What is a Bad Credit Score
What is a Bad Credit Score
Determining what a bad credit score is really depends on the type of credit you are trying to obtain and the lender or financing company that will be providing that credit. Every credit provider will have different levels of risk tolerance and different credit products require higher or lower scores to receive an approval. The following guide will provide borrowers with insight into general credit expectations for financial products in an effort to help clarify exactly what the term bad credit means.
One of the most popular types of credit that borrowers seek is a credit card. