A bad credit score can severely limit financial options in life, making it more difficult to obtain credit from lenders for anything from a mortgage to a new fridge. But what is considered bad credit in the eyes of lenders?
Credit scores are calculated by credit rating agencies using a complex formula in order to provide a useful shorthand for an individual’s financial situation, as a reference point for potential lenders. Factors involved in calculating a credit score include details such as the amount of money that a person owes to creditors, and how well they manage those debts – prompt, punctual payments will enhance a credit score as it reduces the perceived risk to the lender if a loan applicant has a history of servicing their debts in a responsible fashion. If an applicant has a large number of substantial loans outstanding, however, and a history of missing payments, then this increases the risk associated with lending to that individual and could lead to them being considered as bad credit.
In general, credit rating scores range from 300-850 – the higher the score, the more credit-worthy the individual. Anything above 720 or so is considered an excellent credit score, and most people within this bracket will have little trouble in securing credit at competitive interest rates. 660 to 720 is the average middle ground inhabited by most applicants for personal finance, and finally anything below 660 or so is considered a bad credit score.
Although credit rating scores are used heavily by lenders, applicants should not make the mistake of thinking they will automatically be refused credit if they have what is considered a bad credit rating. Lenders can and do use their discretion when making credit available, and an applicant’s assets, income prospects and other individual circumstances can be taken into account. A bad credit score does mean that a loan or credit applicant may find they are charged at a higher rate of interest, or that they are required to secure credit against other assets, but it does not necessarily preclude them from borrowing.
Credit rating scores can fluctuate throughout a person’s life, and individuals with a credit score of less than 660 can take steps in order to improve their rating over time, ensuring that they pay bills promptly and do not over-extend their financial commitments. Bad credit is considered to be credit which is extended to people who, in the eyes of lenders, risk defaulting on payments or, in the worst cases, declaring themselves bankrupt. It is important to remember that bad credit is not necessarily based on an applicant’s income, however. Through careful management of their credit facilities, there is no reason why even individuals on modest incomes can attain the very highest credit scores.