You may find it difficult to borrow money with bad credit from banks, credit unions, or other financial institutions since most lenders check your credit report as a part of their underwriting process. Even if you manage to borrow, the offered interest rates can be significantly higher than usual. 

In this guide, we’ll take a deeper look into what bad credit means, how it can impact you, and what you can do about it.

What Is Bad Credit?

In financial terms, bad credit indicates a low credit score and a less-than-perfect credit history. It indicates that you have failed to make on-time payments of debts and may not be likely to repay debts.

Examples of a Bad Credit Score

Your credit score (we’ll take the example of FICO here) can range between 300 and 850. Your credit score number is an indication of how likely you are to repay a loan. Here are a few examples of different credit score ranges and what they mean to help you understand the concept.

FICO Credit Score Ranges

300 - 579 (Poor)

A FICO score between these ranges is considered very poor and signifies that the borrower cannot handle debt. It impacts your eligibility for any type of loan unless you have a co-signer for your application or it’s for a credit-builder loan. 

580 - 669 (Fair)

With fair credit scores, you have a 50-50 chance of loan approval. It shows that you’re having difficulties with debt repayment, that you have missed a few payments, or that you have maxed out all of your credit cards. You may be eligible for subprime loans, but those are typically available at a higher interest rate.

670 - 739 (Good)

The national average credit score is a 718 FICO score. Finding a loan with scores in this range is easy, but you may have to settle for higher interest rates compared to borrowers with very good scores.

740 - 799 (Very Good)

A healthy credit score range signifies that you are eligible to apply for almost all secured and unsecured loans with lower interest rates and better loan terms. 

800 - 850 (Exceptional)

The perfect credit score grants you access to the best credit cards and loan options that lenders have to offer, including the most exceptional annual percentage rates.  

Factors That Influence Your Credit Score

Credit scoring models determine your credit score based on a number of key factors. Here are the factors that influence your FICO scores:

  • Payment history (35%): Whether you’ve paid your past debts on time.
  • Amounts owed (30%): The amount of credit you’re using compared to the total credit limit. This is also known as the credit utilization rate.
  • Length of credit history (15%): How long you’ve had credit accounts.
  • Credit mix (10%): Variety of credit accounts you have, such as installment loans, mortgages, and credit cards. 
  • New credit (10%): How often you’re applying for new credit accounts.

How Bad Credit Affects Your Ability to Borrow

If you have ever borrowed money or owned a credit card, you already have a credit report with a credit bureau. The top three credit bureaus in the country (Experian, Transunion, and Equifax) keep track of how much money you owe in debt and your repayment history, which helps them generate your credit score.

Having a bad credit score can have a number of drawbacks: 

  • Difficulties in prequalification for loans and lines of credit. Most creditors will just discard applications with a bad credit score.
  • High interest rates on debts
  • High premiums on insurance
  • Paying a deposit for utilities
  • Hiring problems for some roles
  • Fewer renting options
  • Not being able to buy a home
  • Not able to buy a car

While you can rent an apartment and get a car loan with bad credit, you’ll pay higher interest rates, which can make borrowing expensive.

How To Fix a Bad Credit Score

Credit repair may take some time and effort, but it’s well worth the effort. Here’s what you can do to improve your credit score.

Set Up Automatic Payments

Make debt payments through the online automatic payments method (autopay) rather than keeping track of them yourself. The monthly payments will be automatically deducted from your bank account at the end of the billing cycle. It will ensure that you pay every month and never skip a payment. On-time payments can have a measurable impact on your credit score.

Keep Old Credit Card Accounts Open

If you have any unused credit card accounts that are currently active, keep them open. It helps you maintain a good credit utilization ratio. Closing accounts might sound like the right thing to do, but it actually hurts your credit score. Don’t apply for any new credit cards unless you need them. 

Pay off Debts

Try to pay off your debts as soon as possible. Focus on paying the debts with the highest interest rates first, typically credit card debt, and then move on to smaller debts, using the debt avalanche method. 

Check the interest rates disclosures to keep track of the interest rates of all your loans and credit cards. This will free up your available credit and improve your credit utilization ratio. 

Avoid New Debt Inquiries

Do not apply for new credit cards and personal loans if you struggle with a low credit score. Credit checks done by financial institutions and credit card issuers will affect your credit history, appear on your credit reports, and may signal lenders that you are taking new debts to repay existing ones.

Always ask if a lender is doing a hard pull or a soft pull of your credit. Since soft inquiries aren’t connected to a specific application for new credit, they will not ding your credit score. 

On the other hand, when a financial organization, such as a lender or credit card issuer, investigates your credit when making a lending decision, this is referred to as a hard inquiry. They frequently occur when you apply for a mortgage, loan, or credit card, and you are usually required to authorize them as they will affect your credit.

Pro Tip: Avoid companies claiming ‘quick fixes’ to your credit score. Credit repair cannot be done overnight. However, there are plenty of legitimate credit repair companies out there, so be sure to do your research to find a reputable one.

The Bottom Line on Bad Credit

You may have bad credit if you haven’t paid your bills on time, maxed out credit cards, made late payments, or have a foreclosure or bankruptcy in your credit history. This can make it difficult to get access to credit at a competitive rate. Get a free credit report from all three credit bureaus to monitor your credit report.  

Getting out of debt with bad credit can also be challenging since it makes it harder to qualify for products like debt consolidation loans.

Debt relief companies like TurboDebt can help you pay off your debts faster through strategies that fit your financial needs. They can also guide you on building credit and staying on track once you are debt-free.