What is Bad Credit?

Bad credit refers to the status of your credit history and reveals the likelihood of you being a risky borrower. In other words, it shows you'll likely fail to make on-time payments to lenders now, and in the future. Bad credit is usually indicated by a low credit score.

The FICO credit score is what most lenders use to determine how risky a borrower will be. It's separated into the following ratings:

  • Poor: 300-579

  • Fair: 580-669

  • Good: 670-739

  • Very Good: 740-799

  • Exceptional: 800 -850

The higher your score, the more likely you're viewed as a desirable borrower.

What Causes Bad Credit?

Your credit score is influenced by your credit history report, which is based on what lenders provide to the three major credit bureaus -- Equifax, Experian, and TransUnion. The information found in these reports influence your credit score going up or down based on your credit behavior. These include your payment history, types of credit or loans you have, how much you owe, how long you've held credit or loan accounts, and recent credit applications.

This means that behaviors such as failing to make on-time payments, high debt balances, declaring bankruptcy and too many recent applications for loans may negatively impact your credit score. The more often these types of behaviors occur, the more likely you'll end up having bad credit.

How Bad Credit Affects You

If you have bad credit, you'll find it hard to take out a loan. When you do get a loan it will likely be subject to higher interest rates or less favorable terms compared to those who are seen as more creditworthy. You'll end up paying more overall because of higher interest rates and are limited in terms of your loan options.

Bad credit may also affect your chances of getting approved as a renter, as landlords check credit scores to determine the likelihood you'll pay rent on time. Some employers may check your credit score as part of their employment screening process.

Other ways bad credit can affect you include potentially paying for higher insurance premiums, and paying required security deposits to turn on utilities.

How to Get a Loan with Bad Credit

It's possible to get a loan even if you have bad credit, though you may have fewer options than those with good credit. Most people with bad credit turn to secured loans, meaning you'll need to put up collateral in order to take out a loan.

For instance, a secured credit card will require that you put down a cash deposit which will equate to your credit limit. As you exhibit positive credit behaviors such as making on-time payments, you may be able to upgrade to a different type of credit card and have your deposit returned.

Otherwise, you may be able to seek out alternative credit sources such as peer-to-peer lending platforms, as you may have a higher chance of approval.

How to Fix Bad Credit

The good news is that you can change your credit score when there's new information on your credit report. You can change your financial behavior to positively affect your score, including:

Check your credit history report: Seeing your credit history will give you insight into what could be causing your low credit score. It's also important to check your credit history report to see if there are any errors. If you find errors, take the necessary steps to correct them.

Otherwise, use these insights to help you figure out what actions you need to take to increase your score.

Make on-time payments: Your payment history is one of the most important factors affecting your credit score. Ensure that you're paying all your loans and credit cards back on time, even if it's the minimum payment amount. If you keep doing this consistently, you should see your score go up.

Avoid applying for new credit: Having too many recent applications may show lenders you're stretched thin financially and relying on credit too much, potentially lowering your score. Instead, hold off applying for new loans or credit cards as long as possible.

Pay down your debts: If possible, make more than the minimum payments on your credit cards and loans, or find a way to make extra payments. The lower your debt amounts, the more lenders may view you more favorably.

Ask an Expert about Bad Credit

All of our content is verified for accuracy by Mark Herman, CFP and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Bad Credit.

Be the first to ask a question

If you have a question about Bad Credit, then please ask Mark.

Ask a question
Mark Herman, CFP
Mark Herman, CFP
Expert Certificate

Master of Business Administration (M.B.A.)

Member of the Board, Financial Planning Association of Austin

Mark Herman has been helping friends with financial questions since serving as an Army helicopter pilot. Since then, he’s gained valuable experience in the corporate world before moving on to become a Certified Financial Planner™

Verified Content You Can Trust
verified   Certified Expertsverified   5,000+ Research Pagesverified   5+ Million Users