If you have really bad credit or really good credit, you probably know it already. But there's a vast middle area where your score is too low to get you the best offers. If you want to sign up for a new credit card, take out a loan at a car dealership, get a mortgage to buy a house, or borrow money for some other purpose, the quality of your credit score makes a serious difference.

Key Takeaways

  • If you have a bad credit score, you'll generally pay higher interest rates on loans and credit cards—and may have trouble getting them at all.
  • A bad credit score can also raise your insurance premiums and even hamper your ability to rent an apartment or get a job.
  • Your credit score is determined by a number of factors, the most important of which is whether you pay your bills on time.

Why Credit Scores Matter

With a bad score, few banks will take a chance on you. Those that do will likely offer you only their highest rates. Even a so-so score may jack up rates compared to those offered to people with excellent credit.

A bad credit score can also increase your insurance rates or cause insurers to reject you altogether. It can stand between you and the apartment you want to rent. Negative items in your credit report can even hurt you when you apply for a job.

Let’s take a look at what is considered a bad credit score, how you might have gotten there, and what you can do to fix it.

Do You Have a Good or Bad Credit Score?

Credit scores, which may range from 300 to 850, take into account a number of factors in five areas to determine your creditworthiness: your payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts.

A bad credit score is a FICO score in the range of 300 to 579. (FICO stands for Fair Isaac Corporation, the company that originated the most widely used credit scoring system.) Some score charts subdivide that range, calling “bad credit” a score of 300 to 550 and “subprime credit” a score of 550 to 620. Regardless of labeling, you’ll have trouble obtaining a good interest rate or getting a loan at all with a credit score of 620 or lower. In contrast, an excellent credit score falls in the 740 to 850 range.

Things That Can Hurt Your Score

Borrowers with bad credit usually have one or more of the following negative items on their credit reports: 

Your payment history counts for 35% of your score, so missing your payment due dates seriously hurts your score. Being 31 days late is not as bad as being 120 days late, however, and being late is not as bad as failing to pay for so long that your creditor sends your account to collections, charges off your debt, or agrees to settle the debt for less than you owe. 

How much you owe relative to how much credit you have available is another major factor, accounting for 30% of your score. Say you have three credit cards, each with a $5,000 credit limit, and you’ve maxed them all out. Your credit utilization ratio is 100%. The scoring formula looks most favorably on borrowers whose ratio is 20% or lower.

To keep their credit utilization ratio at a favorable 20%, someone with $15,000 in available credit should aim to keep their debt under $3,000.

The length of your credit history counts for 15% of your score. You don’t have much control over this component. Either your credit history stretches back several years or it doesn’t.

The number of new credit accounts you have counts for 10% of your score, which means that applying for new loans to move your debt around might hurt your score. On the other hand, if moving your debt lands you a lower interest rate and helps you get out of debt more easily, new credit could ultimately boost your score.

The types of credit you use count for the remaining 10% of your score. If you have an auto loan, a mortgage, and a credit card—three different types of credit—it can mean a better score than if you only have credit cards. Again, don’t worry too much about this one. Applying for different types of loans in an attempt to improve your score will have little impact and only get you further into debt—not what you want if you have less than stellar credit. Instead, focus on paying down your balances and making your payments on time.

Things That Won’t Directly Affect Your Score

You might be glad to know that the following factors have no direct impact on your credit score: 

  • Your income. It doesn’t matter whether you earn $12,000 or $120,000 a year, as long as you’re making your payments on time. Having a low income doesn’t have to mean having bad credit.
  • Where you live. Living in a bad neighborhood won’t give you a bad credit score, nor will living in a prestigious one gives you a good score. If you own a home, its value doesn’t influence your score, either.
  • Participating in a credit counseling program. Signing up for help managing your bills neither hurts nor helps your score. It’s the specific steps you take under that program that will influence how you rate.
  • Your race. Even if someone might guess your race based on your name, FICO doesn’t factor race into your credit score.
  • Your marital status. Your credit report doesn’t state whether you’re married or divorced, nor does it factor that into your score. Marriage might indirectly lead to a good credit score if having two incomes makes it easier to pay bills you were struggling with—or it might leave you with bad credit if you marry someone who's financially irresponsible. Divorce can indirectly hurt your credit score if it damages your finances, but again, marital status won’t affect your score directly.
  • The interest rate on any of your loans or credit cards. Whether you’re paying the default interest rate of 29.99% on a credit card or a promotional introductory rate of 0%, the scoring formula doesn’t care.

Does No Credit Mean Bad Credit?

Having no credit history and no credit score—as might be the case if you're just out of school or newly arrived in the U.S.—doesn't mean you have "bad" credit. Even so, it can make it harder to rent an apartment, open a credit card account, or obtain a loan. In many cases, you can get around your lack of a score by using alternative methods to prove your financial responsibility.

If you want a mortgage, for example, you can submit a history of timely rent and utility payments with your mortgage application. Or, if you aren't eligible for a conventional credit card, you can apply for a secured credit card, which, after a period of time, may qualify you for a conventional one.

3 Tips for Improving a Bad Credit Score

Here are some simple steps you can take that will almost certainly improve your score over time.

1. Make at least the minimum payment on time, every time, on every account. You may not have the cash to totally pay off your balances or even make a serious dent in them, but if you can at least make the minimum payment by the deadline each and every month, that will help your score.

2. Try to fix significant credit report errors. You can obtain your credit reports once a year, free of charge, from the three major credit reporting agencies (Equifax, Experian, and TransUnion) at the official website for that purpose, AnnualCreditReport.com. The three agencies' reports may differ somewhat, depending on what information they collect. If you find an error on any of them, you can file a "dispute," following the steps outlined on that agency's website. The agency is then required to investigate the matter and report back to you. For additional help spotting errors on your credit report, consider taking advantage of one of the best credit monitoring services.

3. Talk with your creditors. If you’re having trouble repaying your debts, see if you can work out a more favorable arrangement with your credit card companies or other lenders. Make sure you get any agreement in writing. Be aware that some arrangements can hurt your score, though. Asking to have your credit card payment due date changed to five days after you get your paycheck, for example, will not hurt your score, but getting your creditor to reduce your loan balance will.

The end game here is not just improving a three-digit number, but correcting the problems that might have gotten you into a difficult financial situation in the first place. In the long run, it’s not about having a 740 credit score, nice as that might be, but having your debts under control and being able to focus on your financial goals for the years ahead. If you need additional help removing negative marks from your credit report, the best credit repair companies can speak with the three major credit reporting agencies on your behalf.