subject: The Definition of ‘Bad Credit' [print this page] The Definition of Bad Credit' The Definition of Bad Credit'
Your income level has little to do with whether you are approved for credit. What is important is how you manage your finances, reflected in the terms good credit and bad credit. But do you know what it means to have bad credit? Although it can be subjective, for instance being approved for a standard credit card instead of the platinum version, for the average American the designation is based on several financial factors. So if you hope to have 'good' credit, these are the things NOT to do:
Having a credit score below 675
When most people consider the shape of their credit, they're thinking about their credit score. This three-digit number, between 300 and 850, provides a snapshot of financial responsibility and is definitely a subjective factor that lenders use to define 'good' or 'bad' credit. While one company may demand a score of 700 to grade a consumer's credit as 'good', another may only require 675 for that same 'good' designation.
Negative information on credit reports
But how do creditors get the information they need to determine 'good' or 'bad' credit? They make a request to the three credit reporting agencies, Equifax, Experian and TransUnion, for a copy of your credit report. These companies collect information sent to them by creditors, credit card companies, banks, landlords and utility companies on all consumer activity, in addition to any public records filed with the courts.
Not in every instance do creditors report to all three credit agencies, so the three may have different information on file about you. This could mean that TransUnion report may show you having 'good' credit, while Equifax views your credit file as 'bad'. This is one important reason to get a free report from each of the three agencies for a clearer picture of what lenders are seeing when you apply for credit.
The more irresponsible you are with handling credit, the lower your credit score will be and the more likely you will have 'bad' credit. Here are the five main consumer activities that are included in your reports and the impact they have on your credit score and the designation of 'bad' credit:
Paying bills late (35%)
Using more than 50% of your available credit limit (30%)
New to using credit (15%)
Applying too often for credit (10%)
Limited types of credit used (10%)
To summarize: Pay your bills on time, don't max out your credit accounts, apply for credit only when necessary, demonstrate your ability to handle different types of credit and be patient. As time goes by, your credit will improve and you will earn a 'good' credit designation and the opportunities to borrow will become more favorable.
