While each lender is free to interpret what constitutes bad credit versus good credit, there are some basic guidelines that most follow when evaluating a loan applicant.
To begin with, there is no absolute definition of bad credit since each lender is free to evaluate what “bad” credit really means. In the United States, a credit score established by the Fair Isaac Corporation (now simply called FICO) is the most widely-used credit score for determining a person’s credit-worthiness. Using information from the three credit bureaus (Experian, TransUnion and Equifax), FICO uses a proprietary mathematical formula to calculate a three digit credit score for each bureau.
To keep things simple we’ll use the scale used by Experian that states that, based on the FICO score range of 300 to 850, anyone with a credit score that's at or below 579 is considered to have bad credit. According to Experian, 61% of borrowers with scores in this range are likely to default or become seriously delinquent on their loans in the future.
FICO scores between 580 and 669 are considered fair. According to Experian, only 28% of these borrowers are likely to become seriously delinquent (90 days or more) on loans.
A FICO score of 670 to 739 falls into the “good” range, 740 to 799 is “very good,” while 800 to 850 is “exceptional.” To put it in perspective, according to Experian, “most consumers have credit scores that fall between 600 and 750,” while the average FICO score in 2020 was 710.
Your credit score is based on a number of factors including the timeliness of payments, overall debt versus income, the percentage of available credit you’re using, your credit mix (types of credit, i.e. revolving credit, installment credit), and your time in the bureau (how long you’ve been using credit).
Designed to offer a quick snapshot of someone’s credit worthiness at that moment in time, the FICO credit score gives payment history the most weight, and it constitutes over a third of the score. Thirty percent of the score is based on amounts owed versus available credit, 15% on length of credit history, 10% on the mix of credit and 10% on new credit inquiries.
Payment history refers to whether or not payments were made on time, and the amount owed refers to the total amount of debt including mortgages, car payments, credit cards, bills in collections, judgments and other debts. Length of credit history takes into account the oldest account noted on the credit report, while credit mix considers how many different types of accounts a borrower has. For example, a borrower who only has credit cards scores lower in this category than a borrower with a mortgage, a car loan, a line of credit and a credit card. Finally, new credit refers to the number of credit inquiries recently made by the individual or the number of accounts recently opened.
Bad credit can result of you fail to make payments when they’re due, you’ve defaulted on a loan or other legal obligation, you’re new to credit, or haven’t used credit in the past 10 years. Bad credit makes it more difficult and/or costly to secure new credit, such as a car loan, from lenders.
Finally, people who are "in the bureau" – those with enough credit history to generate a score – also have more than one credit score. For instance, car dealers and automotive lenders generally use a score that places more emphasis on a borrower's car credit history. So depending on how they paid any previous car loans, this score could be higher or lower than their non-weighted credit score.
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