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How Bad Credit Affects You

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Your credit score is much more than a three-digit number. It can also be the key you need to get a great deal on a new home loan or the barrier preventing you from achieving your next job. Your credit score is what lenders use to evaluate credit risk and a high credit score can be seen as an indication of financial responsibility.

Before discussing how a bad credit score can affect you, let’s first understand how credit scores work. The credit score calculated by the Fair Isaac Corporation, which is now more commonly known as FICO, is the most popular score used by lenders. They introduced their credit scoring model nearly 60 years ago. Since then it has become the standard evaluation measure used by 90% of top lenders, banks, and credit card companies. Contrary to popular belief, there isn’t just one FICO score, however. The company offers dozens of different scores depending on the type of loan companies are issuing.

What is a bad credit score?

A bad FICO score typically falls within a range of 300 to 579. Currently, 16% of all people fall into this range.

Credit Score Breakdown
Credit Category
Score Range
Very Good

If you are curious to find out where you stand or if you are considering applying for a new card or loan, and would like to estimate the impact on your credit, you can check out our tool here.

How your score is calculated

Your credit score is calculated based on various data points including the amount of debt you owe, payment history, credit mix, new credit inquiries and length of credit history. Some of these factors impact your score more greatly than others. On-time payment history and credit utilization are by far the biggest components of your score.

This information is provided by the three major credit reporting bureaus: Experian, TransUnion, and Equifax (FICO itself, is not a credit reporting agency).

Your base credit score will be reflected in a value between 300-850, and the value may vary slightly between the three bureaus. Some lenders may choose to look at industry-specific FICO scores instead of your base score. This number can range from 250-900. In both cases, however, the higher the score the better, and we will primarily focus on the FICO base score.

How did my credit score get so low?

As mentioned earlier, there are five factors that make up your credit score. They are not weighted evenly, however. The amount of debt you owe makes up 30% of your score while payment history makes up 35%. More than half of your credit score is weighted in just two areas. The other three — the length of credit history, new credit inquiries, and credit mix — make up 15%, 10% and 10% respectively.

Though your score could drop for a number of reasons, the most common reason for a poor credit score is that a person has fallen behind on debts, maxed out their credit cards, or has some sort of significant financial setbacks like a bankruptcy or home foreclosure.

Medical bills and divorce can also drag a credit score down, notes Sonya Smith-Valentine, a National Harbor, Md.-based CPA.

It’s best practice to make your payments on-time and consistently and never use as much credit as you have been allotted. A good rule of thumb is to keep your credit balances under 30% of your total credit limit.

Additionally, applying for a new loan, mortgage or credit card may also put a dent in your credit score if you are applying for too many in a short period of time. Lenders see a bunch of new credit inquiries as red flags that this person may be trying to overspend.

How bad credit affects you

Smith-Valentine has seen bad credit affect her clients in several ways.

“Some clients needed to move because of a job transfer but they couldn’t get approved for an apartment,” she said. “Some couldn’t get a job in their field due to their bad credit because a credit check was a requirement for the job.”

Below are some other ways bad credit can affect you:

It’s harder to get approved for a mortgage

Getting approved for a mortgage loan has gotten more difficult since the housing crisis in 2008. For those approved for new mortgages, the median FICO has increased from 707 in late 2006 to 754 in 2017. For those in the lower ranges, scores increased from 578 to 648.


In many cases, a bad credit score will require you to have a higher amount for a down payment, additional fees, and a higher interest rate. One example is the FHA loan. Those with credit scores above 580 can get a loan with just 3.5%, but you would need 10% if your score is between 500 and 579. Furthermore, bad credit typically translates to a higher mortgage rate. And the higher your mortgage rate is, the more expensive your loan will be over time. You can save tens of thousands of dollars by improving your credit before applying for a mortgage loan.

Credit cards

The most obvious effect of having bad credit is that you will not qualify for some of the best credit cards on the market. You may also be subject to higher interest rates and lower credit limits. In some cases, you may only be eligible for a secured credit card or a credit card with insanely high APRs and fees. As your credit improves, however, you may have an opportunity to negotiate for a lower rate and increase your credit limit. Here is a list of secured and unsecured credit cards that may be a fit.

Auto loans

In the context of auto loans, credit scores between 501-600 are considered subprime (i.e. bad) and 300-500 is deep subprime (i.e. really bad) according to Experian. If you find yourself slated in either of these ranges, you’re going to pay more in interest but that does not mean that you’re permanently trapped. You will first want to choose a car that is within your budget. Next, you should look for the shortest term, lowest rate loan options. Shopping around will be key here. You definitely don’t want to walk into a dealership with poor credit unless you’ve shopped for financing first and you know you’re walking in with your best offer already. When you have the car loan, make sure that you are making consistent, on-time payments. Missing payments with your car may result in higher payments in the future, repossession and an even lower credit score.

Having poor credit can also limit your options if you want to refinance a car loan later.

