It can be depressing when you’re at the bottom of the credit scale, but it doesn’t have to be.
You can increase your credit score if you use the right techniques and persevere. And I promise you, it won’t take you the rest of your life to build a solid credit score, either. So let’s get started.
What is considered bad credit?
Here’s a broad definition: A consumer who has bad credit, also known as bad credit, has a FICO score of 579 or less. With a bad credit rating, you may only be approved for credit cards, mortgages, or personal loans with high interest rates. But see this as a temporary problem. Once you start working on your score, your ability to get credit will improve.
Understanding how credit scores work can help you make better credit decisions. There are two credit scores that are most often used by lenders: FICO scores and VantageScores. FICO also offers score versions for different industries.
About 90% of lenders use some version of the FICO score to help determine an applicant’s creditworthiness. FICO Score 8 seems to be the most used version, but there are also newer versions like FICO Score 9 and FICO Score 10. It takes a long time for lenders to use a new score, which is why FICO Score 8 is still so popular.
FICO scores range from 300 to 850. According to myFICO.com, here are the values for each credit score range:
- Exceptional: 800 and more.
- Very good: 740 to 799.
- Good: 670 to 739.
- Fair: 580 to 669.
- Bad: 579 and below.
As you can see, the bad credit score range for FICO is 579 and below. The average FICO score in April 2021 is 716, which is considered good credit. A bad FICO score is a little below average. Improving your score might seem impossible right now, but having good credit will be within your reach after spending time rebuilding your credit.
Let’s take a look at the factors that make up the FICO score:
- Payment history: 35%.
- Amounts due: 30%.
- Length of credit history: 15%.
- New credit: 10%.
- Credit mix: 10%.
If you have a bad credit rating, it means lenders think you have a high risk of delinquency. In fact, about 61% of consumers with a credit score below 580 are likely to become delinquent on a credit-related account, according to FICO. This is why it is difficult to get credit approved without paying high interest rates.
VantageScore ranges from 300 to 850, as does the FICO score. But because VantageScore weighs options a little differently, a FICO score of 700 cannot be directly compared to a VantageScore of 700. Additionally, FICO scores have different ranges for each credit score.
Here are the VantageScore ranges:
- Excellent: 750 to 850.
- Good: 700 to 749.
- Fair: 650 to 699.
- Poor: 550 to 649.
- Very poor: 300 to 549.
As you can see, there are two categories that could be considered to fall under the bad credit range. With VantageScore, bad credit ranges from 550 to 649. And very bad credit is less than 550. You will need a score of 650 to climb into the fair credit score range.
Rather than using percentages like FICO does, VantageScore focuses on the influence of each factor in the algorithm. The factors that make up the VantageScore include:
- Available credit, balances and use of credit: extremely influential.
- Credit and experience mix: very influential.
- Payment history: moderately influential.
- Age of credit history and new accounts: less influential.
How bad credit affects you
The impact of a bad credit score, regardless of which score is used, can be significant. You will pay high interest rates when you apply for credit. And that’s assuming you can get approved for credit. Bad credit can make it difficult to buy a home, rent an apartment, or even install utilities.
Bad credit can also lead to higher auto and health insurance rates in some states. And if you apply for a job with an employer who wants to see your credit report, it will most likely be obvious that you have bad credit because of the items listed on your report.
But there are ways to get started on the path to good credit. It takes time, but persistence will help you get there.
How to fix bad credit
Now that you know more about how credit scores work, your short term goal is to move to fair credit, which for FICO is 580.
Your long-term goal? To get the lowest interest rates, you’ll need a FICO score of at least 760, which puts you in the very good FICO score range. This won’t happen right away, of course, but it is a possibility if you use one or more of the following strategies.
Set a budget and track expenses. If you don’t have a budget, you need to set one today. Once you remedy this situation, you should also track your spending which is easy to do with a free app or online money management tools.
It’s hard to stay on budget if you don’t know how much you’ve spent and where you’ve spent it. Going into debt or increasing the debt you already have could worsen your credit score. So think of it as your financial base. A solid foundation helps you build good credit.
Get a secured credit card. With a bad credit score, you will have a hard time getting a decent credit card approval. Before you decide to get an unsecured credit card with a high annual percentage rate and monthly maintenance fees, take a look at secured credit cards.
You will need to pay a deposit to secure the credit card. But you will get a normal looking credit card to use for your purchases. These cards are listed on your credit report as a revolving credit account, and as long as your issuer reports your payment history to the credit bureaus, you will achieve a better credit score. That is, as long as you use the card responsibly.
Many people are unaware that this option exists. You can check with your local bank or credit union to see if credit loans are available. Each institution has its own set of rules and rates for lending from credit builders, but usually the bank or credit union sets up a blocked deposit account that has a small amount, such as $ 1,000. .
You then repay the “loan” in monthly installments. This type of loan is identified as an installment loan by the FICO score algorithm, which also gives you a little boost in the “mix of credit” category.
You have a credit utilization rate, which is the amount of credit used versus the amount of credit available. If you keep balances on your credit cards from month to month, your ratio could be high.
A ratio above 30% can lower your credit score. As you pay off your debt, your credit score will start to rise. As already stated, the available credit is 30% of your credit score. To get the greatest positive impact on your score, keep your balances below 10%.
How to maintain a good credit score
If you make maintaining good credit a priority in your life, you will reap many financial benefits. You’ll get better interest rates, get approved for better credit cards, and save money on mortgages.
- Pay your bills on time. Payment history is 35% of your FICO score. Be consistent with timely payment habits, and you will see it reflected in your credit score.
- Keep utilization rates low. You learned about credit utilization ratios in the previous section. Once you’ve paid off your debts, your ratio goes down, which improves your score. Remember this: lowering debt helps you correct a bad credit rating. But even after the credit card debt is paid off, maintaining a 10% ratio on each credit card helps you turn a good score into a great score.
- Don’t close credit cards. Closing a credit card negatively impacts your score. Here’s why: When you close a card, you lose available credit. This increases your credit utilization rate, which can lower your credit score.
- Spread out credit card applications. Whenever you apply for a credit card, the issuer does a thorough investigation to examine your credit report and score. Your score may drop between two and five points for each application. A firm request stays on your report for two years, but it no longer impacts your score after it’s been on your report for 12 months. So wait about four to six months after applying for a credit card before applying for a new card.
It is also important that you stay clear of credit card debt. It is very difficult to have a high credit score if your credit usage is high due to debt. Have a budget for each credit card you use and pay off the balance on the due date each month. Stick to your budget and you’re unlikely to go into debt.