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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 low score. 

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

What Is a Credit Score?

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 high 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. 

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 payment history, 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 your overall credit score 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. 

The Credit Score Tiers

Your credit score generally ranges from 300 to 850, with a higher score being better. Here’s a breakdown of the credit scoring model from FICO, and what each tier says about you as a borrower:

580 and Below: Poor Credit — This tells lenders, banks, credit unions, and employers that you are a risk when it comes to borrowing, and you’re considered a “subprime” borrower. It may mean that you have a lot of debt, or that you make late payments or no payments at all on your financial obligations. Having a bad credit score has many consequences, such as: higher interest rates, less favorable terms and conditions for loans, being denied altogether for bank loans and possibly credit cards, and more. 

580–669: Fair Credit — This range is below the average American’s credit score, and it will probably mean high interest rates and less-than-favorable terms. You’re still more likely to be approved for a loan than you would be with a score below 580. That being said, the interest rates won’t be great, and the principals may be smaller as well. 

670–739: Good Credit — Your credit score here is either near the average or slightly above the average credit score in the US. Many lenders and banks consider this to be a good score, and you’ll have more borrowing options available to you. This score range is when you’ll start to see better interest rates and terms. If you fall in this category it means that you make payments on time for things like credit cards, mortgages, and other loans. 

740–799: Very Good Credit — This score shows lenders that you are a trustworthy borrower, and that you can handle your debt and credit obligations. If your credit score falls within this range then you have a higher score than the average American. You should have no problem getting approved for loans with great interest rates and terms. 

800 and Above: Exceptional Credit — In this range, your score is well above the average credit score in the US. This is a difficult score to achieve and will most likely take many years to climb to this level. Lenders, banks, and credit unions will be able to offer you the best interest rates at this level. 

How Does Bad Credit Affect Me?

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

Having subprime credit does mean that you’ll have less options for loans and credit cards. Banks might not approve your for a loan, credit card companies may not offer you a 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 credit 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.