Bad Credit: Overview

Such determination may lead to many challenges for a person applying for a bank loan, when applying for credit cards as well as when making other credit requests where the lender assess the applicants ‘credit worthiness’.

Contributing factors for bad credit:

In general, when a person is unable to pay monthly installments for a loan and it happens repeatedly over a period of time, the credit worthiness of the person may slide while accumulating ‘bad credit’ towards his or her name. Thus, borrowings made in the past and its repayment, paying late as well as being bankrupt are some of the components which will determine the ‘bad credit’ status or the negative ‘credit score’ pertaining to a particular person or an organization.

Method of calculating ‘bad credit’:

Many countries have their own credit bureaus which will determine a person’s credit worthiness and will release a report known as the ‘credit report’ for lending agencies to determine for themselves the ‘willingness to repay debt’ by these applicants. Although the models adapted in calculating the credit rating could vary from country to country, FICO scoring system is being used by countries such as US and Canada to govern their credit assessments.

Components of FICO scoring system:

According to FICO scoring system, different factors related to personal credit of a person or an organization will contribute differently towards the credit rating. Thus, ‘payment history’ will be the largest contributor with 35% of the score in FICO scale whereas ‘debt’ will contribute to 30%. Among other contributors, ’revolving debt’, ‘installment debt’, ‘open debt’, age of the credit file, credit diversity as well as credit inquiries can be highlighted.

FICO score indicating a ‘bad credit’:

Following assessing a person’s FICO score it will be the basis to determine if the person is having a ‘bad credit’ or not and in general a FICO score falling below 600 is considered to be ‘bad credit’. But, it should be remembered that, some banks will maintain the ‘bad credit’ limit above 600 and it may range from 600 to even 680 in some institutes. In any event, it will be the lending institutes whom will decide if a person should be considered to be having ‘bad credit’ or not and such decision may depend on the persons relationship with the bank, the region and the nature of the credit application made by a person or by an organization.

‘Bad credit’ warning:

Once a person receives a report indicating ‘bad credit’ there is a possibility of correcting it if there had been any errors from the part of the credit bureaus but this doesn’t amount beyond 2% of all credit reports. But, one should remember that, there is no ‘quick fix’ for ‘bad credit’ and therefore do not fall into traps made by different companies which state, ‘bad credit can be erased’. Beware!

Reference:

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm

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