Determining how “poor” a credit score is can depend on various factors, including the scoring model used and the lender’s specific credit requirements. However, generally speaking, a credit score of 0 or -1 is considered less credit history, a score below 700 is considered poor, a score between 701 and 749 is considered good, while scores between 750 and 799 are very good. Scores above 800 are considered excellent.
A poor credit score can make obtaining credit, such as loans or credit cards, easier. Lenders may view individuals with poor credit scores as high-risk borrowers, which can result in higher interest rates, fees, or even loan denials. It is crucial to consider the factors that can impact credit scores and take steps to improve them.
Credit scores are calculated using credit report data, including information about an individual’s credit history. The factors that affect credit scores can vary slightly depending on the credit scoring model used but generally include the following:
Payment History:
Payment history accounts for the most significant percentage of credit scores, typically around 35%. It looks at how well an individual has paid their bills on time, including credit cards, loans, and other types of credit. Late payments, collections, bankruptcies, and foreclosures can harm payment history.
Example 1:
Mr. A has a credit score of 550 because he has a history of making late payments on his credit cards and other bills. He has had several accounts go into collections, significantly impacting his payment history.
Example 2:
Miss. B has a credit score of 620 because she recently missed a few payments on her car loan. While this has negatively impacted her payment history, she has otherwise been responsible with credit and has no other delinquent accounts.
Credit Utilization:
Credit utilization accounts for about 30% of credit scores and looks at how much of an individual’s available credit they are using. Lenders prefer a credit utilization rate of 30% or less, as high credit utilization can indicate financial risk.
Example 1:
Mr. C has a credit score of 695 because he has maxed out several credit cards and has a high credit utilization rate. This has negatively impacted his credit score, suggesting he may overextend himself financially.
Example 2:
Mrs. D has a credit score of 723 because she uses her credit cards sparingly and keeps her credit utilization rate low. This has positively impacted her credit score, suggesting that she is responsible with credit and is not overextending herself financially.
Length of Credit History:
The length of credit history accounts for around 15% of credit scores and looks at how long an individual has been using credit. Lenders generally view a more extended credit history positively, showing that an individual has a proven track record of using credit responsibly.
Example 1:
Miss. E has a credit score of -1 because she has a limited credit history. She has only recently started using credit and has yet to have much of a track record, negatively impacting her credit score.
Example 2:
Mr. F has a credit score of 790 because he has been using credit responsibly for many years. He has a long credit history and has always made timely payments, positively impacting his credit score.
Types of Credit Used:
The types of credit used to account for around 10% of credit scores and look at the mix of credit an individual has, such as credit cards, loans, etc. Lenders view a diverse mix of credit positively, as it shows that an individual can manage different types of credit.
Example 1:
Mrs. G has a credit score of 751 because she only has one credit card and has never taken out a loan. She has a limited credit history and a lack of diverse credit types, negatively impacting her credit score.
Example 2:
Mr. H has a credit score of 804 because he has a diverse mix of credit types, including credit cards, a car loan, and a home loan. He has demonstrated his ability to responsibly manage different types of credit, positively impacting his credit score.
New Credit:
New credit accounts for the remaining 10% of credit scores and looks at how frequently an individual has applied for new credit. Lenders may view frequent credit applications as a sign of financial instability and may view the individual as high-risk.
Example 1:
Miss. I has a credit score of 710 because she has recently applied for multiple credit cards and loans. This has negatively impacted her credit score, suggesting she may overextend herself financially.
Example 2:
Mr. J has a credit score of 770 because he has not applied for new credit in several years. This has positively impacted his credit score, suggesting that he is financially stable and does not need to rely on new credit.
Improving a poor credit score can take time and effort, but it is possible with a few simple steps. These include:
- Pay bills on time: Payment history is the most critical factor in credit scores, so making timely payments is essential to improving a poor credit score.
- Keep credit utilization low: Maintaining a low credit utilization rate can help improve credit scores by showing that an individual is not overextending financially.
- Check credit reports regularly: Checking credit reports regularly can help identify any errors or inaccuracies that may negatively impact credit scores.
- Avoid applying for new credit: Limiting new credit applications can help improve credit scores by showing that an individual is financially stable and does not need to rely on new credit.
- Consider credit counseling or debt consolidation: Seeking the assistance of a credit counselor or consolidating debt can help individuals manage their finances and improve their credit scores over time.
While several factors can impact credit scores, some things do not. These include:
- Checking your credit report: Checking your credit report will not negatively impact your credit score. You should check your credit report at regular intervals to ensure accurate and up-to-date information.
- Income and employment history: Your income and employment history are not factors in determining your credit score. However, lenders may consider this information when evaluating your creditworthiness and loan repayment ability.
- Age, gender, and marital status: Age, gender, and marital status do not determine your credit score.
- Soft credit inquiries: Soft credit inquiries occur when a lender or creditor checks your credit report for pre-approval or promotional purposes and do not impact your credit score.
- Bank account balances: Your bank account balances are not reported to credit bureaus and do not impact your credit score.
In conclusion, a poor credit score can make it easier to obtain credit and result in higher interest rates and fees. Understanding the factors that impact credit scores and taking steps to improve them can help individuals achieve better credit scores and financial stability. While it may take time and effort, improving a poor credit score is possible with consistent effort and financial responsibility.