Most of us understand the concept of credit — it’s that thing that allows us to buy what we want or need, even when we may not have enough money for it at the time.
It can take the form of a credit card in our wallets, a bank loan to buy a new car, a mortgage on a home or almost any type of borrowing situation.
But what is credit really?
And what does it mean to have bad credit?
The idea of having good or bad credit really refers to our ability to pay back the money we borrow. It comes from the credit rating agencies and their measurement of our record when paying back our loans.
We know this as our credit score. And because the credit rating agencies share our credit score with banks and other lending companies we want to borrow from, this score can be very important to us.
Let’s say you have a credit card you use to pay for things like gas, groceries and occasionally some new clothes. If you pay at least the minimum balance due on time each month, your credit rating will probably go up. However, if you’re consistently late, your credit score is likely to fall.
If you neglect to pay your bill at all, you can expect to get a negative credit score and will be seen as having bad credit.
“Good or bad credit really refers to our
ability to pay back the money we borrow.”
What’s the magic number that says you have bad credit?
The primary credit scoring system in the U.S. is the FICO system, which was developed in the 1970s. It uses a range between 300 and 850 points, with the higher score reflecting better credit.
The different credit rating agencies all use a slightly different way of determining this score, so it can vary a little from one agency to the next. The average credit score for Americans is around 700, although that fluctuates a bit with economic conditions.
This average or median score is used by many lenders to determine the “preferred” or best interest rate they give to borrowers.
So if your credit score is below 700, you might expect to pay a higher interest rate on a loan. If your rate is below 600, you might have trouble getting credit at all.
So the answer to the question of what is bad credit can be given in two ways:
- Any score below 700 or so means you have less-than-average credit.
- Any score approaching 600 or below means you are probably seen as having bad credit and should be actively working toward improving your score.
Contact a credit repair firm if you need professional assistance with your credit and finances.
Photo source: alexweb.org.