Everyone these days is concerned with their credit score. A credit score is crucial in determining the level of access to a loan, and how much a loan will end up costing by determining the interest rate. While a good credit score means better access and lower interest rates, a bad credit score means the exact opposite.
What exactly is bad credit?
The credit range is 300 on the low end to 850 as a perfect score. Most lenders will assume that a credit score of above 700 is good, and anything between 650-700 as borderline. Anything under 650 can be considered to be a risk to lenders.
What determines a credit score?
Credit scores are determined by a number of factors. Naturally, a credit score is mostly made up of how timely you are with payments. 35 percent of your credit score is based on whether or not an individual can pay bills on time. The amount of credit used as a percentage of available credit is another 30 percent of the score.
To put this in perspective, a person who uses 90 percent of available credit is going to have a lower score than someone who uses only half of available credit. Someone who pays a bill 30 days late is going to have their score affected less than someone who pays a bill 90 days late. Keep in mind that credit bureaus are only notified if a payment is at least 30 days late.
Other factors that determine a credit score are length of credit history, and how many different accounts are used. A borrower with a longer credit history is going to have a harder time getting financing as opposed to someone who has been borrowing for 20 years. A borrower with only one credit card might also have a hard time borrowing as opposed to a borrower who has a home loan, car loan and two credit cards.
Foreclosures, repossessions and bankruptcy can also negatively impact your credit score. A repossession or bankruptcy will set you back for years and are hard to recover from. A bankruptcy might allow a borrower to stop paying off a debt, but it will show up on a credit report for up to ten years and will lower a credit score.
Essentially, bad credit stems from an inability to pay back a past loan. Paying a loan off late, not at all or using too much credit will set off red flags. All of these actions will lower a credit score, and will represent a borrower who is a bad credit risk. That is what is referred to when a borrower is said to have bad credit.