If you have really bad credit or really good credit, you probably already know it. But there's that vast middle area where your score is too low to get the best offers. If you want to get a new credit card, take out a loan at the 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.

With a bad score, few banks will take a chance on you. Those that do will likely offer you their highest rates. A bad credit score can also increase your insurance rates or cause insurers to reject you altogether. It can also stand between you and the apartment you want to rent. Negative items in your credit report can even hurt your ability to get certain jobs. Even a mediocre score will jack up rates compared to those offered to people with excellent credit.

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?

FICO scores take into account a number of factors in five areas to determine credit worthiness: payment history, current level of indebtedness, types of credit used, length of credit history and new credit accounts. Scores may range anywhere between 300 and 850.

A bad credit score is a FICO score in the range of 300 to 620. Some score charts subdivide that range, and call “bad credit” a score of 300 to 550 and “subprime credit” a score of 550 to 620. Regardless of labeling, you’ll have trouble getting 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. 

Credit Behaviors That Hurt Your Score

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

Your payment history counts for 35 percent 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 your 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 percent of your score. For example, 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 percent. The scoring formula looks most favorably on borrowers whose ratio is 20 percent or lower.

Less important is the length of your credit history, which counts for 15 percent 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 percent 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 around means getting a lower interest rate that helps you get out of debt more easily, new credit could ultimately help your score.

Types of credit used counts for 10 percent 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 about this one. Applying for different types of loans in an attempt to improve your score will have little impact and only gets you further into debt – not what you want when you have less than stellar credit. Focus on paying down your balances and making your payments on time.

(For options to improve your credit score, read 3 Easy Ways to Improve Your Credit Score.)

These Things Won’t Directly Impact Your Score

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

  • Your Income: It doesn’t matter whether you make $12,000 or $120,000 per 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 give 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 could easily 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 this information 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 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 rate of 29.99 percent or a promotional introductory rate of zero percent, the scoring formula doesn’t care.

Does No Credit Mean Bad Credit?

While not technically bad since it probably means you have no debt, having no credit history and no credit score can make it harder to rent an apartment, open a credit card account or get a loan. In many cases, you can get around your lack of a score by using alternative methods to prove your financial responsibility. For example, if you want to get a mortgage, you can submit a history of timely rent and utility payments with your mortgage application.

Implications You're in The Red (Bad Credit Score Ranges)

If you’re able to get approved for new credit at all, having a bad credit score means you’ll pay significantly higher interest rates than someone with an excellent score. The consumer credit counseling agency Springboard reported that in January 2014, a consumer with a credit score of 300 to 550 could expect to pay 9.5 percent for a mortgage, 18.9 percent for an auto loan, and 28.9 percent for a credit card. Borrowers in the subprime category of 550 to 620 didn’t fare much better, except in credit card rates, where they might pay 19.8 percent. Meanwhile, a consumer with an excellent credit score of 740 to 850 could expect to pay 3.9 percent for a mortgage, 5.1 percent for an auto loan and 7.99 percent for a credit card.

The higher rates you’ll pay when you have bad credit mean higher monthly payments and much more money spent on interest in the long run. You can expect to pay higher premiums for auto and homeowners insurance, too. It’s hard to improve your finances under these circumstances.

(For related reading, see Credit Cards for People With Bad Credit.)

Three Tips for Improving a Bad Credit Score

There are some extreme ways to try to raise your credit score, but not everyone can use them and they might even backfire. Here are some simple steps you can take that will almost certainly improve your score.

1. Make at least the Minimum Payment on Time, Every Time, on Every Account 

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

2. Try to Fix Significant Credit Report Errors

If there are negative items on any of your three major credit reports, follow the credit bureau’s steps to try to get those items removed. This process can be frustrating and even futile, but it’s worth trying to clear up any mistakes.

3. Talk to Your Creditors

If you’re having trouble repaying your debts, see if you can work out a more favorable arrangement with any of your credit card companies or lenders. Make sure you get any agreement in writing. Be aware that some arrangements can hurt your score, though. Getting 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 Bottom Line

The end game is not really about improving a three-digit number, but about correcting the problems that got you into a difficult financial situation. It’s about taking action to give yourself more options and more peace of mind when it comes to your personal finances and your life. In the long run, it’s not about having a 740 credit score, but being out of debt and having money in the bank that will allow you to achieve your financial goals.