What is a bad credit score? – Forbes Advisor

A bad credit score can prevent you from qualifying for a loan. If your score is too low, it increases the chances of having your loan refused. And even if a lender approves your loan, you’ll likely have to pay a higher interest rate.

Since lenders often use different credit score models or internal guidelines, what is considered a bad credit score varies. However, we can give you an idea of ​​the quality of your score based on the credit score ranges of two of the most popular credit scoring models: FICO and VantageScore. We’ll also show you how to improve your credit score.

What is a bad FICO score?

The FICO 8 score, the most widely used version of the FICO scoring model, ranges from 300 to 850. Borrowers with lower scores pose higher risk to lenders. According to this model, a score of 669 or less is not a good credit score. Additionally, scores between 580 and 669 are considered fair; scores below 580 are considered low or bad.

In addition to the FICO Score 8 model, some lenders use different FICO scoring models for different types of loans. For example, when applying for an auto loan, a lender may use your FICO Auto Score. This score varies from 250 to 900; higher scores represent less risk.

What is a bad VantageScore?

The VantageScore credit score model also has a range between 300 and 850. However, according to this model, a credit score below 661 is not good. Scores between 601 and 660 are considered fair. Anything below this range is considered bad or bad (500 to 600) or very bad (300 to 499).

How to improve a bad credit score

If you have bad credit, you can take steps to improve it. Here are five actions you can follow:

1. Review your credit report. Your credit score is based on the information in your credit report. If it shows negative information, it will damage your credit score. Reviewing your credit report at least once a year can help you spot and correct reporting errors, if any. You can view your reports for free each week until April 20, 2022 by visiting AnnualCreditReport.com.

2. Pay your bills on time. For both credit scoring models, payment history is an important factor. If you pay off your debt on time, it can increase or improve your credit score. However, payment delays of 30 days can cause him serious damage. One way to make sure you pay your bills on time is to sign up for autopay.

3. Consider taking out a credit loan. A credit enhancement loan is a loan designed to help you build your credit score. Unlike traditional loans, the lender does not give you a cash lump sum. Instead, you must make fixed payments into an account. Lenders always charge interest on this type of loan, but in some cases you get it back at the end of the loan term.

4. Apply for a loan with a co-signer. If you need a traditional loan instead, consider applying for a loan with a co-signer. A cosigner who has good credit and a decent income can increase your chances of loan approval. Paying off the loan on time can improve your score.

5. Become an authorized user on a credit card. Another action that involves the help of another person is to be listed as an authorized user on a family member’s or friend’s credit card. If the person adding you has a good payment history on the card, it can boost your score.

How a bad credit score can affect you

Bad credit scores can hurt you financially in several ways, including:

• Higher interest rates. In general, having a lower credit score means lenders will charge higher interest rates to compensate for the risk. If you are approved for a loan with a high interest rate, it can significantly increase your borrowing costs.

• Does not meet a lender’s credit score requirements. If your score is too low, you may not meet a lender’s minimum credit score requirements. For example, lenders generally do not approve borrowers who have a FICO score below 580 unless they have a co-signer. Also, some lenders only approve borrowers who have excellent credit ratings.

• Rent an apartment. When you try to rent an apartment, the landlord may charge you a higher deposit. Also, some landlords may require you to prepay the first and last month’s rent.

• Apply for a mortgage. Bad credit often results in a higher down payment to qualify for a mortgage. For example, a loan from the Federal Housing Administration (FHA) allows you to deposit 3.5% if your credit score is at least 580. If it is below this threshold, you may still qualify, but the amount of your deposit increases to 10%.

• Apply for a car loan. If you need to apply for an auto loan, it can be difficult to get the financing you need. Similar to a mortgage, lenders may require a higher down payment. And while some auto lenders may advertise loans without a credit check, we don’t recommend them because they incur exorbitant fees.

• Car insurance rates. Some car insurance companies will charge you higher insurance rates if you have bad credit.

• Utility Accounts. When you apply for a new utility account, a utility company will review your credit. If you have bad credit, you may be required to pay a refundable deposit.

Why good credit scores are important

Having a good credit score is important as it helps you borrow money at lower or 0% interest rates. For example, if you have excellent credit, you might qualify for a 0% APR credit card, which offers interest-free financing for an extended period. Using this type of card can save you a lot of money in interest. It can also help you get out of debt faster if you transfer the balance from another high-interest card.

Plus, if you have a good credit score, you can avoid some security deposits and pay lower down payments on some loans. This can free up some of your money for other financial goals and expenses.

When you add up all the savings, a good credit rating can save you thousands of dollars over your lifetime.

Conclusion

When you have bad credit, it can be hard to get ahead financially. Because you are considered risky to lenders, you will find it difficult to access the credit you need. Plus, higher interest rates and down payments can increase your borrowing costs. In addition, your cost of living may increase. However, the good news is this: you can improve your credit score and your chances of loan approval by taking some of the steps mentioned above.