When it comes to credit, or essentially the level of trust potential lenders have that you'll repay money you've borrowed, you could fall anywhere on a scale from having very bad credit, meaning no one will lend you any money, to outstanding credit, where banks and credit companies practically beg you to borrow. Most people fall somewhere in between these two extremes.
What is Bad Credit?
Bad credit generally describes a record of past failures to keep up with payments on your credit agreements, resulting in the inability to get approved for new credit. It typically means you haven’t paid your credit and other obligations on time, or haven't paid them at all. Declaring bankruptcy can also impact your credit, particularly in the first few years after you've been discharged.
Companies called credit bureaus (also referred to as credit reporting agencies) keep track of your borrowing history by collecting your credit information from companies you have accounts with then compiling these details into a credit report.
Each credit bureau maintains its own separate report, and your credit history could vary among them, due to errors or omitted information.
Rather than pore through page after page of credit data, lenders often use a numerical summary of your credit report, known as your credit score, to gauge your creditworthiness. Different companies such as auto lenders, mortgage lenders and credit card companies look at potential borrowers differently according to their needs, so to accommodate this, dozens of credit score variations exist.
Credit scores range from 300 to 850, with 670 being considered the low end of a "good" credit score and lower scores indicating increasingly lousy credit.
How Bad Credit Happens
Having a multiple negative accounts, late payments or possibly a loan default on your credit report can result in lower credit scores. If you've had accounts sent to a collection agency, such as unpaid medical or utility bills, the collection agency could report your delinquency to the credit bureaus even if the original company does not.
Bad credit often results when people go through a rough spot financially, triggering multiple negative events in a short period of time such as medical expenses, charging up high balances recently on credit cards, or filing bankruptcy. Some negative events need only happen once, such as a vehicle repossession or real estate foreclosure, to make lenders wary of working with you.
The Effects of a Low Credit Score
Once you have poor credit, lenders are less likely to lend to you because of the increased probability that you could fall behind on any new credit card or loan accounts. You might find all your applications for credit denied, or if you do get approved, you’ll likely receive a much higher interest rate than borrowers who have good credit scores.
The increased interest rate is a lender's way of compensating themselves for the risk of loaning money to you.
Bad credit affects more than just your credit card and loan approval and interest rate. Some insurance companies consider your credit when quoting you an insurance rate. Utility service providers may even charge a security deposit for applicants with poor credit. Landlords may require a higher security deposit if you have bad credit, or they may turn you down for a lease or rental agreement altogether.
Keeping an Eye On Your Credit Standing
If you typically stay on top of your finances, you may have a decent idea of where your credit score falls. You know if you've been late on any loan payments lately, or have large credit card balances that exceed 30 percent of your available credit.
If you've recently had credit applications turned down, your credit card interest rates have increased or your card issuers have lowered your credit limits, take these things as a sign that your credit score may be dipping.
Checking your credit score will help you see where you stand. Many free credit score services offer free credit score simulators, which show you how much your credit score could move up or down by paying down accounts, opening new accounts and other changes.
Then grab a copy of your credit report to what's affecting your credit. You might find out that one of the credit bureaus hasn't recorded an account that has a positive payment history, or you could even find mistakes that have lowered your credit score needlessly. You can get one free copy of your credit report each year from each of the three credit bureaus, TransUnion, Equifax, and Experian through AnnualCreditReport.com.
In response to the outbreak of COVID-19, the credit bureaus are offering weekly free credit reports through April 2021. You can get your weekly free credit report through AnnualCreditReport.com.
Take Steps to Repair Your Bad Credit
Bad credit doesn’t have to last forever. You can take steps to improve your credit score over time. First, focus on removing negative information from your credit report either by using a credit report dispute or a credible credit repair technique.
Also, the impact of some negative marks on your credit report lessen over time, so sometimes all you have to do is wait things out. Focus on adding positive information to your credit report by adding new accounts and consistently paying them on time.
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Consumer Financial Protection Bureau. "How Does My Credit Score Affect My Ability to get a Mortgage Loan?" Accessed May 27, 2020.
Nationwide. "How Credit Affects Your Car Insurance Premiums." Accessed May 21, 2020.
Federal Trade Commission. "Utility Services." Accessed May 27, 2020.
Consumer Financial Protection Bureau. "Who May Request My Credit Report?" Accessed May 27, 2020.