Getting your credit score won’t help you much if you don’t know what it means. What is a bad credit score? What are good credit scores? What does it mean to have a bad credit score? Here are the answers to the questions you have been struggling.
Understand that when we talk about credit scores we are referring to a number generated by a special formula based on the information contained in your credit report. The credit score then gives lenders a quick way to analyze how good a credit risk you are. The higher your score, the better risk you are, meaning the less likely you are to default, or not pay back the loan. Different credit scores are set on different scales, but in general the numbers range from 400 to around 900, so a high 700 credit score - or 800 credit score means you are a pretty good risk. Unfortunately it doesn’t work quite the same way on the other end. Your score doesn’t have to be anywhere near 400 for you to be considered a poor risk for lenders. Lenders may have different methods for deciding what a bad score is to them, but most scores in the 500s and low 600s put you in the worst risk category that lenders will consider. Meaning you may get approved for a loan, but at high interest rates and possibly with large balloon payments along the way. If your score is in this range, it is safe to say you have a bad credit score.
A bad credit score is not the end of the world, but it does mean you are not in a good position apply for credit. Whether it’s a credit card, personal loan, auto loan or mortgage, you will have limited access to money and you will be charged excess fees. Lenders need to protect themselves, so if you have a bad credit score that means history shows there’s a strong possibility that you will not continue to pay your debt as agreed. You will have difficulty getting your credit application approved. If and when you do find someone to approve your application it will be with unfavorable financing terms, where you have to pay a high premium to borrow the money. Your monthly payments will be in large part dedicated to the interest rate and you may have to make a large down-payment too. Having a bad credit score wastes money and it makes it harder to have access to money when you need it.
Change your borrowing and repayment practices. You have to prove to creditors that you can maintain positive credit habits for the long-term. If you’ve defaulted on a loan or have late payments, it’s time to make good. If your credit cards are spent to the max, it’s time to pay down those balances to a “credit utilization” of less than 30 percent. Each individual credit picture is different, which is why it is a good idea to get a look at your credit score and credit report. You can’t fix your score if you don’t know what it is. Fortunately, you can get your free credit score from all three credit reporting bureaus from CreditScore.com, and you get a copy of your credit report as well. This is the information you need to begin improving your credit score.