How is a Bad Credit Rating Determined?

If you have a bad credit rating – or think you do – then it’s always a good idea to look at what determines your credit score to decide what made it bad and how to fix it. This is especially important in times that rely so heavily on these ratings to determine where you can live, what you can drive, and ultimately, how you can live your life.

What Determines Your Credit Score?

So before you take a look at what is considered to be a bad credit rating, let’s look at just how your score is decided in the first place. The Fair Isaac Corporation, also known as FICO, uses a specific formula to decide the number that will show up on your report.

Here are the elements that make up the formula:

  • Paying your bills on time. Whether you pay your bills on time or not involves 35 percent of what determines your credit score. For example, if you have a credit card that you always pay on time every month, your score will be higher than if you make some late payments.
  • Total credit limit vs. total amount owed. Approximately 30 percent of your score is determined by the difference between your total credit limit and the total amount that you owe. If you use less of the total amount you have (less than 50 percent), you’ll look better to the bureaus.
  • The length of your history. How long your credit history is accounts for 15 percent of your score. This means, in order to avoid a bad credit rating in this area, you should cancel unused accounts and have paid-off collections deleted from your report.
  • New accounts, applications, and credit diversity. The remaining 20 percent is divided up between any new accounts you take on, how many applications you’ve turned in, and how many types of credit you’ve applied for. Too many accounts can result in a lower score while diverse accounts in good standing can raise your credit score.

The Score Rating Scale

Typically, a score can range from 300 to 850, worst to best respectively. Depending on who you ask, a bad credit rating can fall below any range from 500 to 700, so to be safe, it’s good to keep yours about 700.

The more you know about a bad credit rating, as well as what determines your credit score, the better chance you will have of keeping it in good standing.