What Does It Mean to Have Bad Credit

 Two simple words - bad credit - carry a great deal of weight, especially for anyone hoping to buy a new home or car or looking to get a credit card. Bad credit impacts every aspect of American life. Potential lenders check the credit of every loan application to decide to approve or disapprove a loan application. It helps the lender determine the amount of money you can borrow, the interest rate you'll pay and service and penalty fees that will be applied to the account. But what defines whether someone has bad credit?

Credit Scores Determine Good or Bad Credit
Lenders rely on credit bureaus to supply them with credit scores. The three, major credit reporting agencies, Experian, Trans Union and Equifax, all use the same formula developed by Fair Isaac's and Company (FICO) to calculate a consumer's credit score. Every loan you have ever had and how well you managed those accounts are posted on a credit report. According to the Federal Trade Commission Site on Consumer Issues, the credit-scoring characteristics include an applicant's bill-paying history, the number and types of accounts, the age of account and outstanding debt; information used to calculate a credit score also comes from the loan application.
While the three agencies may have different information about you and slightly different approaches to calculating your score, each agency gives you a score of between 300 and 850. A single FICO score from one of the three agencies may be used to determine loan approval. The lender does not see just a score and judge applicants based on the score number alone, however.

High and Low Scores in a Nut Shell
Anyone with a FICO score of 539 or lower is considered at high risk to lenders. Nearly twenty percent of people at this level have defaulted on a loan; in other words, out of one hundred approved loans, twenty will stop making their payments. By comparison, people with a FICO score of 760 are rated average-to-above-average and default on their loans less than two percent of the time.