If you’re not watching your credit score closely, you may not notice if it goes from fair to bad. When it does, however, your interest rates and more desirable financing options will be further out of reach.
Here’s what you should know about the differences between bad and fair credit.
The basic difference: your credit score
Credit scores are an attempt to sum up your credit risk in a number. Both FICO, the most commonly used credit scoring model, and its competitor, VantageScore, use a range from 300 to 850. If you have fair credit, your score will be roughly between 630 and 689. If it’s bad, it’ll be somewhere below that 630 mark.
But that’s just the general rule. Lenders evaluate scores differently and standards can vary, whether you’re applying for an auto loan or a credit card. That means that some lenders could deem a score of 620 as acceptable, but others choose not to extend credit.
Higher interest rates, fewer opportunities
The higher your credit score, the lower your interest rates. So if you have fair or bad credit, your interest rates are already relatively high for all kinds of debt, from credit cards to mortgages.
In addition, your opportunities to improve your credit may be limited because lenders see you as risky and are less likely to approve your applications. Bad or fair credit affects more than just lending — it can also determine your eligibility for a cell phone or an apartment.
Fixing mistakes in your credit history
If you have bad or fair credit, you’ve probably made some mistakes along the line that are now affecting your overall credit history. Missed payments, repeated inquiries, short credit history, collections accounts, or a high credit utilization ratio can all tarnish your score.
To make an overall improvement in your credit score, check out your free annual credit report to see where you’ve gone wrong and start building your credit score. (You might also find an error in your credit reports. If that happens, dispute it. Wrong, negative information can give you a lower score than you deserve.) There are bad-credit credit cards designed specifically for people who wish to improve their low credit scores.
As you work to improve your credit score, remember the No. 1 rule of good credit: pay your bills on time.
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