What is a Bad Credit Score?

When deciding whether you are eligible for credit products like loans and credit cards, lenders carefully review your credit score. Your credit score is one of the things they take into account. A bad credit score may indicate lower creditworthiness as your credit score is an important element that is taken into consideration by the financial institutions to make a decision on your loan or credit card application. 

A credit score is a total of your financial management and repayment of all borrowed funds, including credit cards and loans. A person will be considered "new to credit" if they have never applied for a loan or credit card and do not have a credit score. A person will fall under the category of having a good credit history if they have taken out a loan or credit card and have paid their EMIs and credit card bills on time every month. However, failing to pay the loan back on time will impact your credit score by lowering it. 

Let us understand more about bad credit scores in detail now that we have discussed about the definition of a credit score. 

Bad Credit Score – Meaning

Your creditworthiness is assessed using a numerical score that is calculated based on your financial activities. Typically, it ranges from 300 to 900, with 300 representing the lowest value and 900 representing the highest. Always strive to keep your credit score around 750 or higher. A credit score of 750 or higher is regarded as desirable by the majority of banks and NBFCs. Although, different credit bureaus have different algorithms for credit score calculation. Your credit score may vary from credit bureau to credit bureau. 

But what is the general credit score range in India? Let’s take a look at the below table to understand the general credit scoring range and what score is usually categorized as a bad credit score: 

So, if your credit score is hovering around 300 to 500, you have a bad credit score and you need to work on improving your credit score to get loans at competitive interest rates. 

Let’s move on to how you can work on your bad credit score to improve it. For that, we need to understand the factors that may be impacting your credit score. 

Factors Resulting in a Bad Credit ScoreYou are more likely to be approved for credit and get offered better interest rates and conditions if you do not have a bad credit score. Low credit scores might make it challenging to qualify for credit at all, let alone getting credit that is affordable. 

Here are a few factors that may result in a bad credit score: 

1. Payment History
   Your credit score improves if you consistently make payments on time; missed payments lower your score. Additionally, your score will decline the longer your payment is past due. Furthermore, recent late payments have a bigger impact than those that occurred in the past. Hence, keep making payments on time to improve a bad credit score. 
2. Multiple Loan Applications
   Multiple loan or credit card application may also result in a bad credit score. Every time you apply for a credit card or loan, the lender or bank will conduct a hard credit check on your report to measure your creditworthiness to make their decision of lending. With every hard credit check, a few points are deducted from your score. If you apply for multiple loans and credit cards within a short period of time, you will end up with a bad credit score. 
3. Credit Utilisation Ratio
   A high credit utilisation ratio is another factor that may result in a bad credit score. Credit utilisation ratio is the percentage of credit that you use against the total available credit to you. Experts advise to not go beyond 30% of your available credit limit to help improve a bad credit score. 

Maintaining a good credit score has numerous benefits, and hence, you should work on improving your credit score. A credit report is your financial report card, ignoring a bad credit score may land you in troubles in future. 

But what can you do to improve a bad credit score? 

Tips to Improve a Bad Credit Score

Because every person's situation is different, there isn't a straightforward solution to this issue. However, in most cases, if your credit score is bad but you start to make improvements, you will start to see changes gradually. 

Here are some suggestions for improving a bad credit score: 

1. Review your credit report regularly to figure out the reason causing a bad credit score. If you do not know the reason that is causing your score to go down, you will not be able to fix it. Find out the problem so that you can move forward to the solution. 
2. Pay down debts as much as you can. If you have accumulated a lot of debts over the time, you must start repaying them. Start with the debts that have high interest rate. Paying down debts will help to improve your bad credit score. 
3. You may not have a credit card and any other debt, but still have a bad credit score due to issues in the past. If that is the case, get a credit card and spend small amounts or amount that you will be able to pay back on time. Once you start repaying the debts on time, you will see an improvement in your bad credit score. 
4. Report or raise a dispute to any of the credit bureaus if you find an error or mistake in your credit report that is resulting in a bad credit score. 

Knowing your credit report and credit score is crucial because having a bad credit score can seriously impact your personal finances. You can manage your credit score and take advantage of more financial opportunities as you improve your credit score by taking the time to learn how credit scores function and what causes a bad credit score. 

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