What is a bad credit score? And how to fix it

A bad credit score is a heavy burden to carry. Not only can a poor score hinder your chances of getting approved for mortgage loans, apartment applications or buying a car, but it can also prevent you from getting certain jobs.

Determining which factors are most important and how your payment history plays a role can be an overwhelming process, but don’t be discouraged!

First, know that a bad credit score isn't forever, but there are ways you can work towards improving it today. Let’s start by examining what is considered bad credit according to each of the two main scoring models, FICO and VantageScore.

What is a bad FICO credit score?

A bad FICO credit score is anything below 670 that falls into the “fair” or “poor” range. Though there isn’t a score that is officially considered to be “bad,” both the fair (300-579) and poor (580-670) ranges are seen as bad in the eyes of lenders, as they signal that the applicant may not be able to repay a loan or honor a credit agreement.

Here’s how each of the “bad” credit scores could impact you:

A score below 580 may mean you struggle to secure credit, rental applications, or loans altogether.
A score between 580 and 669 may mean you’ll face higher interest rates and fewer opportunities to obtain credit.

Meanwhile, a FICO score of 670-739 is considered “good,” a score of 740-799 is “very good,” and a score of 800 or more is deemed “excellent.”

The higher your score, the less risky you will appear to potential lenders. Higher scores will lead to more opportunities and more favorable terms when searching for credit or financing.

The average FICO score in 2021 sat comfortably within the “good” range, at 716 points.

What is a bad VantageScore?

Like FICO, VantageScores range from 300 to 850, though what is considered bad is slightly different. Generally, in the eyes of lenders, a bad VantageScore is anything below 660.

If your score is in the very poor or poor ranges—between 300-600 points—you may find it incredibly difficult to access anything but a secured credit card, or a card that requires a deposit in order to use.

Your options improve slightly in the fair range of 601-660, though you may still only be able to access entry-level credit cards with high interest rates and low limits.

In order to access higher-tier cards, consider aiming for a score of 661 or more. A score of 661-780 is regarded as good and will allow you to access some top-tier cards, and an excellent score of 781-850 will unlock even more perks, from more favorable interest rates to higher limits.

The average VantageScore sat snugly in the “Good” range at 698.

How is a FICO Score calculated?

The FICO Score is the most used of the two credit models. Developed by the Fair Isaac Corporation, it’s an industry standard. It uses the 300-850 range to group consumers into five categories.

FICO determines your score by pulling information from the three primary credit bureaus, Equifax, Experian and TransUnion, and then dividing it into five weighted factors.

Payment history - 35 percent: Payment history marks how consistently bill payments were made in full and on time. This includes things like credit cards, mortgages, and loans.
Amount owed - 30 percent: The total amount of money owed on your credit accounts, whether open or closed, will have a significant impact on your credit score. Keep in mind that if your utilization is too high, financial institutions may believe you are overextended.
Length of credit history - 15 percent: Your length of credit history is the amount of time that the credit accounts have been open. As such, keeping your oldest accounts in good standing can help contribute to a higher score.
New credit - 10 percent: Each time you apply for a new line of credit, it triggers a hard inquiry. Too many new accounts in a short period of time can be seen as a red flag to financial institutions.
Credit mix - 10 percent: Having a mix of different types of credit is seen as being financially responsible. This includes everything from revolving lines of credit, such as credit cards, to installment loans like a mortgage or auto loan.

How is a VantageScore calculated?

VantageScore, founded by the top three credit bureaus, uses machine learning to analyze consumer behavior over time, creating a predictive model that is becoming more popular with lenders.

Two primary versions of this credit scoring system are being used by creditors today, VantageScore 3.0 and VantageScore 4.0. The systems both utilize the same credit-scoring factors, though how they are weighted is slightly different.

Payment history: This factor assesses whether or not you are paying your bills on time. VantageScore 3.0 weighs this factor at 40 percent, while VantageScore 4.0 weighs it at 41 percent.
Depth of credit: Depth of credit considers the age of your credit accounts and the variety of credit you’re using, including credit cards and installment loans. VantageScore 3.0 weighs this factor at 21 percent, while VantageScore 4.0 weighs it at 20 percent.
Credit utilization: This factor assesses your debt-to-credit ratio, or how much debt you have compared to your total credit. VantageScore 3.0 and VantageScore 4.0 both weigh this factor at 20 percent.
Balances: Your balances are essentially how much debt you owe altogether. VantageScore 3.0 weighs this factor at 6 percent, while VantageScore 4.0 weighs it at 11 percent.
Recent credit: Recent credit is determined by how many and how frequently new lines of credit are opened. VantageScore 3.0 weighs this factor at 5 percent, while VantageScore 4.0 weighs it at 11 percent.
Available credit: This factor assesses how much credit is available between all of your accounts. VantageScore 3.0 weighs this factor at 2 percent, while VantageScore 4.0 weighs it at 3 percent.

What impacts your credit score?

