What Is a Bad Credit History and Rating?

What Is Considered a Bad Credit Score and Rating?

To a certain extent, bad credit is relative. As long as they obey laws forbidding discrimination, lenders get to determine their own lending criteria. Some seek only borrowers with exceptionally good credit ratings, and exclude applicants many others would accept. Other lenders focus on borrowers with less-than-ideal, or "subprime," credit. Still others offer an array of products designed for borrowers with a variety of credit ratings.

Regardless of their target borrower profiles, many lenders evaluate potential borrowers' credit ratings using credit scores: three-digit numbers derived by performing statistical analysis on the information in your credit report. Credit scores predict how likely you are to fail to repay a loan, with higher scores indicating lower risk that you'll fail to meet your obligations. The most popular scoring systems, the FICO^® Score^☉ and VantageScore^® models, generate scores in the range of 300 to 850.

Lenders often use credit scores as a first step in their lending decision processes, excluding borrowers whose scores fall below a minimum threshold they choose. Lenders often also use credit scores to help set the interest rates they charge borrowers, and may direct applicants whose scores fall in certain ranges to particular products. Riskier borrowers might be offered credit cards with higher interest rates, for instance, while borrowers with the highest credit scores might be offered lower rates and bonus programs.

FICO assigns ratings to ranges of credit scores according to their relative risk, as seen in the table below. Individual lenders may or may not segment credit applicants using these ranges and categories, and may be willing to extend credit to borrowers in any FICO^® Score range from Exceptional to Fair. Some may even offer modest amounts of credit (possibly requiring a security deposit or collateral) to borrowers with scores in lowest range.

What Factors Influence Your Credit Report and Scores?

The history of debt management recorded in your credit report is the basis for your credit scores and the determination whether your credit is "good" or "bad."

Generally speaking, credit report entries that indicate the difficulties with credit management will be detrimental to your credit profile and your credit score, while those that show sound credit management will promote good credit scores. Credit report entries that can hurt your credit scores the most include:

• Late or missed payments: Payment history is the most important aspect of your FICO^® Score, and even one 30-day-late or missed payment can hurt your score. Payment history is responsible for about 35% of your FICO^® Score.
• Excessive credit card usage: Using a high percentage of the borrowing limit on individual credit cards or on all your cards collectively can make lenders think you're overly reliant on credit. You can calculate that percentage, known as credit utilization, for each credit card by dividing your current outstanding balance by its borrowing limit, and then multiplying by 100 to get a percentage. You can also calculate your overall utilization by dividing the sum of all your balances by the sum of all your limits. Lenders like to see credit utilization, for each card and especially on all cards overall, of less than 30%—individuals with the best credit scores tend to keep utilization at 10% or less. Credit utilization accounts for 30% of your FICO^® Score.
• Seeking a lot of credit in a short time: Whenever a creditor requests your credit report or a credit score based on it for a lending decision, a hard inquiry is recorded in your credit file. These inquiries stay in your file for two years and can cause slight temporary reductions in your credit score. Lenders look at the number of hard inquiries to gauge how much new credit you are requesting. Too many inquiries can raise the level of risk you present to a lender or scoring model and affect your credit scores and the credit you'll be able to secure. New credit activity accounts for about 10% of your FICO^® Score.
• Major negative events: Major credit management missteps that can appear on a credit report include foreclosure, bankruptcy, repossession, charge-offs (the lender gives up hope of collecting what you owe and closes your account) and settled accounts (the lender accepts less than the full amount you owe in a negotiated arrangement, and then closes your account). Each of these can severely hurt your credit for years, even up to a decade.

Consequences of a Bad Credit History and Rating

Individuals with good credit enjoy many advantages, but if you have a poor credit history and rating, lenders may be reluctant to do business with you. That means:

• It may be difficult for you to get loans and credit cards with bad credit.
• If you can get a loan or credit card, you'll likely be offered a relatively small loan amount or spending limit, and you may have to pay a relatively high interest rate. That could cost you hundreds, thousands or even tens of thousands of dollars over the life of a loan, depending on the amount you're borrowing.
• When securing equipment such as cellphones or cable modem, or even renting a car or apartment, poor credit could mean you'll have to pay extra fees or put down security deposits that aren't required of borrowers with more favorable credit.
• Poor credit can mean you pay higher car insurance premiums than you'd receive if your credit were better.

How to Improve Bad Credit

Bad credit doesn't last forever. You can take steps anytime to begin adopting good credit habits that promote improvements in credit score and credit rating. These include:

• Check your credit score. When you get your FICO^® Score for free from Experian, you'll also receive an explanation of the factors in your credit report that are having the greatest negative impact on your score. That can give you a good idea where to focus your score-improvement efforts.
• Pay your bills on time. A good way to avoid late payments is to set up automatic electronic payments for recurring bills, such as student loans and car payments. Setting up email or text message reminders and calendar alarms can help as well. Whatever it takes, do all you can to avoid making late payments.
• Pay down credit card debt. Any payment that reduces an outstanding credit card balance lowers your overall utilization ratio (assuming, of course, that you aren't running up new charges at the same time). If you focus on avoiding new card purchases, and work on paying down the cards with the highest individual credit utilization, you may be able to make progress toward credit score improvement in a relatively short time.
• Apply for new credit only as needed. Avoiding hard inquiries for a year or two can help your credit score recover some, and remove the appearance of overeagerness for new credit accounts.
• Boost your credit. Experian Boost^®ø is a free program that adds your on-time utility, phone and streaming service payments to your Experian credit report, often instantly increasing your credit scores based on your Experian credit data.
• Get credit improvement help. If you're having trouble getting approved for a credit card or loan on your own, you can build credit history with the help of others:
  • Become an authorized user on someone else's account.
  • Work with a cosigner who has good credit. When you have a cosigner for a loan or credit card, the lender also considers them jointly responsible for the debt.
  • Open a secured credit card account. With a secured credit card account, you provide a deposit and the card issuer allows you to borrow up to a certain amount, only using the deposit if you stop paying your bills.
• Be patient. If you have major negative events on your credit report, they can hurt your credit score and credit rating for years, but their impact will diminish over time. That's why patience is another prescription for improving your credit. As long as you avoid additional missteps and embrace good credit habits, your credit will tend to improve over time.