What is a bad credit score? – Councilor Forbes
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A bad credit rating can prevent you from qualifying for a loan. If your score is too low, it increases the chances of your loan being refused. And even if a lender approves your loan, you will likely be charged a higher interest rate.
Since lenders often use different credit scoring models or internal guidelines, what is considered a bad credit score varies. However, we can give you an idea of ââhow good your score is based on the credit rating ranges of two of the most popular credit scoring models: FICO and VantageScore. We’ll also show you how to improve your credit score.
What is a bad FICO score?
The FICO 8 score – the most widely used version of the FICO scoring model – ranges from 300 to 850. Borrowers with lower scores represent a higher risk for lenders. According to this model, a score of 669 or less is not a good credit score. In addition, scores between 580 and 669 are considered correct; scores below 580 are considered poor or bad.
In addition to the FICO Score 8 model, some lenders use different FICO rating models for different types of loans. For example, when you apply for an auto loan, a lender can use your automatic FICO score. This score varies from 250 to 900; higher scores represent less risk.
What is a bad VantageScore?
The VantageScore credit rating model also has a range between 300 and 850. However, according to this model, a credit score below 661 is not good. Scores between 601 and 660 are considered correct. Anything below this range is considered poor or bad (500 to 600) or very bad (300 to 499).
How to improve a bad credit score
If you have a bad credit score, there are steps you can take to improve it. Here are five actions you can take:
1. Review your credit report. Your credit score is based on the information on your credit report. If it presents negative information, it will damage your credit score. Examining your credit report at least once a year can help you spot and correct reporting errors if you have any. You can view your reports for free every week until April 20, 2022 by visiting AnnualCreditReport.com.
2. Pay your bills on time. For both credit scoring models, payment history is an important factor. Paying off your debt on time can increase or improve your credit score. However, 30 days late payments can cause him serious damage. One way to make sure you pay your bills on time is to sign up for automatic payment.
3. Consider taking out a credit builder loan. A credit builder loan is a loan designed to help you improve your credit score. Unlike traditional loans, the lender does not issue you a lump sum in cash. Instead, you need to make fixed installment payments on an account. Lenders always charge interest on this type of loan, but in some cases you get it back at the end of the loan term.
4. Apply for a loan from a co-signer. If you need a traditional loan instead, consider applying for a loan from a co-signer. A co-signer who has good credit and a decent income can increase your chances of loan approval. Paying off the loan on time can improve your score.
5. Become an authorized user on a credit card. Another action that involves someone else’s help is being listed as an authorized user on a family member’s or friend’s credit card. If the person adding you has a good payment history on the card, it can increase your score.
How a bad credit score can affect you
Bad credit scores can hurt you financially in a number of ways, including:
â¢ Higher interest rates. In general, having a lower credit score means that lenders will charge higher interest rates to offset the risk. If you are approved for a loan with a high interest rate, it can dramatically increase your borrowing costs.
â¢ Fail to meet a lender’s credit score requirements. If your score is too low, you risk not meeting a lender’s minimum credit requirements. For example, lenders typically do not approve borrowers who have a FICO score below 580 unless they have a co-signer. Additionally, some lenders only approve borrowers who have excellent credit scores.
â¢ Rent an apartment. When you try to rent an apartment, the landlord may charge you a higher deposit amount. Additionally, some landlords may require you to prepay the first and last month’s rent.
â¢ Apply for a mortgage. Bad credit often results in a larger down payment to qualify for a mortgage. For example, a Federal Housing Administration (FHA) loan allows you to deposit 3.5% if your credit score is at least 580. If it is below that threshold, you may still qualify, but the your deposit amount increases to 10%.
â¢ Apply for an auto loan. If you have to apply for a car loan, it can be difficult to get the financing you need. Similar to a mortgage, lenders may require a larger down payment. And while some auto lenders may advertise loans without a credit check, we don’t recommend them because they come with outrageous fees.
â¢ Car insurance rates. Some auto insurance companies will charge you higher insurance rates if you have bad credit.
â¢ Public service accounts. When you apply for a new utility account, a utility company will examine your credit. If you have bad credit, you may need to pay a refundable deposit.
Why is a good credit score important
Having a good credit rating is important because it helps you borrow money at lower interest rates or 0%. For example, if you have excellent credit, you might qualify for a 0% APR credit card, which offers interest-free financing for an extended period. Using this type of card can save you a lot of money in interest. It can also help you get out of debt faster if you transfer a balance from another high interest card.
Plus, if you have a good credit rating, you can avoid some security deposits and pay lower down payments on some loans. This can free up some of your money for other financial purposes and expenses.
When you add up all the savings, a good credit score can save you thousands of dollars over the course of your life.
At the end of the line
When you have a bad credit rating, it can be difficult to get ahead financially. Because you are considered risky by lenders, you will have a hard time accessing the credit you need. Plus, higher interest rates and down payments can increase your borrowing costs. In addition, your cost of living may increase. However, the good news is this: you can improve your credit score and your chances of loan approval by following some of the steps mentioned above.