Bad Credit Score Facts and How to Start Rebuilding Your Credit
September 19, 2019 by Emma Gordon
You probably know bad credit isn’t something you want in your file. But what else do you know about the topic?
Bad credit — and credit scores at large — may seem like a mystery. But it’s not rocket science. Anyone can benefit by brushing up on this concept as it is one of the biggest factors which determines your financial health.
If you’re ready to learn more, look no further. Here are five interesting bad credit score facts, followed by several tips on how you may be able to increase your credit score.
Bad Credit Score Fact No. 1: Subprime Scores Are on the Decline as the Average American Credit Score Breaks Records
A Subprime credit score is anything 669 or below.
According to 2018 data from Experian, nearly 35 percent of Americans have a subprime FICO credit score. But this number has declined over the past decade. This is in part due to the fact fewer people score in the absolute lowest range — or scores lower than 550 — than in previous years.
What is considered a prime credit score?
If subprime is anything between 580-669, a prime credit score is anything 670 and above.
Generally, you can break prime credit into three major categories: good, very good, and excellent.
- Good credit: 670–739
- Very good credit: 740–799
- Excellent: 800–850
What is the average American credit score?
In 2018, the average American credit score was 704, which hasn’t been this high in years.
That’s according to Bloomberg’s Suzanne Woolley, who shows the average American credit score has been on a steady incline since the Recession.
This is good news for the state of credit across the country, as the average American credit score falls neatly within the prime credit range.
There’s also a small rise in those with “super-prime” or excellent scores, jumping from roughly 20.6 percent to 22 percent in the last year. This has contributed to the relatively high average American credit score.
Bad Credit Score Fact No. 2: Millions of Americans Are Credit Invisible
While invisibility might be a handy superpower to have, when it comes to your credit score, being invisible comes with no benefits. To be credit invisible means the major credit bureaus can’t see you, so you don’t have a score.
According to the most recent data, nearly 26 million Americans are credit invisible. These people have absolutely no credit account.
There’s another 19 million people who have so few accounts on file that the credit bureaus can’t accurately calculate their scores.
Without a score, you may find it hard to get a personal loan, an auto loan, or a mortgage.
This is because thin credit flags you as a lending risk — not necessarily because you’re irresponsible with money, but because a credit score is one of the main ways lenders assess what type of borrower you might be. There’s simply not enough information in your file to make an informed decision about your ability to handle credit.
If you’re denied by mainstream banks in an emergency, some direct payday loan lenders may overlook your thin credit. They may still check your credit, but they’ll look at other things, like your income and employment history, to check if you’re eligible for their product.
Bad Credit Score Fact No. 3: One in Four Americans Have an Error on Their Reports
Being accused of something you didn’t do hurts — whether it’s eating the last brownie or stealing money from a friend.
But the potential damage of this injustice may pale in comparison to carrying around errors on your credit report. Inaccurate credit reports may do damage to your score and affect your financial well-being.
Unfortunately, the errors are more common than you think. It was found in 2017 that more than one in five consumers have an error on their credit report that makes them look like a bigger risk to lenders than they are.
Why do errors happen?
In some cases, the most boring answer is the correct one. Simple errors may result in issues affecting your file.
In other cases you may be a victim of identify theft. If someone has access to personal information like your Social Security Number (SSN), they may be able to take out loans and open accounts in your name.
How to dispute credit reports
A reporting error may have a negative effect on your score — whether it’s an honest mistake or a criminal act. You’ll want to contact the credit bureaus right away to undo any of the damage.
Luckily, the major credit reporting agencies make it easy to report errors online or by mail. If you choose to do this via mail, make copies of any supporting documents you use as proof which shows that the error is inaccurate.
Bad Credit Score Fact No. 4: One in Five Americans Don’t Know How to Check Their Credit Score
You may not know you have an error on your report if you never check your credit.
Some people avoid checking it because they’re worried about what they’ll see. But according to a U.S. News & World Report survey, roughly 20 percent of consumers who took the survey simply don’t know how to check their credit.
This may spell trouble for their credit score. Monitoring your credit score helps you know where you stand, so you may take steps to improve it. It’s also an opportunity to ensure everything on your report is accurate.
The good news is, you may check your credit right away — and for free. Each of the country’s three major credit bureaus offer a free check every 12 months. If you spread out these free checks evenly, you’ll be able to review your report every four months.
Checking your credit won’t tank your score
Some people believe checking their credit will affect their score. This is a common misconception that may prevent people from reviewing their reports as often as they should.
