Learn the Basics: What is Bad Credit?

Bad Credit is a term usually referring to having a low credit score, meaning having “bad credit.”. Credit worthiness is an assessment done by a potential lender for the likelihood that a loan will be repaid as agreed. Credit worthiness is generally measured by a credit score such as a FICO score. A credit history is assessed in whole for a period of seven years as reported on a credit report. There are several factors of this credit score. So it is not based solely on income. These factors include on-time payment history, the age of the oldest credit line, the percentage of credit used, recent inquiries, new account activity, and total available credit.

 

Credit Score Ranges

Credit scores range from 300 to 850. Scores of 300 to 550 are considered Bad. They represent a risk to potential lenders who would have increased risk of loan default if extending a loan to that individual. Certain lenders specialize in this credit score range and typically charge substantially higher fees to compensate for the increased risk. Loans become more available and competitively priced as credit scores increase. Scores of 700-749 are considered Good. While 750 and above are considered Excellent, known as Well Qualified. These scores fluctuate throughout the year based on financial activity. So it is advised to check this score periodically. It is best to catch errors that cause adverse effects on credit scores quickly. The longer an error goes undisputed, the harder it is to correct.

 

Credit Score Uses

Credit scores are used by financial institutions such as banks, loans, mortgage holders, and credit card companies. Other entities checking credit scores are landlords, cell phone companies, utility companies, as well as potential employers. A credit score is considered to be a representation of a person’s credibility and responsible behavior. A responsible person is thought to uphold promises and agreements and pays their bills on time. This is a primary reason why insurance companies have somewhat controversially accessed credit scores. Credit reports to assess a policy holder’s pattern of behavior. Insurance companies use a version of this credit score referred to as Insurance Credit Bureau Scores or Insurance Risk Credit Score. These specific insurance scores include credit history. But also include factors such as past insurance claim history, which would indicate a policyholder’s profitability to an insurer.

Financial planners and advisors refer to bad credit or bad debt as bad uses of credit. Examples would be using a loan to pay for a vacation or carrying unpaid balances on credit cards. These are considered negative because they do not represent value or growth. On the other hand, good credit or good debt is seen as an investment. Examples of this would be a mortgage on a home, student loan for education as an investment in your future earning potential, or some asset that is expected to appreciate.