The Actual Meaning of Bad Credit

Before we go into the meaning of bad credit, it is important to first understand what the credit score actually is. The credit score was developed as a numerical expression to determine the credit worthiness of a person at the present time. It is the job of credit bureaus to maintain and keep the record of the millions of individuals who have credit scores. The credit score is used by financial institutions, banks etc. to determine if any applicant is a potential risk. Lenders will also use the credit score to determine the applicant eligibility to loan products, what interest rate to charge and what terms to attach to any loan product.

The 3 main credit bureaus in United States are Experian, TransUnion and Equifax. They are the ones that will maintain the credit score of the general populace of the US. As with the credit score system of other countries, these credit bureaus maintain a record of all financial transactions and will compile a statistical analysis of a person to derive a single number credit score. Most people don’t know that there are actually different methods of calculating the credit score however the most commonly used method is called the FICO. It is a risk based approach much like one that is used by the insurance companies. So far it has been the most successful at determining the creditworthiness of an individual.

To be referred to as having bad credit means that you have a credit score that has a negative impression on your creditworthiness. Other synonyms of bad credit are adverse credit history, sub-prime credit history, impaired credit history or even just a standard not creditworthy. All of these mean the same thing and can be used interchangeably to describe a person that has been deemed to be not credit worthy. If you have a credit score that is considered poor or bad then you would be considered undesirable to lenders and will most probably be turned down if you applied for any credit based product with financial institutions.

The credit score ranges from 300 to 850. 300 being the absolute worst in term of your creditworthiness and 850 being a pristine credit score with no infractions. The range of the credit score is based on a mathematical algorithmic calculation of a person’s probability in paying back a loan and if it will be paid in time. It is calculated from factors like the total amount of credit that you owe, your past ability to service your debt appropriately, the types and of credit products you took up, length of usage of credit products etc. It should be noted that the credit score scale is slightly logarithmic meaning that the difference between 750 and 850 is less than the difference between 300 and 400. It is for this reason that people below 550 are generally regarded as the ones with the worst credit history.

Typically, credit scores work in such a way that it punishes you for doing something financially “bad” while it doesn’t reward for anything financially “good” that you do. It is a skewed weighting towards looking for any wrong that you do. It is because of this that anyone that is conscious about their credit score or are currently bundled in the “bad credit” group of borrowers should be keenly aware of what they do financially. If you are worried about your credit score then you should try your absolute best not to make any infractions to your credit products. You must be aware of the payment schedule, when things are due and also be sure that you settle them on time.