Find out whether you have poor credit — and how to fix it — to position yourself for better interest rates and terms.
Your credit report is a detailed record of your credit history that can affect your borrowing approval, the rates and terms you’re offered and how lenders view your overall financial health.
But even with your report in hand, it can be difficult to figure out where you fall in the different ranges of credit. We walk you though what it means to have poor credit, how you can find out if you have bad credit and what can you do about improving your financial standing.
What is “bad credit”?
A signal of bad credit is when your credit report reflects heavy debt, negative repayment histories, rejections, defaults, judgments and other information that lenders consider risky borrowing behavior. It takes more than one negative listing on your report for you to be considered a person with poor credit.
When it comes to how derogatory marks affect your score, all listings are weighted differently. For example, a single credit application will not affect your credit standing by much, but many credit applications made within a short time might. On the other hand, defaults, bankruptcies, late payments and more serious negative listings can quickly cause your score to drop.
How do I know if my credit is bad?
The only way to truly know the condition of your credit it to order your credit report. You’re entitled to a free copy of your report every year from the three nationwide credit reporting companies: Experian, Equifax and TransUnion.
Once you have your credit report, you’ll be able to see your borrowing history and individual listings.
Check your credit rating
Can my credit score tell me if I have bad credit?
Lower credit scores indicate worse ratings that are typically in the range of what’s referred to as “bad credit.” A poor credit score can reflect the likelihood of having a potential negative listing on your credit report in the course of a year.
- Excellent (720-850) — Very low likelihood of an adverse event in the next 12 months
- Good (680-719) — Low likelihood of an adverse event in the next 12 months
- Fair (620-679) — Reasonable likelihood of an adverse event in the next 12 months
- Poor (300-619) — High likelihood of an adverse event in the next 12 months
A “bad” credit score won’t necessarily keep you from approval for loans and credit cards, but what you’re offered could come with worse rates and terms than those offered to a person with a higher score.
How is my credit score calculated?
Your credit history is used to determine your credit score. Each credit-scoring bureau uses different criteria for measuring your credit score, weighing your history against a proprietary algorithm.
Lenders and even the bureaus weigh the same factors when determining your credit score — even if they weigh them differently — including how long you’ve had credit, your payment history, your credit utilization ratio and how many loan and other types of credit you carry.
What can negatively impact my credit?
In order to know how to change the course of your credit score, you’ll need to learn what sort of activity made it less than favorable in the first place. Here are the typical pitfalls that can damage your credit:
- Not checking and knowing what’s on your credit report
- History of late, missed or no payments
- Maxing out credit cards resulting in a high credit utilization ratio
- Ignoring notices from lenders regarding your account
- Going default on a credit account
- Not disputing mistakes and errors on your credit report
Keep all of this risky behavior out of your credit repertoire to avoid falling into the murky waters of bad credit.
8 warning signs of bad credit
Having poor credit can limit and prevent you from using loans, credit cards and may even affect your chances of being hired or getting the green light to rent an apartment. Some signs that your credit needs a bit of polishing are:
- Rejected credit card and loan applications. Lenders generally don’t want to lend to someone who’s had a past of not making payments on time. However, if you’ve been denied credit recently, you’re entitled to a free copy of your credit report to see what might be affecting your chances of approval.
- Account closed by a lender. This is a definite sign that your creditworthiness may be at risk. When lenders review accounts, they’ll either lower the credit limit or shutdown the account altogether for a borrower deemed too risky.
- High APRs and low credit limits. Low rates and high credit limits are only given to borrowers who have proven themselves to be responsible borrowers. Lenders charge higher rates to consumers with bad credit to offset the risk of missed or late payments.
- Subprime credit offers. When your score falls into a certain range, you’ll be targeted by subprime lenders with pre-approved offers for credit cards, loans and bad credit payday loans.
- Utility accounts need a deposit. When you move, it’s likely you’ll have to set up utility accounts — gas, water and electric. If the utility company asks you to put down a deposit, it’s likely that they pulled your credit report and categorized you as someone who has the potential to miss or make late payments.
- Calls from debt collectors. If a debt collector is calling about a legit unpaid balance, this is a sure sign that the default credit account in question is going to ding your credit score.
- Trouble finding a job. Your credit report is often used by employers to view how you’ve managed your financial situation in the past — especially if you’re working with money. Black marks and negative information on your report can influence an employer to hire you or not.
- Difficulty getting an apartment. A landlord wants to be sure that they won’t be chasing down a tenant for last month’s rent. If you’ve submitted an application to rent, it’s more than likely the landlord will check your credit to make an informed decision about making you a potential tenant.
How can I improve my bad credit?
Improving your credit score can be a slow process, but it could help you get financed down the road with more flexible options and better borrowing terms.
- Order a copy of your credit report. Request a free credit report from the major bureaus to stay on top of making sure that lenders see only the most accurate picture of your financial health. Confirm that your personal information, employment data, open accounts and balances and other financial details are current and accurate. If you discover any errors, dispute them with the three credit bureaus and the provider that reported them.
- Pay down your credit card accounts. Your overall credit score is determined by many variables, including your credit utilization rate. To indicate to lenders that you’re a responsible borrower, only carry a balance with a utilization of 30% or less. For example, if your credit limit is $1,000, keep your balance below $300, which is 30% of your limit.
- Commit to a budget and timely payments. Take a deep look into your finances to understand how you might be able to lower your debt-to-income ratio and overall debts. If you can successfully continue to make on-time payments, not only will you avoid late fees — but your credit report will also reflect that you can successfully manage your finances.
- Don’t attempt to open new accounts until your score improves. Every time you apply for credit, it’s listed on your credit report and pulls down your score. By waiting, you can take advantage of better interest rates.
- Avoid hastily closing unused accounts. While this sounds like a good strategy in theory, having only newer accounts will result in a lower score. Lenders want to see a long history of credit in your report.
- Track your credit score. Some credit reporting bureaus offer monitoring services that will notify you any time there’s a change in your credit score and information in your report. These services could be helpful in staying top of your overall financial well-being.