New or old, there are a lot of factors that can cause you to have a bad credit score. Here are a few that can push you into bad credit territory:

Late payments: Even one late payment can have a major impact. Credit issuers are likely to report your tardiness even after one payment is late for more than 30 days.
Partial payments: If you make a late payment but don’t pay the full amount, your credit report will show the partial payment. These are still recorded as delinquent and may be reported to credit bureaus as well.
Charge-offs: Your creditor may charge off your debt if you’re delinquent for 180 days or more. They may write the debt off as a loss and hire a collection agency to collect the debt from you.
Accounts in collections: Accounts in collections are considered seriously delinquent and will have a significant impact on your credit score. Keep in mind that even if you’ve paid a collector, the negative impact on your score may remain unless you request a pay-for-delete letter.
Foreclosure: The impact of foreclosure is severe and long-lasting. Not only do you lose your home, but the foreclosure will also stay on your credit report for seven years and will make it extremely difficult to secure another home loan.
Repossession: Like foreclosures, repossessions—or repos—will remain on your credit report for seven years. Generally, most lenders aren’t looking to repossess goods, and they will be willing to negotiate a payment plan that is convenient for both parties.
Filing for bankruptcy: Bankruptcy is a legal process that releases you from the responsibility of repaying certain debts. There are two primary types of bankruptcy for individuals, Chapter 7 and Chapter 13. Chapter 13 bankruptcy remains on your credit report for seven years from the date you file while Chapter 7 bankruptcy will remain on your credit report for up to ten years.
Closing credit card accounts: When a credit card is paid off and closed, the credit history is lost and reduces the overall credit history on a credit report. It can also reduce your total credit, impacting your debt-to-credit ratio. Both of these factors can have a negative impact on your credit score.

How does bad credit affect you?

Your payment history is crucial to your credit score. If payments are frequently missed, lenders may deny your credit or loan application. It’s a financial burden that can prevent you from achieving important milestones in life.

For example, if you apply for a car lease or increased line of credit, lenders will examine your credit report and may deny your request. Simply put, having a bad credit score can make you seem “financially irresponsible” to lenders.

Bad credit can affect opportunities and life goals more than you may think. It's connected to buying a home, or vehicle, opening a business and even employment opportunities.

Here are six ways areas of your life that bad credit can affect.

Leasing/buying a vehicle: It can prevent you from getting approved to buy or lease a car.
Getting a mortgage: It can prevent you from being able to get approved for a mortgage.
Renting an apartment: It can be difficult to get an apartment lease.
Getting a job: It may impact your ability to get certain jobs, especially in finance and government.
Starting a business: It can make it difficult to take out a small business loan.
Increasing your credit: It can affect being approved for increased credit.

How does bad credit affect employment?

Industries such as finance, government and high-end retailers will generally check your credit score, but employers can't discriminate against hiring you for having a low credit score.

They can, however, still see a specific version of your credit report, but must follow the employment regulations of the Fair Credit Reporting Act (FCRA).

Before performing a credit check during an interview, the employer must state in advance that it's a part of the process. You must agree and have the option to receive a copy of the final report. This will allow you an opportunity to contest any errors on the credit report.

So, while they can’t discriminate, it may not appear favorable in their final decision if you have a bad score.

How to fix your credit score

Repairing your bad credit score starts with admitting where you financially stand and then getting help from someone you trust. It may not be where you want to be right now, but it is where you have to start.

It's easy to get advice about fixing your credit from family, friends and hundreds of websites on Google, but be careful because there's not a one-size-fits-all solution.

Everyone's situation is different and what works for some may not work for others. Some people can fix their credit on their own, while others may need a little guidance. Whichever method you're considering, decide on one that you’re comfortable with.

Here are a few options to consider when beginning your credit repair journey.

Regularly review your Annual Credit Report and credit score.

Checking your credit report allows you to see all of the activity in your open accounts. You can see things like changes to the report, processed transactions and dispute errors. Being aware of what’s happening on your credit report is the key to improving your credit score.

Create a money management plan to organize bill payments.

Getting organized with your money will help you make payments on time and have more control over your finances.

Pay bill minimums on time.

Paying a bill's minimum should be your new priority. You may not be able to pay off the entire balance, but meeting the monthly minimum shows creditors that you care about your financial health.

Sometimes all you have to do is ask for help! Many lenders will offer financial hardship programs to those that can't make regular payments. For example, debt solutions programs can help minimize monthly payments, which can help raise your credit score.

Ask a family member to be a cosigner on your credit.

Asking someone that you trust to be a cosigner may not be easy, but can be a solution to helping you improve your credit. Essentially, the person you ask will need to have “good” to “excellent” credit. They will vouch to the lenders that you will make payments on time. (However, if the borrower—A.K.A. you—missed any payments or is delinquent, then the cosigner will be responsible.)

Apply for a secured credit card.

Secured credit cards work by allowing you to deposit a set amount of money on the card. These cards are shared with the three credit bureaus and appear on your credit report, helping you build positive credit.

Sign up for a credit freeze or credit lock.

A credit freeze is a free service that will only allow the lenders that you approve to perform credit pulls. This is also a good method for preventing identity theft and credit fraud.
A credit lock is like a credit freeze, but it’s overseen by the three credit bureaus and requires a monthly service fee. The main difference between the two is that credit locks allow you to lock and unlock your credit report at will.

Consider hiring a credit repair service.

Hiring a credit repair service may be an option that you've never considered, but could also be a saving grace. These companies will help you develop a financial plan to improve your credit. They will negotiate with credit companies and the credit bureaus on your behalf.

Having bad credit doesn't have to be something that you accept as part of your life. Deciding to improve your bad credit is a step towards making a positive change and rebuilding your credit to be even better than before.

How long does it take to fix bad credit?

Negative marks from collections, missed payments, and Chapter 13 bankruptcy can stay on your credit report for seven years. In more extreme cases, Chapter 7 bankruptcy can remain for up to 10 years. So, there isn't a given time for how long it can take to fix a bad credit score. It all depends on your history and the negative items incurred.

Checking your credit report and making a financial plan can help you turn around your bad credit. Seeking the help of a credit repair advisor can only increase your odds for success. Try applying a few of these strategies, and don't be surprised if you see your credit begin to rise.

Note: The information provided on Narrow Path Consulting does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.