Credit Education

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03. Aug, 2016

What Is “Bad Credit” ?

Someone in bad credit is likely experiencing financial difficulties. They find it hard to meet payments on loans and credit card charges. In Charles Dicken’s novel David Copperfield, leading character Wilkins Micawber describes a bad credit situation in simple but poignant terms: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”

The language is quaint and the currency unfamiliar, but the message about consequences of bad credit comes across clearly. Though times have changed radically from the mid-1800s, bad credit leads to misery at any point in time.

What Causes Bad Credit?
The most common causes include loan defaults, delayed payments, and overuse of credit cards. Those who make credit ratings like to see at least 30% of available credit unused. In the popular imagination, bad credit is usually linked with irresponsible financial behavior – but sicknesses and unemployment also bring credit ratings down. Sometimes identity theft can change the victim’s credit status.

Bad Credit Makes it Harder to Get Loans
People in bad credit must expect cold receptions from bank managers, insurance companies, and potential employers. Bad credit puts the ability to return money borrowed in doubt. Some look down on such loan seekers as financially incompetent. Others suspect them of being careless with other people’s money or plain dishonest. Who wants to risk lending money to someone with a bad credit record?

If bad credit results from temporary financial difficulties, it seems unfair to make these negative judgments. However, bank and credit card companies have to protect their funds. This is why so many financial institution managers err to the side of caution.  

Measuring Bad Credit
In the United States, the FICO (Fair Isaac Corporation) credit scores populate credit status. The three major credit reporting agencies (Equifax, Experian, and TransUnion) compile credit reports. They base these reports on the individual credit histories banks and other financial institutions share with them. The credit bureaus apply their own methods to assign each person a credit score.

The median American FICO credit score is 723. Usually credit scores over 700 are categorized as good, while anything below 630 counts as a bad credit score. Using this ‘bad credit’ definition, the FICO’s 2015 figures reveal just over one out of five Americans have bad credit.

Different Kinds of Bad Credit
In addition to various criteri used by credit bureaus, the definition of good and bad credit changes with context. A loan seeker with a credit score of 600 gets turned away by many lending institutions. However, a loan seeker with a score of 690 could be rejected by a lender who specializes in low risk loans.

Aside from individual policies financial institutions follow, bad credit definitions adjust in line with the sums involved. For example, if someone with a credit score of 699 wants to take out a six-figure mortgage, many lenders will consider them a bad risk. However, if they seek a loan of $1,000, a 699 credit score could be perfectly acceptable.  

Try to Get a Better Credit Score
Everyone stands to gain from improving their credit score. Credit status can be transformed through regular loan installment payments and less credit card spending. With a sustained effort, the credit score eventually rises up through the 600s. New lending possibilities open, and interest rates become much lower.

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