, but making the minimal payment by the deadline each month can enhance your credit score.

2. Attempt to correct severe credit report inaccuracies. AnnualCreditReport.com is the official website for obtaining free credit reports from the three main credit reporting agencies (Equifax, Experian, and TransUnion) once a year. The reports of the three agencies may vary somewhat based on the information they gather. If you detect an inaccuracy on any of them, you may register a “dispute” by following the processes described on the website of that agency. The agency is then obligated to conduct an investigation and report back to you. Consider using one of the top credit monitoring services to assist you in detecting inaccuracies on your credit report.

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3. Communicate with your creditors. If you’re having difficulty repaying your bills, consider if you can work out a better deal with your credit card company or other lenders. Make sure any agreement is in writing. However, be warned that certain combinations might lower your score. Requesting that your credit card payment be moved to five days after you get your paycheck, for example, would not harm your credit score, but requesting that your loan sum be reduced will.

The goal here is not only to improve a three-digit figure, but to address the issues that may have led to you being in a bad financial position in the first place. In the long term, having a 740 credit score isn’t as important as having your obligations under control and being able to concentrate on your financial objectives for the next years. If you want further assistance in eliminating bad marks from your credit report, the top credit repair organizations can communicate with the three main credit reporting agencies on your behalf.

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