You’ve heard the term “bad credit” thrown around here and there. But, what exactly is a bad credit score, and how do you end up with one?
What Determines Bad Credit?
So, what exactly determines bad credit? That would be your credit score. Your credit score is based on a rating scale of 350 to 800, with 800 being the best possible score. According to FICO, the creators of the most widely-used credit score, any score under 580 is considered bad credit. In terms of auto financing, most lenders will look at your FICO score to determine your eligibility for a loan. There are five things that make up your FICO score:
- Payment History (35%) – This is the biggest chunk that makes up your credit score. Lenders are concerned with whether or not you’ll be able to pay them back, so this is one of the first things they look at. If you’re inconsistent with paying your bills on time and in full each month, your credit score will drop.
- Amounts Owed (30%) – The second biggest chunk is amounts owed compared to your credit limits. This factor mainly deals with your credit utilization ratio, which is the sum of your credit card balances divided by their credit limits. Lenders don't like when it appears that you're relying too much on credit, so your score typically is negatively impacted if your utilization ratio is 30 percent or higher.
- Length of Credit History (15%) – This section shows how long you’ve been using credit. If you just started using credit, your credit history won’t be very lengthy, and you start from the bottom. Lenders who work with bad credit may still work with you if you have thin credit, as long as the other areas of your report look okay.
- Credit Mix (10%) – What types of credit have you used? This includes credit cards (revolving credit), and loans and mortgages (installment credit). Having a mix of different credit types can help boost your approval chances – as long as you’re up to date on monthly payments.
- New Credit (10%) – FICO in particular looks into how many accounts you have, as well as how new these accounts are. Each time you apply for a new line of credit, a lender will pull your credit report and score (also called a hard inquiry), which will lower your score slightly. If you’ve applied for too many new lines of credit at once, multiple hard inquiries can cause concern for lenders.
How Can I Improve My Credit?
There are many different ways you can improve your credit score. Some of the most common ways are to keep up with monthly bills and lowering credit card balances. But, did you know that taking out a subprime auto loan can also help improve your credit? These car loans are designed for credit-challenged buyers so you can finance a vehicle while working toward improving your credit.
It’ll take some time, but you can get your credit up from “bad”. Don’t feel discouraged if you need a car but are still struggling to find financing. Not every dealer has a subprime department, so it can be difficult to find one to work with. Here at Auto Credit Express, we strive to help consumers improve their credit through auto financing. We do this by matching you to a local dealer that has the lending resources to help buyers with credit challenges. Get started today by filling out our cost- and obligation-free online auto loan request form.