Find out whether you have poor credit — and how to fix it — to position yourself for lending approvals.
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 discern where you fall in the credit landscape. 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”?
Many Americans suffer from what’s called “bad credit” — but there’s no fixed definition as to what that means. Generally, it means that 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, and when it comes to how they affect your score, 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. However, defaults, bankruptcies, late repayments and similar negative listings can quickly put you in “bad credit” territory.
How do I know if my credit is bad?
Whether you have “bad” credit can be a gut feeling, especially if you frequently receive calls or letters from debt collectors or have a history of late payments. Rather than wonder how lenders see you, order your credit report.
You are entitled to a free copy of your credit report every year from the three nationwide credit reporting companies: Experian, Equifax and TransUnion. Once you have your credit report, you will be able to see your borrowing history and individual listings.
If after examining the details you uncover information that you believe is inaccurate or not current, document these errors and dispute them with each of the credit bureaus. Even small errors and typos can affect how a lender scores your “bad” credit.
Can my credit score tell me if I have bad credit?
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.
Lower credit categories indicate worse ratings that are typically in the range of what’s referred to as “bad credit.” They reflect the likelihood of an adverse event being listed on your credit report in the course of a year when compared to the average American.
- Excellent — Very low likelihood of an adverse event in the next 12 months
- Very good — Low likelihood of an adverse event in the next 12 months
- Good — Slightly less likelihood of an adverse event in the next 12 months
- Average — Reasonable likelihood of an adverse event in the next 12 months
- Below average — 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.
Get your credit score or repair your credit
What listings on my credit report should I look out for?
Carefully review your credit history annually to stay on top of making sure that lenders see only the most accurate picture of your financial health. Make sure that each of the elements below are correct, and document any problems you find to report to the bureau for fixing.
- Your personal information. Ensure that your name, your Social Security number and your employment history are correct. If you find a diversion from this information, report it immediately to limit any chance of identity theft.
- Open accounts. If your report shows that you owe on an account you have since fully repaid or closed or credit or store cards you’ve never used, call the credit reporting bureau first and then call the provider to find out how to resolve the issue.
- Incorrectly listed payments or defaults. You may find negative information that’s reported incorrectly on your report, such as late or missed payments. Highlight anything that you believe is not correct and dispute it with both the reporting bureau and the creditor or institution that provided the information.
- Duplicate listings. Are any of your accounts listed more than once? Especially with collections, you’ll want to make sure that the same account is not listed multiple times throughout your report.
- Cosigner information. If you find that you’re listed as a cosigner on a loan that you did not authorize, contact the reporting bureau immediately.
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 too 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. Your report can give you a better understanding of how to improve your finances. For example, if you see a lot of listings for late payments, focus on paying your bills on time to improve your score over the long term.
- 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.