credit scores explained: what is bad credit?

Your credit score is a big part of your life…whether you realize it or not.

If you’re considering a big purchase, a new apartment, a personal loan, or even a new job, then you’re likely finding out that your credit score affects many different aspects of your life. This is why it’s important to know what your credit score is, how it works, and how to improve it if you have a bad credit score. 

Luckily, CreditNinja is here to help you learn the ins and outs of your credit score. 

What Are Credit Scores?

In the simplest terms, a credit score is a three-digit number that shows how financially trustworthy you are. A low credit score means that lenders, banks, employers, and even landlords may not trust you, because you haven’t been keeping up with your financial responsibilities. A good credit score on the other hand, means that you make payments on time, you don’t have too much debt, and you’re financially responsible. 

Other factors that go into determining approval for financial products, besides credit scores, includes income. Generally, the higher an applicant’s income is the more likely it is they will receive approval for loans or lines of credit. However, this doesn’t mean that people who earn lower incomes don’t need good credit opportunities. In fact, according to a Consumer Federation of America survey of over 1,000 Americans, 20% of households with an annual income of less than $25,000 plan to apply for credit within the next 12 months. Only 13% of Americans who earn an annual income of at least $75,000 are planning on taking out a loan within the next year.1 

What Is a Credit Report?

So where does this magical number come from? Well, there are a few companies that track your financial information over the course of your life. They compile all of this information into a document called a “credit report.” Your credit report contains info on your history of payments, your use of credit cards, your total amount of debt, and more.  

Your credit report is then used by several different companies called “credit bureaus,” to calculate overall credit scores or “credit rating.” Technically, everyone has several different credit scores, depending on which credit bureau you look at. But the most commonly used credit score is called your FICO score. FICO stands for Fair Isaac Corporation, and this is one of the companies that collects your credit score data and gives you a score based on what’s in your report.

What Goes On a Credit Report?

The information found in your credit report can generally be broken down into five categories. Those categories are: 

  • Payment history (makes up 35% of your total credit score) 
  • Amounts owed (30%)
  • Length of credit history (15%)
  • Mix of credit accounts (10%)
  • Recent hard credit inquiries (10%)

Payment History

The most important category on your credit report is going to be your payment history. Payment history encompasses how on-time you are with making payments on your various financial obligations. These obligations may include: 

  • Loan payments 
  • Bill payments (mortgages, rent, etc.)
  • Credit card payments

Making all your payments on or before their designated due date is essential if you want to maintain a healthy history of payments. In fact, just one late payment has the potential to negatively impact your credit reports for the next seven years!  

Amounts Owed

The next most impact factor that contributes to credit scores is your amounts owed. Amounts owed refers to the total amount of debt you currently owe. According to the credit bureau, TransUnion, the average amount of debt held by a consumer in the first quarter of 2023 was $11,281.2 That’s an increase of $1,385 when looking at the same data from the previous year. 

Length of Credit History

Your length of credit history refers to how long you have had open and active financial accounts. The longer your credit history, the more your credit score will benefit. When consumers have an established history of handing credit accounts, it shows lenders and financial institutions that the borrower has financial experience. 

Credit Mix

The different types of credit accounts you have also contribute to credit scores. While you will want to avoid “bad debt” such as payday loans or other quick cash loans, it may be a good idea to have a few different types of credit accounts if you can handle them responsibly. Some of these credit products may include: 

  • Personal loans 
  • Credit cards 
  • Bank loans 
  • Mortgage 
  • Student loans  

New Credit Inquiries

Lastly, the amount of hard credit inquiries on your profile also contributes to credit scores. Every time you apply for financial products like car loans, a traditional loan or credit card, the lender will most likely request a hard credit pull. While one or two hard credit inquiries won’t cause your credit score to plummet, many hard inquiries within a short period of time may have negative effects on your credit. 

The FICO Score Tiers

Generally, a FICO score can range from 300 to 850, with a higher score being better. Here’s a breakdown of the credit scoring model from FICO, and what the varying credit scoring ranges says about you as a borrower:

Credit Score RangesCredit RatingDescriptionConsequences 
580 and belowPoor creditIndicates a high risk to lenders, banks, credit unions, and employers. It may suggest a lot of debt, late payments, or no payments at all during credit history. Higher interest rates, less favorable terms and conditions for loans, possible denial for bank loans and credit cards.
580 – 690Fair credit Below the average American’s credit score. It will probably mean high interest rates and less-than-favorable terms.More likely to be approved for a loan than with a score below 580, but the interest rates won’t be great, and the principal may be smaller.
670 – 739Good creditNear or slightly above the average credit score in the US. Many lenders and banks consider this to be a good score.More borrowing options available, start to see better interest rates and terms. Indicates timely payments for credit cards, mortgages, and other loans.
740 – 799Very good creditShows lenders that the borrower is trustworthy and can handle debt and credit obligations. Higher than the average American score.No problem getting approved for loans with great interest rates and terms.
800 – 850Exceptional credit Well above the average credit score in the US. Difficult to achieve and requires many years of excellent history.Best interest rates offered by lenders, banks, and credit unions.

