What is a Bad Credit Score and How is it Determined?

Credit scores summarize a person’s creditworthiness based on information from an individual’s credit reports at a given moment. FICO (Fair Isaac Corporation) scores are the most used type, and gathers information from the major credit reporting agencies. In addition, lenders have their own strategies to determine the risk value for lending decisions based on credit scores, income, employment information, and type of credit requested.

Credit scores, which range from 300 to 850, influence credit options offered by lenders to individuals. Borrowers usually ask lenders about what is bad credit score. It’s hard to determine what is a bad credit score since there is no set range used by all lending institutions. However, most lenders would consider credit scores lower than 620 to be bad.

How is a Bad Credit Score Determined?

FICO scores are determined by personal information collected on individual credit reports. This information can be grouped into five main categories used to determined credit scores such as payment history, credit utilization, credit history’s length, new lines of credit, and credit types used. By having an approximate idea of what is a bad credit score you will be able to recognize its causes and try to avoid them.

Payment History

An individual payment history is determined by various factors such as:

  1. Payment information for specific credit accounts like retail, credit cards, mortgage, installment loans, amongst other.
  2. Delinquencies’ length, if any.
  3. Number of items that are past due.
  4. Past due amounts for collection accounts or delinquent items.
  5. Reports from negative public records like suits, bankruptcy, judgments, collections, delinquencies, liens, and income attachments.
  6. Time on reports for negative public records, delinquent, and collection accounts.
  7. Number of accounts repaid as scheduled.

Amounts owed

Credit scores are based on the following information on owed amounts:

  1. Owed amounts on specific credit accounts.
  2. Owed amounts on accounts in general.
  3. Accounts listed with balances.
  4. Percentage of used credit lines. This percentage is determined by calculating the balance proportion for total credit limits.
  5. In some accounts, the absence of specific types of balances.
  6. Percentage of owed installment loan amounts based on initial and current balances.

Credit History’s Length

Credit history’s length is another important factor that determines credit scores based on the following:

  1. Length of account activity.
  2. Length since accounts were opened.
  3. Length since specific types of accounts were opened.

New Lines of Credit

Credit scores can also be affected by certain information on new lines of credit.

  1. Time for recent credit inquiries.
  2. Time since a credit inquiry was reported.
  3. Number of new accounts opened based on account type.
  4. Information on how long recent accounts have been opened.
  5. Information on positive credit history re-establishment for past payment issues.

Credit Types Used

Credit scores are partially based on information about the number and type of credit accounts used like consumer finance accounts, loans, and credit cards.

Many customers ask the question of what is bad credit score. While a bad credit score is considered lower than a 620 FICO score, specific lenders may use different criteria based on personal conditions. FICO uses overall financial information to estimate a person’s credit risk. There’s no way to know how important a single piece of information is, but consumers should attempt to minimize negative credit records in order to get affordable lines of credit.