Personal loans

Getting a personal loan can be a good tool to help cover emergency expenses or consolidate your existing debts. Getting a personal loan with bad credit isn’t impossible but it’ll be expensive. Personal loans with bad credit will most likely result in higher interest rates and fees. To make the loan terms more beneficial for you, start by looking at your local banks and credit unions. Even with bad credit, local banks may offer loans without upfront fees. Keep in mind, personal loans to cover regular expenses has its risks. You will want to avoid falling further into debt and hurting your credit score even more.


Insurance companies don’t use the regular FICO credit score formula to determine how much you will pay but they do factor in your credit history. According to Esurance, many U.S. car insurance companies use credit-based insurance scores to help determine risk. This practice was banned in Massachusetts, Hawaii, and California. Though the credit measure for insurance is different, the effect is still the same. Those with lower credit ratings pay more than those in the highest tiers.

Security deposits

The relationship between how much you may need to pay for a security deposit on a new apartment and your credit score can vary by your city’s local laws. In general, landlords can choose to require a higher deposit or tack on additional fees.


Attempting to refinance a loan, such as a mortgage or auto loan, with bad credit is no easy task, but it is not impossible. You may want to consider adding a cosigner and comparing rates with local banks and credit unions to find your best deal.


Having bad credit has a big impact on buying a new phone or signing up for a different carrier since most large service providers conduct some type of credit check. Back in 2015, T-Mobile highlighted the fact that half of the customers didn’t qualify for a phone. One way around this is by selecting prepaid phone options without the credit check or switch to a carrier that caters to your credit score.

Job search

With the exception of the trucking industry, most employers can request credit checks if they have your written consent. Because your credit score is seen as a measure of trustworthiness and organization, a low score may not look good to hiring managers. Serious credit issues could disqualify you from a role completely depending on your field. You may be able to improve your job search by checking your credit regularly and tending to credit issues prior your search.


A joint survey with Discover and Match Media Group found that higher credit scores were more attractive than nice cars. The survey also states that 50% of the respondents found a high credit score more attractive than a nice job and 40% preferred it over physical attraction. When asked which traits were associated with high credit scores, responsible, trustworthy and smart received the most responses.

Ways to improve your bad credit score

Credit scores are fluid, if you do not qualify for an offer today you may be able to make some changes to help better position yourself in the future. Keep in mind that time is your biggest asset when looking to improve your credit score. Bad marks on a credit report will typically fall off in seven years. In the meantime, the key is to flood your credit report with positive information that can counteract the negative marks.

Here’s how to do just that:

Pay every bill on time

As mentioned earlier, paying your bills on time is one of the most important factors in your credit score. This is the single largest factor making up 35% of your total credit score. Having up-to-date accounts and paying them on time will almost always have a positive effect on your credit score. If your score is low because you’re just starting out or have no existing credit, taking out a personal loan may be an option for you but you’ll want to consider all strengths and potential drawbacks.

Pay down existing debts and avoid new debt

The next biggest area affecting your credit is the amount you owe in relation to your overall available credit — this is known as credit utilization and should be kept below 30%. Your utilization can be easily calculated by dividing the debts you owe by the combined total limit. For example, let’s say you have two credit cards, with a $2,000 limit each. On one card, you carry a balance of $500 and on the other, you have a balance of $1,000.

You’re using $1,500 of your total available credit limit of $4,000. You would have a credit utilization of 37.5%. In this situation, you would want to pay your balance down and try not to keep a combined balance above $1,200.

Making a plan and paying off your debts is one of the most effective ways to improve your credit score and your overall financial health. Creating the most effective plan would include creating a budget and taking into account of what is owed and to whom. From there, you will need to allocate your income appropriately to eliminate your balance.

Review your credit report and report errors

With a little bit of time and organization, you can repair your credit through professional services or on your own. If you’ve kept your debt utilization down and have a history of paying your bills on time but your credit score is still low, you may want to check your credit report for any errors. You are entitled to a free credit report each year and if you find an error, you have the ability to dispute it with each of the bureaus.

If you are having trouble getting something removed from your report or your situation is a bit more complex, you could consider turning to a credit counseling firm like the National Foundation for Credit Counseling.

Consolidating debt

Consolidating your debt may also be an option, which can allow you to transfer your various balances into one loan. Not only will you have one simple payment, you may also save on interest charges. Check out our guide to debt consolidation here.

Final Thoughts

Having a bad credit score can affect many different corners of your life. Fortunately, your credit score isn’t set in stone. It can be improved with great habits and time. Always use credit responsibly by taking no more than what you can reasonably pay and make those payments on time. If you’re feeling stressed while making payments, let your lenders know; do not leave them in the dark. Lastly, keep an eye on your debt utilization and your credit report to keep your overall debt in check and to spot any errors. Your credit score will not change overnight, but employing these habits can lead to a brighter financial future.


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