How Do You Get a Bad Credit Score: Avoid These Mistakes

What is a bad credit score?

A bad or poor credit score is generally considered a FICO® Score below 580 or a VantageScore® credit rating below 600. Both major credit scoring models evaluate information from your credit reports to help lenders assess credit risk but use different formulas. So, your credit scores can vary between FICO and VantageScore models a bit.

What does a poor credit score mean for you?

Lenders use your credit score to evaluate how risky it may be to lend you money. Your credit score directly influences whether you are approved for credit, the maximum amount you can borrow, and the interest rate you pay.

For instance, if you have an excellent credit score, you may be seen as low risk for banks, landlords, or other creditors. Whereas someone with a low credit score might be perceived as more of a risk when it comes to loaning them money.

How do you get a poor credit score?

A bad credit score usually happens due to negative financial habits or major financial events reported to the three major credit bureaus: Equifax, Experian, and TransUnion. Below we’ll explore some of the most common causes of a bad credit score.

1. You’re new to credit

If you are new to credit or don’t have a long enough credit history, you likely have no credit or a thin credit profile. Having a thin credit file is not the same as having bad credit, but it can still make it difficult to qualify for loans, credit cards, or housing. Unlike a ruined credit, which shows a history of missed payments, defaults, or collections, a thin file is caused by a lack of activity and signals an unknown risk rather than a broken track record.

2. Late or missed payments

Payment history accounts for 35% of your FICO® score. It’s the single most influential factor lenders use to evaluate your creditworthiness and credit repayment risk. So, paying late is one of the worst credit management habits you can practice.

Missing a payment by a few days or a week typically won’t show up on your credit report, lenders may charge you a late fee or penalty interest rate, though. Once a payment is 30 days late, the lender can report it to the credit bureaus, resulting in a negative mark on your credit report. Multiple late payments and/or long overdue payments (60, 90 days, or more) can have a more significant, negative impact on your credit score. Once reported, a late payment can remain on your credit report for up to seven years.

3. High credit utilization ratio

Another bad habit that’s wise to avoid is keeping a high credit utilization ratio on your credit cards, the amount of credit you’re using relative to your total credit limits. High credit utilization significantly hurts your credit score because it accounts for roughly 30% of your FICO score (and about 20% of your VantageScore).

When your credit utilization ratio climbs too high, it means you’re using a high percentage of available credit on your credit cards. In other words, you’re getting close to maxing out your accounts. This behavior indicates risk and could negatively impact your credit score.

4. Carrying a credit card balance

Many people believe that carrying a small balance and paying interest demonstrates to lenders that you can manage debt responsibly. But that’s a credit myth. In fact, one of the worst traps you can fall into is carrying a balance on your credit cards from month to month.

Carrying credit card balance can be risky for several reasons:

• One major impact of carrying a balance is that it can raise your credit utilization ratio.
• If you carry a credit card balance, the card issuer may charge interest on what’s left over and on any new purchases.
• If you’re carrying a credit card balance because you’re not able to make a payment at all, your missed payments could negatively affect your payment history.

5. Not monitoring your credit

Inaccurate data on your credit report, such as incorrect late payments, duplicate accounts, or outdated debts, can quietly lower your score and cost you approval or better rates on new credit. Thus, failing to monitor your credit reports and your score is a mistake. The impact your credit has on your financial life makes it too important to ignore.

The good news is that these errors can be correctable. If you spot any inaccuracies or fraud, report them to both the credit bureau and the company that reported the account.

6. Opening too many new credit accounts at once

Applying for too many credit cards within a short period of time is generally not good practice. Each application typically triggers a hard inquiry, lowers your credit score by about 5 points, and signals financial risk to lenders. Multiple applications can also affect the average age of your credit accounts, accounting for approximately 15% of your credit score.

Focus on smart financial habits

Knowing common credit mistakes is just as important as practicing healthy financial habits. By following a few simple steps, you can minimize the risk of damaging your credit score and improve your creditworthiness:

• Review your credit reports regularly and dispute any errors or inaccuracies.
• Consistent, on-time payments are crucial to building a good credit history.
• Keep your credit card balances low relative to your available credit limits.
• Since each hard inquiry can temporarily lower your score, be mindful of taking on new debt.