What Is a Bad Credit Score?
“Bad” credit scores are more accurately described as below average, but credit scores aren’t permanent. There are plenty of ways to turn a score from bad to good.
By Allan Halcrow | American Express Credit Intel Freelance Contributor
5 Min Read | December 15, 2021 in Credit Score
A credit score is only “bad” if it keeps you from qualifying for the loan or interest rate you want.
People with credit scores labeled “subprime” – meaning, below average – likely won’t get good interest rates or may not be able to borrow at all.
Credit scores aren’t permanent. With discipline and time, anyone can improve their scores.
“Bad,” like beauty, is in the eye of the beholder – and it isn’t even a word that credit reporting agencies or lenders use. So, when you ask “What is a bad credit score?”, the most accurate answer is: any score that keeps you from qualifying for the credit card, loan, or interest rate that you’re seeking.
Let’s explore what that means in practice, and what people with so-called bad scores can do to improve them.
Although “bad” is not one of them, there are certain words lenders and reporting agencies generally apply to specific credit score ranges, each of which has different implications for your ability to use credit to borrow money. There are two primary credit scoring models, FICO and VantageScore, and they both report scores from 300 to 850. Though they break down their ranges slightly differently, they’re closely aligned. Let’s focus on FICO, which is the older model and more widely used in lending decisions. The FICO Score ranges are:
- Exceptional: 800-850.
- Very Good: 740-799.
- Good: 670-739.
- Fair: 580-669.
- Very Poor: 300-579.
Americans’ average FICO credit score – which the Consumer Financial Protection Bureau (CFPB) calls “Prime” – was 710 in 2020 and falls in the “Good” range.1 When you hear “subprime” used to describe credit scores, it means below average. Lenders usually consider any score below the Good range as subprime and might anticipate that people with subprime scores may struggle to repay what they borrow.
So, you may consider it fair to call a subprime credit score bad. And according to the Experian credit reporting agency, approximately 34% of people have subprime FICO scores,2 which means they generally won’t get favorable interest rates and may not be able to borrow at all.
A subprime credit score can mean different things, depending on your personal situation and financial goals. If you’re retired, own your home outright, and don’t need to borrow money, even a Very Poor score may not make a difference to you. But if you’re trying to buy a home or need to borrow money to replace a broken refrigerator, the picture may be quite different. Broadly speaking, bad credit scores may result in:
- Paying higher interest: Lenders reserve the most favorable interest rates for customers with the highest credit scores because those scores tend to predict who is most likely to repay what they borrow. That means lenders will charge subprime borrowers higher interest for everything from credit cards to auto loans and mortgages. If you pay off the balance on your credit card each month, higher interest rates may not matter much. But over the life of an auto loan or mortgage, a higher interest rate can cost you thousands of dollars and mean a higher monthly payment.
- Challenges to get a mortgage: Low credit scores can hurt approval chances. And if you do qualify, it’ll likely cost you more in interest.
- Other difficulties: It may be harder to get approved for an apartment lease, utility service, or mobile phone contract, for example. Or you may qualify only if you make a deposit. You may also have to pay higher premiums for insurance.
- Job-seeking hurdles: It may be tougher to get that dream job, since many employers check credit reports as part of job-candidate background checks.
If your current credit score is subprime and the consequences sound bleak, there are still good reasons not to be discouraged. Remember, credit scores aren’t destiny. You can take action to improve your credit score.
Improving your credit score doesn’t happen overnight. Negative marks, like late payments, can stay on your credit report for as long as seven years. But with discipline and diligence, anyone can improve the score over time. The following tips can help:
- Pay bills on time. More than a third of your credit score is shaped by your payment history, so on-time payments can make a big difference. If your memory isn’t a strong suit, setting up automatic payments is one way to ensure you keep current.
- Keep balances low. Credit utilization – how much of your available credit you use – is the second most important factor in shaping your credit score. Experts suggest that you keep your balances below 30% of your total credit limit, but the lower the better.
- Build good history. Think carefully before closing credit card accounts. Lenders value credit history. Assuming you keep your account in good standing, the longer you have it, the more it helps your score.
- Mix it up. Lenders want to see that you can effectively manage different kinds of credit – credit cards, personal loans, auto loans, and mortgages.
- Apply for credit carefully. Every time a creditor pulls your report for the purposes of making a lending decision, it’s called a hard inquiry. And it dings your score.
- Explore different credit options. If you’re not able to qualify for a standard credit card or get a personal loan from your bank, you’re not out of options. There are other financial products that can help anyone build credit, and some are designed specifically to help people with poor credit or no credit. One option is to become an authorized user/additional card member on someone else’s account. You’ll both get credit for a positive credit history. Of course, you’ll also both experience credit dings if there are late payments or excessive spending on the account.
- Know where you stand. Experts encourage you to review your credit report regularly. It’s easier to develop an improvement plan if you have a clear understanding of what’s helping or hurting your score. And a regular review can help you spot errors or signs of fraud on your report, either of which could potentially keep you from a good or excellent score.
A bad credit score is one that keeps you from qualifying for the loan or interest rate you want. For most people, a score of 669 or less – which lenders regard as subprime – qualifies as a “bad” score. But credit scores are not permanent, and taking strategic action can help you improve your score over time.