How Does Bad Credit Affect Me?

If you have a bad credit score, you may be wondering how it will actually affect your day-to-day life. Are there loans for people with bad credit scores? Will it be possible to get a credit card? What kind of interest rates can I expect if I have a bad credit score? These are great questions to ask, and it’s very important to get the answers and make a plan for how to improve a bad credit. 

Having a bad credit score does mean that you’ll have less options for loans and credit cards. Banks might not approve you for a loan, credit card companies may not offer you a credit card or line of credit, and if you do get approved for one somewhere it will probably mean very high interest rates. 

The best way to fix your bad credit and improve bad credit history is to make payments on time, and start figuring out how to eliminate your debt. There are plenty of resources in the rest of the CreditNinja Dojo for how to start improving your credit score.

Tips for Improving a Bad Credit Score

Improving a bad credit score can help you find approval for a wider variety of financial products, receive better loan deals, and even plan for retirement in the future

Some tips that may help boost bad credit scores are: 

  • Make Timely Payments – Making all your due payments on time is the best way to improve your FICO score.
  • Focus on Paying Debts – Stabilizing your debt-to-income ratio is another great way to improve your score. Utilize debt repayment strategies such as the avalanche or snowball methods! 
  • Improve Utilization of Credit – If you want to avoid overspending, consider getting a secured credit card. Secured cards require borrowers to pre-pay their credit limit upfront, so you never have to worry about your balance getting out of hand.
  • Limit New Hard Credit Inquiries – Stopping yourself from applying for new loans or credit accounts will not only save you from going through a hard credit check, it will also help ensure you don’t accumulate more debts. 

Bad Credit FAQs

What is credit utilization and how does it affect my credit score?

Credit utilization refers to the percentage of your available credit that you’re currently using. For example, if you have a credit card with a $10,000 limit and you’ve used $3,000, your credit utilization is 30%. High credit utilization can negatively impact your credit score as it suggests you may be at risk of overextending yourself financially. It’s generally recommended to keep your utilization of credit below 30%.

How does credit card debt contribute to a bad credit score?

Debt from credit cards can contribute to a bad credit score if it leads to high credit utilization or if you’re unable to make your minimum payments on time. Both of these factors can lower your credit score. It’s important to manage your credit card debt effectively to maintain a good credit score.

Can I improve my bad credit history?

Yes, you can improve your bad credit history over time by consistently making payments on time, reducing your overall debt, and not applying for too much new credit at once. Credit builder loans and some types of bad credit loans may also be a useful tool to help rebuild your credit.

What is a credit risk and how is it determined?

A credit risk refers to the potential liability of a borrower not being able to repay their loan or other credit obligation. Financial institutions determine how much of a risk a borrower is by analyzing their credit history and current financial situation. Factors such as history of payments, utilization of credit, and total debt are considered.

What does ‘extended credit’ mean and how does it affect my credit score?

Extended credit refers to the total amount of credit that lenders have made available to you. This could include credit cards, loans, and other lines of credit. If you have too much extended credit and you’re using a large portion of it, this could lower your credit score due to high utilization of credit.

How often do credit bureaus update credit reports and scores?

Major credit bureaus typically update credit reports and scores every 30 to 45 days. However, the exact frequency can vary based on the reporting practices of your lenders and creditors.

What is a credit builder loan and how can it help improve my lower credit score?

A credit builder loan is a type of loan designed to help individuals build or improve their credit scores. The money you borrow is held by the lender in a secured account while you make payments towards the loan. These payments are reported to the major credit bureaus, helping to build a positive history of payments and improve your credit score over time.

A Note From CreditNinja on Bad Credit

CreditNinja knows that finding an approval for an affordable loan can be difficult when you don’t have a good credit score. That’s why we strive to provide convenient funding to as many borrowers as possible, despite bad credit, or even past bankruptcy

But, before you submit an application for a personal installment loan, make sure you review your other options first. Depending on your financial situation, you may find it is more affordable to dip into your own savings, ask a friend or family member for a short-term loan, or even get an additional part-time job to cover your expenses. 

Looking for more information on loans, credit, improving bad credit scores, and handling your finances? Head over to the CreditNinja blog for tons of free financial resources available 24/7! 


  1. Annual Survey Reveals That Low-Income Consumers Are Most Likely To Seek Credit yet Know the Least about Credit Scores
  2. Credit Card and Unsecured Personal Loan Balances Remain at or Near-Record Levels as Consumers Navigate Challenging Economic Climate
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