What is considered a bad credit score?
A bad credit score is a FICO score below 670, which means it is in the fair or poor credit ranges. Along the same lines, a bad score in the VantageScore model is less than 661, which would fall into the fair, poor, or very poor credit ranges.
Ratings in these ranges are often referred to by lenders as “subprime” and people with poor credit ratings may find it difficult to access credit on favorable terms.
Bad credit complicates many common financial activities, from opening a new credit card to taking out a first mortgage. You could end up with lower credit limits and higher interest rates, and bad credit could even prevent you from getting that new job.
Let’s take a closer look at how credit scores work, what factors go into a bad credit score, and how you can improve your credit score and access better financial opportunities.
Learn more: How to check your credit score
What is a bad credit score?
There are two widely used credit scores: FICO Score and VantageScore. Although both scoring models use a credit spectrum ranging from 300 to 850, their credit scoring ranges are somewhat different.
FICO credit score ranges
Here’s how the FICO credit score system classifies credit scores:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
In 2021, the average FICO credit score was 716 points, which is squarely in the ballpark. If you have bad credit (below 670), your credit score is significantly below average, either in the poor range or in the average range.
VantageScore credit score ranges
The VantageScore model breaks down its credit score ranges as follows:
- Excellent: 781-850
- Good: 661-780
- Fair: 601-660
- Poor: 500-600
- Very low: 300-499
The average VantageScore in 2021 was 698, well within Vantage’s good credit rating range.
In the VantageScore model, a score between 300 and 660 is considered a bad credit score, with scores below 500 considered very bad.
Factors that affect your credit score
Your credit score is based on the information in your credit report. Each of the three major credit bureaus (Equifax, Experian, and TransUnion) compiles a unique credit report based on how you use the different credit accounts under your name.
Here are the five factors that make up your credit score, according to the FICO model:
- Payment history (35%): Your history and the speed of payments on your credit accounts.
- Use of credit (30%): Your debt ratio, or your current credit balances compared to the amount of credit you have.
- Credit history (15%): The length of your credit history, i.e. the length of time you have successfully maintained open credit accounts.
- Composition of credit (10%): The mix of credit in your account. Lenders like to see that you can handle both revolving credit, like a credit card, and installment loans, like a car loan.
- Credit applications (10%): How often do you apply for new lines of credit.
It is possible to have a high credit score even if you are low in one of the five factors. If you’re relatively new to credit, for example, you may not have an extensive credit history and you may only have one or two credit cards in your name, which means you don’t have a lot of credit yet. However, if you make payments on time, keep your balances low, and avoid asking for too much credit at once, you can still establish and maintain a good credit score.
The impact of a bad credit rating
Here are some of the unfortunate ways a bad score can impact your life.
- More time to get credit approval: Lenders view borrowers with bad credit as a risk, which means they are less likely to approve you for credit. Since banks and lending institutions generally have rigorous qualification standards for their products, getting approved for a loan or credit card can be difficult for anyone with a bad credit score.
- Higher interest rates and more restrictive terms on loans and credit cards: Some lenders have more lenient guidelines and will approve a borrower with bad credit for credit products. However, they will likely compensate for their risk by attaching a higher interest rate to the loan or credit card – the higher your interest rate, the more interest you will pay.
- Higher insurance premiums: Most states allow home and auto insurance companies to check your credit scores as part of their risk analysis. Your insurer may view your poor credit score as a higher overall risk indicator and charge you a higher premium.
- More difficult time to rent an apartment: Many landlords perform credit checks on potential tenants. The landlord won’t see your credit score, but your credit report allows them to review your payment history, collection accounts, and other information to determine your creditworthiness. Ultimately, landlords are less likely to approve a lease for applicants with bad credit than for tenants with good credit.
- Could restrict career opportunities: With your written permission, it is legal for an employer to review your credit report and use the information when making hiring decisions. Although some states have laws that restrict the use of credit information in the hiring process, other states do not offer such protections.
- May have to make a deposit for utilities: Utility companies can and do perform background checks on those seeking their services. If your credit history is poor, you may need to pay a security deposit in order to establish utilities.
If you are concerned that your credit is having a negative impact on your life, rest assured that you can take proactive steps to increase your credit score.
How to improve a bad credit score
There are many ways to improve your credit score. At the end of the day, it’s about taking strategic action and consistently making sound financial decisions. Here are four steps you can take to improve your credit profile.
- Check your credit reports: Start by getting a free credit report and score from each of the three major credit bureaus at AnnualCreditReport.com. Dispute any errors and identify negative information that is lowering your score so you know where to focus your credit repair efforts.
- Avoid late payments: Since payment history accounts for 35% of your credit score, paying your bills on time is one of the best ways to establish and maintain strong credit. Consider setting up automatic payments on your accounts to avoid late payments.
- Reduce your credit utilization rate: Your credit utilization rate represents 30% of your FICO score. A general rule of thumb is to keep your balances below 30% of your credit limit, while the top credit scorers use less than 10% of their available credit.
- Become an authorized user: If your credit history is poor or you just want to improve your payment history, consider asking a friend or relative to add you as an authorized user on their credit card account. Assure the person helping you that you don’t even need to use the card or even know their account number. This strategy can be beneficial if the person you’re asking has an account with a high credit limit, low credit usage, and a strong history of timely payments.
The bottom line
A bad credit score is a FICO credit score below 670 and a VantageScore below 661. If your credit isn’t where you want it to be, remember that a bad credit score has no not to weigh you down. Fortunately, there are simple steps you can take to improve your credit and you could see results quickly. It’s worth it, because good credit can lead to more financial opportunities and rewards.