What Constitutes Poor Credit? | Credit Score Ranges Explained

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What Is a Bad Credit Score?

A credit score is a number that represents how likely you are to pay back money borrowed from lenders, such as banks and finance companies. The higher your score, the more likely you will repay your debts on time.

Your credit score is calculated based on information in your credit report, which includes details about your borrowing habits, including any unpaid bills or late payments. It also considers whether you have been sued for debt collection. If so, what type of judgment was made against you?

Your credit score can range between 300 and 850, with 700 considered excellent. A score above 750 indicates good repayment ability. Generally speaking, poor credit is any credit score that is below 640. This means the borrower has a history of making late payments or has defaulted on past loans. Poor credit can make it challenging to qualify for new loans and lead to higher interest rates.

Credit scores are used by many financial institutions when deciding whether to lend you money, and they affect your interest rates and other terms of lending. 

What Determines Credit Scores?

The main components that determine your credit score:

Payment History:

This component accounts for 30% of your overall credit score. Your payment histories have determined this over the past 12 months. If you’ve paid off your debts on time, your credit score will show up positively.

If you’re struggling to make ends meet, keeping up with your monthly payments may be difficult. However, there are ways to improve your payment history. For example, you could consider refinancing your mortgage to lower your interest rate, or you could consolidate your debts into one loan.

It would be best if you aimed to pay off your debts within 60 days of receiving them. Any outstanding debts that haven’t been paid within this period will negatively impact your credit score.

Amounts Owed:

This component accounts for 20% of your overall credit rating. This is determined by calculating the total amount owed on your credit cards, loans, and mortgages.

Lenders use this figure to assess your risk of defaulting on future debts. They want to know how much you owe because they need to calculate how much money they stand to lose if you don’t repay your debts.

In addition, lenders look at the length of time you’ve had these debts. Lenders tend to give you less time to pay off more significant debt than smaller ones.

Length of Time Since Last Payment:

This component accounts for 10% of your overall credit score. This is determined by assessing how long it has been since you last repaid your debts. It takes lenders around 90 days to build a complete picture of your payment history. Therefore, if you haven’t paid your debts for longer than 90 days, your lender won’t be able to predict how likely you are to repay your debts accurately.

However, if you’ve recently started repaying your debts, your lender will take note of this. Your credit score will increase as your payment history improves.

How Can I Improve My Credit Score?

Improving your credit score isn’t easy. But there are ways to boost your score without waiting years to see results. Here are some tips to help you get started:

Pay Your Bills on Time:

One way to improve your credit score is to pay your bills on time. Your credit rating will improve if you consistently pay your bills on time. To do this, set up automatic bill payments through online banking, or ask your creditors to send you reminders before your due date.

Keep Your Balance Low:

Another way to improve your credit rating is to keep your balance low. You can achieve this by ensuring you only carry a small amount of cash in case of emergencies. Also, avoid using your credit card for purchases you can’t afford. It’s best to stick to using debit cards instead.

Boost Your Credit:

You can also boost your credit score by regularly checking your credit report. Make sure you dispute any errors on your credit report, so they aren’t used against you when applying for new loans.

Avoid New Hard Inquiries:

If you have a hard inquiry on your credit report, it will appear that you applied for a loan. This will hurt your credit score. To prevent this, ensure you check your credit report every three months.

Don’t Close Old Accounts:

Closing an old account will also damage your credit score. Instead, try to pay off your old debts first. Then close the account once you’re done paying them off. Remember, improving your credit score doesn’t happen overnight. It takes time to build a good payment history, and it can take several years to see an improvement in your credit score.

How Can I Maintain a Good Credit Score?

Maintaining a good credit score requires consistent repayment of all your debts. If you miss one payment, your credit score could drop significantly. Here are some other things you should consider doing to maintain a good credit score:

  • Stay Current with Payments: Make sure you stay current with all your payments. Don’t let your balances grow too high.
  • Ensure All Debts Are Paid On Time: Ensure you make regular payments on all your debts. Paying late hurts your credit score.
  • Never Miss a Payment: Missed payments can cause your credit score to fall. So don’t forget to pay your bills on time.
  • Do Not Apply For Too Many Loans: Applying for multiple loans at once can negatively impact your credit score. Only apply for what you need.
  • Try not to use Credit Cards: Using a credit card for everyday expenses is acceptable. However, avoid using your credit cards for large purchases such as furniture or appliances. These types of purchases can damage your credit score.
  • Use Debit Cards: Debit cards allow you to spend money from your bank account directly. They offer better protection against fraud.
  • Pay Off Debt Early: Debt consolidation may be tempting. But it won’t help your credit score. It can lower your score. Instead, focus on paying off debt early. Once you’ve paid off your debt, you can start building a positive credit history.

What factors influence your credit score?

There are a few key factors that influence your credit score. First, your payment history is a significant factor. If you have a history of making late or missing payments, your score will be lower. Second, your credit utilization ratio is essential. This is the amount of credit you’re using compared to the amount of credit you have available. If you’re using a lot of your available credit, your score will be lower.

The length of your credit history is also another factor. The longer you have a good credit history, the better your score will be. The types of credit you have can influence your score. Different kinds of credit, like installment loans and credit cards, can help your score. Finally, new credit inquiries can lower your score. If you’re applying for a lot of new credit, it can signal to lenders that you’re a high-risk borrower.

Author: Tom Harold Zeus

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Tom Harold is a personal finance and insurance writer who has more than 10 years of experience in covering commercial and personal insurance options. He is also determined to beat her brother, who is a financial advisor with intimate knowledge of the field of personal finance. He devotes time researching the latest rates and rules.

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