How to Know When You Truly Have a Bad Credit Score…

Just what is a bad credit score? To the average consumer, having a bad credit score can take on several different meanings. But for a consumer that will be in the market for a house, car, or even a personal loan of some kind, a bad credit score can mean all-around bad news. A bad credit score doesn’t suddenly show up on a consumer’s doorstep and lands inside his or her lap. Like anything good and bad, a bad credit score is the result of some kind of bad action—namely, in the world of consumer credit, for every bad action there’s an even worse reaction. Perhaps a consumer has just been laid off; maybe it’s a situation where a death in the family has caused major financial blunders; more than likely, most consumers just simply fall behind on their payments, which seems to always do the trick.

FICO Scores Rein Supreme…

Here’s the thing about today’s credit scoring model: in the world of credit scores, FICO (or Fair Isaacs Company) has a virtual monopoly. In fact, the second in line, which is the VantageScore system, created by Experian, isn’t even remotely considered a competitor. This statement holds true based strictly on the grounds that very few lenders will ever pull your VantageScores. If you want a mortgage, a car loan, or any kind of financial product from a commercial bank (or a credit union for that matter), FICO’s scoring model is considered the industry standard. To VantageScore’s credit, they have been making some improvements to its credit scoring model, adopting more features from FICO’s scoring model, including offering a scoring range between 300 and 850.

A Bad Credit Score is Determined by Lenders…

How do you know when you have a bad credit score? It’s simple: go to several different lenders of credit and find out. First and foremost, having a bad credit score isn’t as objective as many would lead you to believe. The system varies. The thing that can get perplexing to many consumers delves from this very same logic: “How do you know which lender’s scoring model is correct?” The short answer is—you don’t. Which is why having a bad credit score sucks. Conversely, a person with a high credit score is showered with prime credit card offers and 0% APR auto loans for just showing up. Why? Because at a 750 FICO score and above, you as a potential borrower represents very little risk to a lender.

Credit Score and Its Different Uses…

Exactly what are credit scores used for; and why should you be concerned if your score is good or bad? In brief historical review, FICO scores came into existence as a result of huge demand by the lending institutions themselves, who needed a way to expedite his or her decision making process. What can a three digit number tell you about a person? Absolutely nothing! But from the vantage point of the lenders who adapted this scoring model, early on, they learned that a number could immediately gauge whether or not that person was bankable or not. On a positive side, if the score isn’t terribly bad, then chances are you’ll pass the decision making process, but will rightfully be penalize with higher finance charges if it’s not up to industry standards. Buyer beware: credit scores have several different uses to a lender of credit. Alas, credit scores are useful in a variety of ways, but for the most part, they are used for the following financial purposes:

  1. To decide whether to extend credit to you or not.

  2. If approved, how much credit to extend to you.

  3. Once your limit is established, to decide whether or not you’re capable of higher credit limits.

  4. And if the credit market slows down, (as it did the aftermath of the “Great Recession of 2008-2010”), a low credit score can most certainly be the determining factor in whether or not your credit limits are decreased as much as 50%. (Some lenders may even close riskier accounts altogether.)

  5. To determine the interest rate you’ll get charged for a loan, or in the case of an insurance company, the discount rate they may offer you on an insurance policy.

In final, there really isn’t such a thing as a "bad credit score," –namely, the number itself represents no particular value outside of a lender’s greater discretion. In essence, a credit score is only bad when it prevents you from reaching any of your financial goals—be it a new home, a car loan, or even the best deals on your auto insurance.

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