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. Good Credit

    A qualification of an individual's credit history that indicates ...
  2. Credit Mix

    The types of accounts that make up a consumer’s credit report. ...
  3. Credit Limit

    Credit limit is the amount of credit that a financial institution ...
  4. Credit Utilization Ratio

    The credit utilization ratio is the percentage of a borrower’s ...
  5. Hard Inquiry

    A type of credit report check that may lower an individual's ...
  6. Prime Credit

    A credit score that falls into the range that is one step down ...
Related Articles
  1. Personal Finance

    What Credit Score Should You Have?

    We break down credit scores by age to see what your score should be and how it will affect your major purchases.
  2. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  3. Personal Finance

    Common Things That Improve And Lower Credit Scores

    Credit scores are used by lenders to estimate credit risk. Find out how you can better earn the trust of lenders and reap the benefits.
  4. Personal Finance

    How Your Credit Score Compares to the Average American's

    While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau.
  5. Managing Wealth

    Can You Hit A Perfect Credit Score?

    Everyone wants a great credit score, but few know exactly how to achieve perfection. Find out how your credit score is kept and what it takes to reach a perfect 850 rating.
  6. Personal Finance

    How Bad Is My Credit Score?

    You've seen the number, but what does it mean? Here's how to assess your credit score and get to a better place if needed.
  7. 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.
  8. Personal Finance

    The 5 Biggest Factors That Affect Your Credit

    Credit companies rely on these factors to determine whether to lend to you and at what rate.
  9. 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.
  10. 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.
RELATED FAQS
  1. How does the number of credit card accounts I have affect my credit score?

    Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential ... Read Answer >>
  2. 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