Most people spend very little time worrying whether they have a bad credit score. But the reality is that financial institutions like phone companies, banks, and even electricity providers share people’s financial information with each other. The collective result of all this information sharing is your credit report, from which your credit score is created. Banks use these to decide whether to approve loans and the interest rates they apply.
It isn’t just banks and lenders who assess your credit score. Employers can use it as a guide to determine your trustworthiness. Insurers can even use it to decide whether you will make payments on time.
A bad credit rating can lead to financial issues in the future. You could find yourself being rejected for loans, landlords might be reluctant to rent you a house, and it can even mean you won’t be approved for a mortgage.
Usually having a bad credit rating is not something you will be actively aware of. The information tends to become available when you apply for a loan. So read on to find out everything you need to know about bad credit scores.
What is a bad credit score and how does it happen?
The term ‘bad credit’ refers to a low credit rating. Your credit rating, or credit score, is a summary of your credit history, and the higher the rating, the better.
Each time you don’t make a repayment on time, this is filed on your report, and affects your credit score. Whilst one or a small number of missed payments will most likely not negatively affect your credit score long-term, repeatedly missing payments will eventually give you a bad credit rating.
There are three bureaus that maintain your credit report: Equifax, Experian, and illion. These bureaus keep a record of each time they are contacted by a creditor for when someone makes a credit application. They are also advised if you default on your credit repayments; if you fail to make a payment, either on time or at all.
Late payments can be missing the minimum required monthly repayment on your credit card, or being behind in repaying a creditor for an item you purchased under finance, such as a car or refrigerator.
Filing bankruptcy or entering into a Debt Agreement can also contribute to a bad credit rating, so you should always carefully consider these options before committing to them. Whilst bankruptcy itself remains for three years, it will remain on your file for seven years after you’ve entered into it.
It is also possible that a credit agency has made a mistake or has been given misleading information. They may have incorrect personal information, there could be data entry errors, and there’s even a chance your credit has been influenced by identity theft. So if you think there are inaccuracies on your credit report, look into every detail, and if you find something is incorrect, be sure to contact the relevant credit agencies.
What is the credit scoring system?
The credit three bureaus measure good and bad credit scores slightly differently to each other, and it is worth taking a look at the ways credit score is measured by the three bureaus.
Equifax Credit Score
With Equifax, your score will range between 0 and 1200. They apply a system that rates the likeliness of whether an adverse event will negatively affect your credit score in the next 12 months.
Equifax Score Ranges:
- Below Average: 0 – 509
- Average: 510 – 621
- Good: 622 – 725
- Very Good: 726 – 832
- Excellent: 833 – 1200
Experian Credit Score
Your Experian Credit Score can go as high as 1000, but the number to stay above here is 550. Anything 549 and below is considered ‘below average’, and will impact your capacity to be approved for loans.
Experian Score Ranges:
- Below Average: 0 – 549
- Fair: 550 – 624
- Good: 625 – 699
- Very Good: 700 – 799
- Excellent: 800 – 1000
Illion Credit Score
Illion’s score also goes up to 1000, and being 500 and above counts as ‘Good’. They consider 300-499 to be ‘room for improvement’ range. Anything below that indicates there are significant issues with payments or other negative data associated with your file.
Illion Score Ranges:
- Zero: 0
- Low: 1 – 299
- Room to Improve: 300 – 499
- Good: 500 – 699
- Great: 700 – 799
- Excellent: 800 – 1000
Accessing your Credit Report
You can access your credit score online with each credit bureau and are able to get a copy of your credit report every three months. The option exists to access your report from all three different bureaus, as they all hold slightly different information. Some provide the information for free. It takes around one to two days to access it online, or up to ten days if you order it via mail.
There are a number of ways to access your credit score quickly and for free. Get Credit Score is a good example.
What it means if you have Bad Credit
Having bad credit means creditors are less likely to lend to you, because they will likely conclude you are at a high risk of not being able to make your repayments. Even when creditors do lend to someone with bad credit, they will most likely set a far higher interest rate than borrowers with high credit scores.
Broadly speaking, bad credit is the result of repeatedly not keeping up with repayments of loans, or finding yourself in serious debt.
Fixing your Bad Credit rating
It is often difficult to fix your credit score when it is very low, however, there are things you can do to help it.
Request scores and make sure your credit information is accurate
Before fixing your bad credit rating, you need to get a clear understanding of where your credit rating sits. You can request your credit rating from Equifax, Experian, and illion. Once you have all the details, make sure that all of your personal and credit information is accurate. If you find any anomalies, submit a correction request in writing.
Pay off your debt
It is important you pay off your debt. There can be a few different ways to approach this, but it always requires a plan. Speaking to a financial expert is always a good idea if you are struggling to take control of all your debt.
Seek financial advice, if needed
Getting loans with Bad Credit
There are still ways to get loans if you have bad credit, but you should always be highly diligent.
Only borrow what you can repay
Some lenders loan money to people with bad credit, but there you should always be careful about interest rates, and to only take out loans you can pay back. You certainly don’t want even more debt. Nonetheless, such lenders will consider borrowers with bad credit on a case-by-case basis, so you will have the opportunity to consider the conditions of any given arrangement.
Pay on time, every time
Simply having debt is not necessarily a bad look to potential lenders. Indeed, having loans gives you the opportunity to build a good credit score, so long as you are punctual with your repayments. Having a good record with repayments increases the chances of being approved for loans.
Review loan conditions carefully
Bad credit can lead to you having extra conditions placed on your loans, and you need to be clear about what those conditions are. For example, a loan you receive might be given a ‘secured’ status, which means the borrower will need to offer collateral to secure the loan. It is also possible to get a new credit card when you have bad credit, but there is a large chance you will have a higher interest rate as well as other restrictions.
Watch out for high interest rates
While short term loans can be an option, it is always important to consider all the conditions. Short term loans can help you fix some of your debt, but they often come with extremely high interest rates. Short term loans include small loans such as payday loans for amounts under $2000, as well as medium-amount loans for amounts under $5000. Short term loans tend to be repaid over a matter of months or even weeks, and often have very high interest rates and/or fees.
If you’re in financial hardship and are looking to borrow a small amount, it’s important to compare your options before applying for a short term loan, as you could be in for high costs if you’re not careful.