What are the Causes of a Bad Credit Rating?

What Is Bad Credit?

Bad credit refers to a person’s history of failing to pay bills on time, and the likelihood that they will fail to make timely payments in the future. It is often reflected in a low credit score. Companies can also have bad credit based on their payment history and current financial situation.

A person (or company) with bad credit will find it difficult to borrow money, especially at competitive interest rates, because they are considered riskier than other borrowers. This is true of all types of loans, including both secured and unsecured varieties, though there are options available for the latter.


  • A person is considered to have bad credit if they have a history of not paying their bills on time or owe too much money.
  • Bad credit is often reflected as a low credit score, typically under 580 on a scale of 300 to 850.
  • People with bad credit will find it harder to get a loan or obtain a credit card.

Examples of Bad Credit

FICO scores range from 300 to 850, and traditionally, borrowers with scores of 579 or lower are considered to have bad credit. According to Experian, about 62% of borrowers with scores at or below 579 are likely to become seriously delinquent on their loans in the future.

Scores between 580 and 669 are labeled as fair. These borrowers are substantially less likely to become seriously delinquent on loans, making them much less risky to lend to than those with bad credit scores. However, even borrowers within this range may face higher interest rates or have trouble securing loans, compared with borrowers who are closer to that top 850 mark.

A person is considered to have bad credit if they have a history of not paying their bills on time or owe too much money.

8 Things That Cause a Bad Credit Score

Your credit score is important. It determines how much credit lenders are willing to grant. Knowledge of the causes of a poor rating can help you to avoid the pitfalls that can take years to correct. A bad credit score is caused by several key elements as listed below.

  • Late payments. Your credit history accounts for thirty-five percent of your credit score. Make your credit card payments on time to keep your credit score from decreasing.
  • Defaulting on payments. If you don’t pay your credit card bills, a bad credit score is assured. Additionally, your unpaid accounts will be inevitably charged off after a few months.
  • A charge off. Your accounts become charged off when a creditor sees that you do not intend to make payments on the balances. An account in charge off status is extremely harmful to your score.
  • Collection Accounts. Creditors can hire or sell your delinquent debt to third-party debt collectors to try to obtain a payment from you. This is often the step they take prior to charging off your account. Collection agencies can use questionable methods to make you pay including threats of lawsuits, calling your place of employment or even family members.
  • Defaulting on a loan. Defaulting on a loan affects your score in much the same way as a charge off. It is a statement to any prospective finance company that you are a credit risk.
  • Filing bankruptcy. Bankruptcy is the most harmful to your credit score. It is the option of last resort.
  • Foreclosure. Foreclosure has the same effect on your credit as a loan default. It sends a message to lenders that you are a high credit risk and shows a history of not being able to keep your payments current. Losing your home is very likely to result in a bad credit score because all late and missed payments are shown on your report.
  • Judgments. An unpaid judgment is much worse than a paid judgment. Creditors look at judgments because they show creditors that the court system had to force you to pay your debt.
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How to Improve Your Credit Score?

Improving your credit score can be easy once you understand why your score is struggling. It may take time and effort, but developing responsible habits now can help you grow your score in the long run.

A good first step is to get a free copy of your credit report and score so you can understand what is in your credit file. Next, focus on what is bringing your score down and work toward improving these areas.

Here are some common steps you can take to increase your credit score.

  • Pay your bills on time: Because payment history is the most important factor in making up your credit score, paying all your bills on time every month is critical to improving your credit.
  • Pay down debt. Reducing your credit card balances is a great way to lower your credit utilization ratio, and can be one of the quickest ways to see a credit score boost.
  • Make any outstanding payments. If you have any payments that are past due, bringing them up to date may save your credit score from taking an even bigger hit. Late payment information in credit files include how late the payment was 30, 60 or 90 days past due and the more time that has elapsed, the larger the impact on your scores.
  • Dispute inaccurate information on your report. Mistakes happen, and your scores could suffer because of inaccurate information in your credit file. Periodically monitor your credit reports to make sure no inaccurate information appears. If you find something that’s out of place, initiate a dispute as soon as possible.
  • Limit new credit requests. Limiting the number of times, you ask for new credit will reduce the number of hard inquiries in your credit file. Hard inquiries stay on your credit report for two years, though their impact on your scores fades over time.
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What to Do if You Don’t Have a Credit Score

If you want to establish and build your credit but don’t have a credit score, these options will help you get going.

Get a secured credit card. A secured credit card can be used the same way as a conventional credit card. The only difference is that a security deposit typically equal to your credit limit is required when signing up for a secured card.

This security deposit helps protect the credit issuer if you default and makes them more comfortable taking on riskier borrowers. Use the secured card to make small essential purchases and be sure to pay your bill in full and on time each month to help establish and build your credit.

Become an authorized user. If you are close with someone who has a credit card, you could ask them to add you as an authorized user to jump-start your credit. In this scenario, you get your own card and are given spending privileges on the main cardholder’s account.

In many cases, credit card issuers report authorized users to the credit bureaus, which adds to your credit file. As long as the primary cardholder makes all their payments on time, you should benefit.