What factors determine “bad credit” and “good credit”?

Everything you need to know about credit ratings and how you can improve your score today.

Last updated:

Man worried about bills, looking at laptop

We value our editorial independence, basing our comparison results, content and reviews on objective analysis without bias. But we may receive compensation when you click links on our site. Learn more about how we make money from our partners.

Your credit rating plays an important role in getting approval for financial products such as mortgages, car loans and credit cards. If your record tracks a poor pattern of debt management, you’ll be considered a high credit risk and may be refused credit or offered a higher interest rate.

Learn what factors separate a good credit rating from a bad credit rating, plus what your options are if your credit score classifies you as a risky borrower.

What is a bad credit rating?

poor credit history

A bad credit report is usually scarred by things like bankruptcy, and payment defaults. Less extreme black marks include late payments, high credit balances and frequent applications for credit — like applying for three credit cards in a month.

A bad credit rating can result in rejected applications, lower credit limits and more restrictive payment terms. Unless all of your accounts are in good standing, this could signal a lack of responsibility when managing your finances to potential creditors.

What causes a bad credit rating?

The following can result in a negative credit rating:

  • Credit inquiries. Every time you apply for credit, the lender makes an inquiry on your credit report, called a “hard inquiry“. Leaving a trail of frequent credit inquiries can cause future lenders to view you as desperate — inquiries stay on your report for two years.
  • Late or skipped payments. Poor payment habits can be a warning sign to potential lenders, so it’s always better to make your payments on time, even if it’s the minimum. It’s also important to remember that your payment history can stay on your credit report for up to seven years.
  • Credit defaults. This happens when a lender takes action to retrieve a debt that you’ve stopped making payments on — defaults stay on your record for seven years.
  • Court judgements. These legal blemishes — lawsuits, wage garnishments, tax liens and more — stay on your record for seven years.
  • Bankruptcy. Bankruptcy will stay on your report for up to ten years, depending on chapter filled.

How to repair a bad credit rating

How would a bad credit rating impact me?

For starters, you’re probably going to have a tough time being approved for loans and credit cards with low interest rates due to the risks associated with a bad credit rating. Some other ways poor credit can hurt you are:

  • Security deposits. If your credit history shows that you have a habit of being late and missing payments, your landlord or utility provider may jack up the security deposit.
  • High car insurance premiums. People with lower credit scores pay more for car insurance because of a system that accounts for risk called credit-based scoring. However, you won’t have to worry about this if you live in California, Hawaii and Massachusetts — the practice has been banned in these states.
  • Limited credit card options. Great credit cards with perks, rewards and low interest rates are often reserved for consumers who have proven their creditworthiness in the past.

How can I fix a bad credit rating?

You may be able to improve your bad credit rating by practicing responsible lending habits — such as making payments on time. It could be worth consolidating debts to make your payments easier, which may improve your credit score in the long run.

There are also credit repair services that offer guidance and counseling to help improve your credit score. Keep in mind that credit repair services charge money and it may not be worth it depending on your circumstances.

Before you apply for credit, confirm that you’re an eligible applicant

While knowing your credit rating is useful when improving your credit history or applying for a loan, it’s merely an indicator of your creditworthiness. Consider the eligibility requirements such as your present employment, total income and current assets before you apply for your next line of credit.

How long do black marks stay on my credit report?

You can take comfort knowing that time is on your side if you have bad credit because most of your black marks will be erased from the report in seven years. If you can’t wait that long and need credit, there are personal loans and bad credit rating credit cards.

Do you have good or bad credit?

Updated December 6th, 2019
Name Product Starting price Trial period Credit scores Credit monitoring Credit reports Update frequency
$19.99
30 days
TransUnion
Equifax
Experian
Yes
TransUnion
Equifax
Experian
Monthly
Annually
Get your credit report and FICO score for just $1 with enrollment in Experian CreditWorks credit monitoring. Cancel anytime.
$19.95
1 day
TransUnion
Equifax
Experian
Yes
TransUnion
Equifax
Experian
Monthly
Get quarterly access to your most widely used FICO® Scores and a 3-bureau credit report.
$24.95
No
TransUnion
Equifax
Experian
Yes
TransUnion
Equifax
Experian
Monthly
TransUnion credit score, monitoring and identity theft insurance.
$15.95
No
TransUnion
Equifax
Experian
Yes
TransUnion
Equifax
Experian
Monthly
Monitor your key business relationships to protect your company from losses.
$19.95
7 days
TransUnion
Yes
TransUnion
Monthly
$1 for a seven-day trial to get access to your credit score and credit report from TransUnion.

Compare up to 4 providers

Updated December 6th, 2019
Name Product Monthly Fee BBB Rating Customer Support Cancel Anytime
$25
A
Phone
Email
Online Chat
Yes
Save money and build credit with a secured-installment loan that you can access after 12 or 24 months.
$99.95
F
Phone
Email
Mail
No
Specializes in clearing your credit report of inaccurate items with all three credit bureaus.
$19
A+
Phone
Email
Yes
Get a free consultation to help identify erroneous items on your credit report.
$89.95
F
Phone
Email
Yes
Law firm that offers three tiers of credit repair suited to your situation.
Credit Firm Professional Credit Repair
Credit Firm Professional Credit Repair
$49.99
A+
Phone
Email
Mail
Yes
Professional credit repair service that can help you create a step by step action plan. Cancel anytime.
$79
C
Phone
Email
Mail
Yes
Professionals work with you to clean up your credit and raise your credit scores. Cancel anytime.
$79
C
Phone
Email
Mail
Yes
Free credit report and monitoring that comes with a 90-day money-back guarantee.

Compare up to 4 providers

What is a good credit rating?

The characteristics of a good credit report include established credit accounts with low balances, regular payments made on or before the due date and a clean legal record. A healthy credit report has little or no black marks — like late payments and credit defaults.

“In general, a good credit rating will give you access to higher credit limits and lower interest rates.”

How do I get a good credit rating?

  • Establish healthy accounts. As long as you actively use your account, regularly pay your bills on time and have a diverse credit portfolio, you’ll generally be viewed as a responsible borrower.
  • Make punctual payments. Paying your bills on time sends good signals to lenders and demonstrates your ability to make timely payments.
  • Stay free of debt. Avoiding debt will also demonstrate your ability to repay your balances and could position you as a low-risk applicant.
  • Demonstrating job stability. Staying at the same job for a few years, rather than frequently hopping between jobs can make you appear as a low risk borrower to potential lenders.
  • Stay in the same place. Making rent or mortgage payments consistently at one residence gives lenders the comfort of knowing you’re not likely to default on your payments.
  • Make infrequent credit card applications. Each credit card application you make shows up on your credit report regardless of whether it’s approved.

What if I have no credit?

A blank credit report isn’t necessarily assuring to lenders. Most lenders are likely to prefer someone with a proven record of responsibly maintaining open accounts over someone with no history of borrowing.

Bottom line

There are multiple services in the US that provide credit reports, but the major three credit reporting agencies are Equifax, Experian and TransUnion. Consumers are entitled to a free credit report every 12 months from each of the credit bureaus.

The range of details in the report may vary between agencies, so it can be useful to see exactly what’s there to ensure that they’re all correct. You should contact the credit reporting body as soon as possible if you find any mistakes on your credit report.

Was this content helpful to you? No  Yes

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site