What is a bad credit score and how does it affect you?

Your credit score is a number calculated using the information in your credit report. When you apply for a new line of credit, a creditor may use your credit score to determine:

• Whether you can afford to repay a loan
• Your creditworthiness, or your reliability in making repayments

Typically, the higher your credit score, the easier you’ll find it to be approved for credit. A higher credit score can also help you unlock other benefits, including lower interest rates and more favourable terms as compared to other borrowers with a lower score. 

On the other hand, a bad credit rating is a red flag for most lenders and credit providers. If you’re applying for a loan with a low credit rating, you can expect to pay a higher interest rate than the market average. Some creditors might even reject your credit application altogether if your credit score doesn’t match their eligibility criteria. 

There’s no universally accepted definition of a bad credit score. In fact, each lender has their own classifications for what they consider to be a bad credit score and how it impacts your eligibility for a credit product with them. That being said, you can get a fair idea about bad credit scores by looking at the credit scoring system used by two of the three major credit reporting bureaus, Experian and Equifax. 

Source:Experian.com.au, Equifax.com.au.

As illustrated in the image above, the Experian and Equifax credit scoring system is divided into five tiers:

• Excellent
• Very good
• Good
• Fair
• Poor/Below average

Generally, an Experian score below 550 and an Equifax score below 510 is considered bad. Anything below 400 is exceptionally poor.

Lenders review your credit file and credit rating to assess the risk involved in lending you money and whether you’ll be able to repay the borrowed money or not. As a general rule, a higher credit score makes it easier to be approved for financing and credit products. Conversely, a less than ideal credit score can raise red flags for the lender and make it difficult for you to be approved or secure favourable lending terms.

If you’re wondering how you can get a bad credit score, it could be the result of anything from a missed repayment to loan default and even errors in the information listed on your credit file. That’s why it’s important to check your credit score regularly to keep an eye on your financial health. 

You should also review your credit file at least once a year, and before making any credit application, to get an idea of where you stand. If you find your credit score is lower than you expected, double-check the entries to identify any errors or discrepancies. If you find any incorrect information listed on your file, connect with the respective credit bureau to have it removed from your file.

Besides checking your credit report, you can make some positive lifestyle changes to improve your credit score. Under the comprehensive credit reporting system, both positive and negative information is listed on your credit file. 

Positive information includes paying your bills on time, clearing outstanding debts and reducing the limit on a credit card. Negative information includes delayed or missed repayments, defaulting on loans and applying for multiple credit products in a short span of time. Therefore, even if you’ve made financial mistakes in the past, taking positive steps like reducing your debts and paying your bills regularly will help improve your credit score. You can also read this article for simple tips to repair your credit and maintain it.