Loading the player...

What is a 'Bad Credit'

Bad credit describes an individual's credit history when it indicates that the borrower has a high credit risk. A low credit score signals bad credit, while a high credit score is an indicator of good credit. Creditors who lend money to an individual with bad credit face a greater risk of that individual missing payments or defaulting than creditors who lend to individuals with good credit.

BREAKING DOWN 'Bad Credit'

An individual's credit history is dependent on a number of factors, including the amount owed, the amount of available credit and the timeliness of payments. An individual may have bad credit if he does not make timely payments or has defaulted on a loan during a period of time. Having bad credit makes it more difficult or costly to obtain loans, such as mortgages, from financial institutions.

How Credit Scores Are Determined

In the United Scores, the Fair Isaac Corporation (FICO) calculates credit scores. Using information from the three credit bureaus, Experian, TransUnion and Equifax, FICO weighs various information in strategic ways to calculate the score.

Designed to offer a quick snapshot of an individual's credit worthiness, the FICO credit score gives payment history the most weight, and it constitutes over a third of the score. Thirty percent of the score is based on the amount owed, 15% on length of credit history, 10% on the mix of credit and 10% on new credit inquiries.

Payment history refers to whether or not payments were made on time, and the amount owed refers to the total amount of debt including mortgages, credit cards, bills in collections, judgments and other debts owed by the individual. Length of credit history takes into account the oldest account noted on the credit report, while credit mix considers how many different accounts a borrower has. For example, a borrower who only has credit cards scores lower in this category than a borrower with a mortgage, a car loan, a line of credit and a credit card. Finally, new credit refers to the number of credit inquiries recently made by the individual or the number of accounts recently opened.

Credit Scores That Indicate Bad Credit

FICO scores range from 300 to 850. Traditionally, borrowers with scores at or below 579 have bad credit. According to Experian, 61% of borrowers with scores in this range are likely to default or become seriously delinquent on their loans in the future.

Scores between 580 and 669 are labeled as fair. Only 28% of these borrowers are likely to become seriously delinquent on loans, making them considerably less risky to lend to than borrowers with bad credit scores. However, even borrowers within this range face high interest rates or have trouble securing loans.

RELATED TERMS
  1. Credit Score

    A credit score is a number ranging from 300-850 that depicts ...
  2. FICO Score

    A FICO score is a type of credit score that makes up a substantial ...
  3. Credit Rating

    A credit rating is an assessment of the creditworthiness of a ...
  4. Balance Chasing

    Balance chasing is the practice by some banks of reducing a customer’s ...
  5. Credit Reporting Agency

    A credit reporting agency is a business that maintains historical ...
  6. Cut-Off Score

    A cut-off score is a minimum credit score an individual may have ...
Related Articles
  1. Personal Finance

    How Bad Is My Credit Score?

    Find out how to assess your credit score to determine bad credit score ranges or if you are sitting at a comfortable level, and what you can do about it.
  2. Personal Finance

    Credit Scores And Your Mortgage Payment: It Matters

    Your credit score can have a huge impact on your mortgage payments. Here are some reasons why.
  3. Personal Finance

    Is My Credit Score Good Enough for a Mortgage?

    Your score is critical in determining not only whether you'll secure a loan for a home, but also what interest rate you will be offered.
  4. Personal Finance

    How to Read Your Consumer Credit Report

    Learning how to read your consumer credit report is vital, as it includes important information about your credit history.
  5. Personal Finance

    Should Your Credit Rating Scare You?

    Take the mystery out of credit scores by learning the most important ways it can impact your life.
  6. Personal Finance

    Credit Repair: How to Improve Your Credit Score

    There is no quick fix for a bad credit score, but there are several strategies you can take to improve your credit rating and save money over the long term.
  7. Personal Finance

    Debunking Credit Myths and Improving Your Score

    The best way to improve your credit score is to ignore the many credit myths that exist and use these tips.
  8. Personal Finance

    Best Ways to Get Free Credit Scores

    Don't know your credit score but want to? Here are five free credit monitoring services and five credit card companies that offer your score for free.
  9. Personal Finance

    How To Overcome Bad Credit

    Some lenders can look overlook your credit score and assess other factors that fairly determine if you are a reasonable credit risk.
  10. Managing Wealth

    Websites That Give Your True Credit Score for Free

    A few websites do provide your true credit score – or something very close to it. Here's where to find them.
RELATED FAQS
  1. Can a Best Buy credit card help you build credit?

    Learn about how using a Best Buy credit card responsibly can lead to a higher credit score and lower interest rates on mortgages ... Read Answer >>
Trading Center