In reality, running a check with the three major credit bureaus won’t impact your score. When you check your own credit, you’re performing a soft inquiry.
A soft inquiry, or a soft pull, is a way of checking your credit report without leaving a record on your report, unless you’re checking a subprime credit report such as Experian’s Clarity. On a subprime credit report, all checks are recorded on your credit report.
How to Impact Your Credit Score
There’s no quick fix to bad credit, but there is a way to build positive credit habits over time. The best advice for positively impacting your credit score is committing to responsible habits like the ones below.
1. Pay your bills on time
Paying off bills on time is one of the best things you can do for your finances. You’ll avoid late penalties and additional interest. But more importantly, you’ll establish good credit behavior.
FICO weighs payment history heavily when calculating your credit score, and it may reward consumers who consistently pay their bills on time, as long as they keep up with good credit habits in other areas.
But that means the opposite is true. You may see your score drop if you regularly forget to make payments. Your score may fall even after one missed payment, so make sure you keep track of your bills.
2. Pay at least the minimum balance
Paying every bill in full and on time is ideal. But sometimes, things may go unplanned. You may encounter a long list of unexpected bills during an already tight month.
If you find it hard to cover the full balance owing on a credit card or a line of credit, you have the option of paying the minimum payment. It’s usually a percentage of the total bill or a flat fee. In any case, it’s a fraction of the cost of the balance.
Paying at least the minimum payment can help to keep your credit card or line of credit in good standing. As long as you make this payment by the due date, you may be able to continue building a positive payment history.
The minimum payment is a convenient option during a tight month, but don’t make it a habit if you have the cash to spare. You’ll pay more in interest and other fees if you pay only the minimum balance each month.
Ideally, you’ll want to pay as much as your full balance as possible to avoid these charges and pay down your debt faster.
3. Keep balances low
How you use your credit cards or line of credit will also impact your score. Generally, you’ll want to avoid maxing out these accounts.
This may be confusing, especially if you’ve been approved for a large limit. What’s the point of having it if you can’t use it?
Well, consider the full limit on a credit card or line of credit as a backup in case things go wrong. The $2,000, $5,000, or $10,000 limit is there as a safety net when you face unexpected expenses — not an excuse to upgrade your entertainment system or go on a vacation.
Keeping these balances as low as possible will help establish good credit in your name. Most financial experts recommend using 30 percent or less of your available credit at any given time.
4. Open and close accounts carefully
Maintaining a good credit score is a balancing act. You may have to manage several open accounts at once, making sure you’re paying each one on time. Eventually, you might get to a place where you feel comfortable holding these accounts and your score steady.
However, you risk your financial stability every time you add or take away an account to your load. Remember, each new account from a mainstream lender will attach a hard inquiry to your file — which may lower your score.
By removing an account, you may also see a dip in your score. It may increase your overall debt load if you don’t keep a low balance in your other accounts.
You also won’t strike from the record any negative entries that you have in a closed account. Once a lender reports delinquent payments to a credit bureau, it’s attached to your name for seven years — even if you close the account.
Although there generally isn’t any harm in opening or closing an account, don’t make a habit of doing either frequently.
5. Be patient
Building credit may take a long time. Expecting to raise your credit score by 100 points overnight will only make you feel like a failure when you don’t pull off the impossible. If your score is low, getting your score to match the average American credit score isn’t something you can do in 24 hours.
How long does it take to rebuild credit is a frequently asked question that doesn’t have an easy answer. It depends on how low your credit score is as well as the specific entries on your report.
Bankruptcies and collections will take seven years to fall off your report. During those seven years, these entries will drag down your score even if you’re building positive payment history.
The good news is, these healthy credit habits will be worth more once something like a bankruptcy falls off your report.
Use These Credit Score Facts to Improve Your Credit
Luckily, no credit score is permanent. It’s a constant evolving gauge of your finances that reacts in roughly real time to your behavior. Figuring out how to pay off debt quickly and stick with a regular payment schedule is good credit behavior.
Eventually, even the worst instances of bad credit will fall off your report. If you’ve managed to collect positive instances of punctual payments and low balances in the meantime, you may see your score increase once it does.
Good credit means you’ll have a better chance at getting personal loans at low rates. But you don’t have to wait until you have good credit to borrow cash. In an emergency, we offer online installment loans that help you cover unplanned emergency expenses, even if you have bad credit.
Remember this if you’re living with bad credit and commit to the tips above. The average American credit score of 704 may be within your grasp as long as you put in the work.