What Exactly Is Bad Credit?

The term bad credit is often bandied about by credit companies on television adverts and on the internet

, but what exactly is bad credit? How do you end up having it? And what can you do to fix it and have good credit? This article seeks to answer those questions and several others.

If a person has bad credit they essentially have a low credit score. A credit score is a number that represents the credit worthiness of a consumer and the likelihood of that person paying their debts as agreed. Several different credit scoring systems are used by the many thousands of financial businesses across the country, including the FICO score, the NextGen score and the Vantage score.

In the US the FICO scoring system is the best known and most widely used credit scoring system. It gives consumers a credit score of between 300 and 850, with the higher the number the greater the chance of the customer being approved for a credit product. People with a FICO score at the lower end of the scale (300-500) could therefore be deemed those with bad credit.

The credit score is not pulled out of thin air, it is calculated from an array of information relating to the manner in which a customer has handled their previous credit accounts over the last few years. These accounts can include mortgages, credit cards, personal loans and store cards.

Although the exact formulas used for calculating credit scores are closely guarded, the components analyzed are usually the person's payment history, their credit utilization, length of their credit history, types of credit used and the amount of recent credit they have obtained.

As different companies have different priorities and scoring systems when they are looking for new customers, some people that are deemed as having bad credit by one company may have good credit with another. This is the reason why it is possible to be rejected for one credit card then accepted for another just a few days later.

Generally speaking, however, missing personal loan payments, going over your credit card limit, exceeding your overdraft limit and defaulting payments will severely damage your credit score, whichever way you look at it.

There is no instant fix for bad credit, but a good starting point is to get a copy of your credit report. Check all of the information is correct and have it amended where necessary. Even a small mistake can have a surprisingly big effect on your credit rating.

After that it is simply a case of making repayments on time, honoring payments, staying within your agreed credit limits and generally showing your creditors that you are a reliable customer that can be trusted with their money.

If you have a poor credit rating there is no point applying for a low rate 'gold' credit card, as you will almost certainly be rejected, which will damage your credit rating even further. Instead, apply for a card with a higher rate of APR, but make sure you make all of your payments on time, and pay the monthly balance off in full wherever possible. In time, bad credit scores can be turned into good credit scores through good behavior.

by: William Trustey

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