What Is A Bad Credit Score?

Consumer credit and debt is playing an increasingly influential role in the way we run our lives and for that reason it is essential that you check your credit score on a regular basis. However, it will not be much good to you if you cannot tell the difference between what is a bad credit score and what is a good credit score?

Don't worry if you don't know the answer as you have to come to right place. In the next few minutes it will take you to read this article you will have a clearer understanding of bad credit scores and how they can affect you financially.

What Is A Bad Credit Score Rating?

First of all, you need to be clear about what a credit score actually is. It is a 3 digit number that is created by a formula using financial data contained within your credit report. Banks, credit card companies and other financial lenders use the credit score to determine quickly what kind of risk you are to lend money to.

The score is measured on what is called a credit score scale and the higher your score is positioned on the scale the less risk you are. In layman's terms, a better credit risk means there is less chance that you will default on a loan and that is what the banks like to see.

As nothing in the finance world is simple your score can be measured on more than one credit scoring system. This means that you can have a different score based on the lending criteria unique to that bank. However, in saying that the most common credit score range is the Fair Isaac or FICO score scale which has a number range between 300 and 850. Currently a 700 or above would be considered a good to excellent score.

On the other end of the scale things are not as clear cut. Even if your credit score is not near the lower end of the scale you can still be considered a high risk. Although, lenders may use different scales to measure your credit worthiness it would be safe to say that scores below 600 indicate a higher credit risk.

What Causes A Bad Credit Score?

There are a number of factors that can lower your credit rating but the most influential is your payment history. This is taken into account when your credit score is calculated. It is estimated that your payment history represents 35 percent of your score. Your credit history can be effected if you have a habit of making late payments, have delinquent debt accounts and have suffered from bankruptcy.

Your debt to credit ratio is also an important factor. What this basically means is the amount of money you owe. The more money you owe the greater credit risk you become. Many people are affected by this when they exceed the limit on their credit cards.

Many people think that staying within their credit limit is good enough however, this is not the case. Depending on the lender you may be penalized if you exceed more than 30% of your credit limit. Therefore, you should make sure your outstanding balances do not exceed 30%. For example, if your cards limit is $5000 then, 30% of that is $1500 and that is limit you will want to stay within.

What Are The Consequences Of A Bad Credit Score?

Having a bad credit score does not mean you are going to end up on the street. However, it can have an effect on your creditworthiness when it comes to borrowing money. If you are deciding to make an application for a home mortgage your life can become more complicated if your score is low.

Depending on how bad your credit score is you will find it much more difficult to have your loan application approved compared to a person with a good score. Even if you are successful a low score can mean that you are more likely to be charged a higher interest rate by lenders. This can become very expensive for example, higher mortgage interest rates over the full term of the loan and mean thousands of dollars.

What You Need To Do To Reverse Your Bad Credit Score?

If you have a low credit score and you want to qualify for the best credit in the future then, you will have to improve the way you handle your money. If you have a history of making late payments you will need to get better organized. This is simple to do. All it requires is setting up a monthly transfer facility through your bank. In this way you can pay your creditor balances automatically rather than manually which can be very complicated and time consuming.

Understanding credit reports is a skill you should learn. These reports can contain financial information that can be out of date or inaccurate. Negative entries such as defaults and missed payments that are inaccurate could have a negative effect on your creditworthiness. You have the right to contact the three major credit bureaus and dispute entries that are either wrong or out of date and have them changed.

Keep a careful eye on your cards limits as too much credit card debt can play havoc with your score. Remember the 30% rule pointed out earlier. Keep the number of credit cards you have down to a minimum. When you can prove to banks and other lenders that you are a responsible borrower you will see your credit rating rise.

Raising your score will not happen over night. It will take time but, the rewards are worth it. If you haven't checked your credit score yet then you can obtain these free of charge from Credit Score.com. They will be able to furnish you with your scores from the 3 major credit agencies. With this you can take the first steps to securing your financial future.

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