What is a Bad Credit Score?

Introduction to Understanding the Effect of a Bad Credit Score

A bad credit score can affect your entire life. Some think it will only apply to their ability to get loans and credit cards, but people have been turned down for insurance and even jobs because their credit scores are poor. Because 78% of the population has reports with errors, this is unnecessary in many cases. In order to understand that, let’s take a brief look on how a bad credit score is perceived by lenders, insurers, and employers.

The Impact of a Bad Credit Score

Lenders know that the lower the credit score the higher the delinquency rate. Each percentage category has its risk level. The 800 and up range makes up 11% of the population and has a delinquency rate of 1%; the lowest category—300-499—makes up only 1% of the population but has an 87% delinquency rate.

Auto Insurers and a Bad Credit Score

Auto insurers have statistical data that shows those with lower credit scores file more claims, although consumer groups are waging war on this system. Insurance companies may perceive those who don’t pay bills on time are less responsible in general. Your credit score might also tell your employer whether you can manage a department, be trustworthy in a security situation, or handle money reliably. A person who couldn’t handle finances for one likely couldn’t manage a department. After all, paying a bill on time is a matter of dropping a check in the mail at the right time—doesn’t sound that difficult.

Lenders and a Bad Credit Score

Most consider a good credit score 650 and above, although lenders reserve the best rates for those with scores above what’s called the “median.” This number (around 723) is not the average credit score; it’s the score that splits those with credit scores in two equal parts—half of Americans have credit scores lower than 723, and half of them have scores higher than that.

A New Credit Score System: A Look at VantageScore

There is also a new system the major credit reporting agencies are currently developing for more accurate scoring. The VantageScore system grades credit on an understandable scale similar to the academic scale, and gives lenders more power to create their own divisions.

The VantageScore system looks like this:

501-600 = F
601-700 = D
701-800 = C
801-900 = B
901-990 = A

Just like in school, a lender can decide that 930 is the dividing line for the A rating, but can also decide that based on recent history perhaps the person should be considered a B borrower instead of a C. However, the highest ratings will still get the highest advantages, so go for an A.