What is Bad Credit?

Woman looking at computer screen with credit card
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When we're talking about credit - the level of trust businesses have that you'll repay money you've borrowed - you can have good credit or bad credit. Here we'll discuss what it means to have bad credit and what you can do if you have bad credit.

What Exactly is Bad Credit?

Bad credit describes a past failure to keep up with your credit agreements and the inability to get approved for new credit. It means you haven’t paid your past credit obligations on time, if you’ve paid them at all.

Your credit account history is collected by companies called credit bureaus (also referred to as credit reporting agencies) and compiled into a credit report. Having lots of negative information, late payments or loan default, on your credit report means you have bad credit. You may have had accounts sent to a collection agency, charged high balances, filed bankruptcy or had a vehicle repossessed. Bad credit typically occurs when you have multiple cases of these things in a short period of time. Some negative events only need to happen once to make lenders wary of working with you. This includes things like bankruptcy, repossession, and foreclosure.

The information in your credit report is used to calculate your credit score, a three-digit numerical snapshot of your credit history at any given time. Credit scores generally range from 300 to 850 with lower credit scores indicating bad credit.

Effects of Bad Credit

When you have bad credit, lenders are less likely to lend to you because you may fall behind on any credit card or loan you’re given. So, your applications for credit could be denied. If you do get approved, you’ll likely be charged a higher interest rate than borrowers who have a good credit score.

The interest rate is the lender's way of compensating for the risk of loaning money to you.

Bad credit affects more than just your credit card and loan approval and interest rate. Insurance companies use a version of your credit score to give you an insurance rate. Some utility and cell phone providers charge a security deposit on applicants with bad credit. Landlords may require a high security deposit if you have bad credit, or they may turn you down for an apartment all together.

How to Know If You Have Bad Credit

If you're paying any attention to your finances, you probably have an idea of whether you have bad credit. You know if you've missed payments or have large big credit card balances. If you've recently had credit applications turned down, your interest rates have increased, or your credit card issuers have lowered your credit limits, it's a sign that you have bad credit.

You can check your credit score to find out whether you have bad credit. There is no universal cut off between a good credit score and a bad credit score, but you generally have bad credit if your credit score is below 620.

Checking your credit report will help you figure out what's hurting your credit score.

U.S. citizens are entitled to a free credit report each year from the three credit bureaus. So you don’t have to pay anything to check to see what’s causing your bad credit.

Steps to Fix 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 credit repair technique. Then, you can focus on adding positive information to your credit report by adding new accounts and paying them on time.