Definition & Examples of Bad Credit
A person with bad credit is considered a risky borrower, usually due to owing large amounts of money or having a history of unpaid bills and debts. Having bad credit can make it hard to get a credit card, mortgage, or other loans. Bad credit is usually seen as a credit score under 580.
Learn more about how bad credit works and how to take steps to fix it.
What Is Bad Credit?
Having bad credit means you have negative aspects in your credit history that indicate you are a risky borrower. There are several factors that can contribute to bad credit, including:
- Previous delinquencies
- High debt balances
- Recent bankruptcies
Bad credit is usually indicated by a low credit score—the numerical summary of the information in your credit report. FICO scores are one of the most widely used credit scores. They range from 300 to 850, with higher scores being more desirable.
The FICO credit score range is broken up into five ratings:
- Exceptional: 800 and above
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: Below 580
How Bad Credit Works
Your credit score is based on five different factors, each of them weighted differently. All of them can contribute to bad credit.
- Payment history (35%): If you have a history of delinquent debts or credit cards that you haven't paid off, you are likely to have a lower credit score.
- Amounts owed (30%): A bad credit score is often due to owing large amounts of money. The more you already owe, the less likely you are to be able to pay off new debt.
- Length of credit history (15%): If you have been reliably paying off debts for several years, you are a less risky borrower. A shorter credit history, however, will lead to a lower credit score. This is also influenced by how long individual credit accounts have been open and whether you have inactive accounts.
- Credit mix (10%): Having a variety of types of credit—such as a credit card, a retail card, a rental history, and a car loan—improves your credit score. Having only one type of credit account will lower it.
- New credit (10%): People who open multiple new credit accounts in a short period of time are statistically riskier borrowers and are more likely to have bad credit.
While your credit score gives you and lenders a quick indication of your credit standing, you don’t have to check your credit score to know whether you have bad credit. A few signs of damaged credit can include:
- Having your application for a loan, credit card, or apartment denied
- Unexpected credit limit cuts
- Interest rate increases
- Receiving communications from a debt collector
If you’ve been more than 30 days late on a credit card or loan payment, or you have multiple maxed-out credit cards, your credit score has likely taken a hit.
Ordering your credit score from myFICO.com is one of the best ways to confirm your current credit standing. There are also a number of free credit score services you can use to check at least one of your scores from the most widely used credit bureaus (Equifax, Experian, and TransUnion).
Free credit score services don’t always provide a FICO score, and usually only supply a limited view of your credit. For example, you may only get a credit score from Experian and not TransUnion or Equifax.
To understand what’s affecting your credit score, you’ll have to take a look at your credit report. This document contains all the information used to create your credit score.
Until April 2021, you can get a free weekly credit report from all three predominant credit bureaus through AnnualCreditReport.com.
What Are the Penalties?
Having bad credit often indicates that you are a more risky borrower, which can make it harder to get approved for new credit cards, a mortgage, or other loans. If you are approved, you may be offered only a high interest rate or other unfavorable terms.
Bad credit can impact other areas of your life as well. If you have bad credit, landlords may not accept you as a renter, or may only agree if you have a co-signer. It can even make it harder for you to get a job if your potential employer checks your credit score as part of your job application.
A good credit score shows you’re a dependable borrower, which makes lenders more willing to have a relationship with you and give you funds. Consumers with very good and exceptional credit scores have better odds of loan, rental, and mortgage approval. They can choose from a wider selection of credit cards and loans with more favorable interest rates.
Most businesses that check credit scores are easier to work with when you have a good credit score.
How to Get Rid of Bad Credit
Having bad credit isn't a permanent condition. You can improve your credit score and demonstrate that you are a responsible borrower by:
- Correcting negative information
- Improving each of the five categories that make up your credit score
Correct Your Credit Report
Start by reviewing your credit report thoroughly. Look for:
- Any information that is incorrect, such as paid debts that are listed as delinquent or accounts that you never opened. You can dispute these errors directly with the credit reporting company by sending a letter detailing any mistakes.
- Information that should have already been removed. With the exception of bankruptcy, negative information can only be listed on your credit report for up to seven years. You can dispute any negative items that have expired.
If you do find any items or accounts in your credit report that you don't remember opening, you might have been the victim of identity theft. You may need to institute a credit freeze or fraud alert, notify your bank and credit companies, or even file a complaint with the FTC to resolve the issue.
Improve Your Credit Score
Removing negative information is just one part of the process. You should also add positive information by improving as many areas of your credit score as you can.
Keep your oldest credit account open and in good standing to add to your credit age. In general, the longer you’ve had credit, the better it is for your credit score.
Don't take on new debt or close credit cards in order to change your credit mix or amount of new credit. Closing credit accounts suddenly will leave you with a higher debt to available credit ratio, which can negatively impact your credit score.
Instead, focus on improving your payment history and lowering the amount you owe. These are the two biggest factors in a bad credit score.
- Work towards bringing past-due bills current and paying down high balances.
- Continue to make regular payments on all your debts while focusing on paying off your larger ones.
- Open new accounts sparingly.
- Take on only as much debt as you can afford, make on-time payments, and keep your credit card balances low.
- Monitor your progress using a free credit score tool.
Once you’re caught up on payments and positive information starts to show up on your credit report, you might notice some improvement in your credit score right away. Depending on how low your credit score was, it can take anywhere from several months to a few years to completely fix your bad credit.
- A person with bad credit is considered a risky borrower, usually due to owing large amounts of money or having a history of unpaid bills and debts.
- Having bad credit can make it hard to get a credit card, mortgage, car loans, rental approval, job, and more.
- Bad credit is usually seen as a credit score under 580.
- You can improve bad credit by fixing errors on your credit report, paying off debt, and maintaining a low balance on your credit cards.