Your credit score is an important financial number that lenders use to determine your borrowing risk level. Credit scores typically range from 300 to 850, and the higher your credit score, the better your credit rating.
According to Experian, a credit score below 670 is considered "fair," while a credit score below 579 is "poor." If you have a bad credit score or a thin credit profile, there are still plenty of ways to improve your credit. It’s important to know where you stand so you can change your credit score to a higher range.
What counts as a bad credit score?
Each credit scoring model has its differences, but many refer to a bad credit score as a score in the 500s. A bad credit score is really anything that prevents you from qualifying for a new credit card or loan.
Some lenders refer to bad or poor credit scores as ‘subprime’ while referring to a good credit score as ‘prime’.
Bad credit is usually a result of high-risk credit factors such as high debt balances or a high total credit utilization along with a history of late or missed payments. If you’ve filed for bankruptcy, this can lower your credit score and remain on your credit report for 7 to 10 years.
Sometimes, your credit score can be poor due to a lack of credit history altogether. People with no credit history or a thin credit file don’t have the highest scores since there is little data to measure.
FICO and Vantagescore bad credit ranges
Two of the most common credit scoring models are FICO and Vantagescore. The FICO scoring model was established in 1989 by the Fair Isaac Corporation and it’s used by 90% of lenders today. Several key factors determine how FICO scores are calculated:
- Your payment history - 35%
- Total amounts owed or credit utilization - 30%
- Length of credit history - 15%
- Credit mix (different types of credit accounts that you have) - 10%
- New credit - 10%
VantageScore was developed by the three major credit bureaus (Equifax, Experian, and TransUnion) in 2006 and this credit scoring model is used for more than 96% of the U.S. population. The VantageScore scoring model uses similar factors to determine your credit score:
- Payment history - 41%
- Depth of credit - 20%
- Credit utilization - 20%
- Recent credit - 11%
- Balances - 6%
- Available credit - 2%
A bad credit range for both FICO and VantageScore are very similar. For FICO, a poor credit score range is 300 to 579. For VantageScore a subprime credit range is 300 to 600.
How a bad credit score affects you
A bad credit score can make it very hard for you to qualify for certain loans and credit cards. Lenders see borrowers with a bad credit score as high risk and less likely to pay back their debt. Some lenders may approve you for a loan, but will charge a much higher interest rate and more fees to accommodate the increased risk.
Some lenders also cater to borrowers with bad credit so you may be able to get a loan this way. However, you probably won’t receive the best terms. When it comes to credit cards, you’ll have a hard time getting approved for some of the best rewards cards with bad credit. Having good or excellent credit can save you hundreds or thousands of dollars in interest on a loan if you can lock in a lower interest rate.
This is why it’s so important to maintain a good credit score especially if you’re looking to take out a large loan such as a car payment or mortgage.
How to improve a bad credit score
There are several ways to improve your score no matter where you stand currently. Here are some key tips to help.
Start by checking your credit
It’s important to monitor your credit score so you know where you’re starting from. Consider using free tools like CreditSesame and CreditKarma and download your full credit report each year through AnnualCreditReport.com.
Pay down debt
If you have bad credit due to unpaid bills, start paying down some of these debts to instantly improve your credit score. Create a budget that prioritizes extra debt payments and cut back on spending where you can.
Get a secured credit card
A secured credit card is an excellent tool for building credit. You put a deposit down ranging from $100 to $300 and this serves as your credit limit to borrow against. Then, all your payments get reported to the three major credit bureaus.
Consider a credit a builder loan
Banks, credit unions, and other financial companies offer credit builder loans which are short-term loans. As you make payments, it gets reported to the major credit bureaus to build your credit score. Many credit builder loans also work as a savings account so you make payments to yourself and receive the lump sum “loan” amount when your repayment term is up.
Commit to making on-time payments
Payment history has one of the biggest impacts on your credit score so make sure you’re paying your loan and credit card bills on time. Aim to pay at least the minimum payment each month and you can set up automatic payments to make it easier.
Limit hard credit inquiries
Avoid applying for credit too often and collecting hard inquiries as these can stay on your credit report for up to two years. If you get prescreened for a credit card or loan and get preapproved without actually applying yet, this will only result in a soft credit inquiry, which won’t impact your score.
You can improve your credit
Having a bad credit score does not have to be permanent. There are different credit scoring models and your score is constantly changing. Focus on practicing healthy financial habits such as keeping debt balances low and paying bills on time to boost your credit score.
Start monitoring your score regularly so you can track your progress along the way.
This story was written by NJ Personal Finance, a partner of NJ.com. The information presented here is created independently from the NJ.com editorial staff, and purchases made through links in this article may result in NJ.com earning a commission.
