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 low credit based on their payment history and current financial situation.
A person (or company) with sup-bar 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.
- 35%—payment history. This is given the greatest weight. It simply indicates whether the person whose FICO score it is paid their bills on time. Missing by just a few days can count, although the more delinquent the payment, the worse it is considered.
- 30%—total amount an individual owes. This includes mortgages, credit card balances, car loans, any bills in collections, court judgments, and other debts. What’s especially important here is the person’s credit utilization ratio, which compares how much money they have available to borrow (such as the total limits on their credit cards) to how much they owe at any given time. Having a high credit utilization ratio (say, above 20% or 30%) can be viewed as a danger signal and result in a lower credit score.
- 15%—length of a person’s credit history.
- 10%—mix of credit types. This can include mortgages, car loans, and credit cards.
- 10%—new credit. This includes what someone has recently taken on or applied for.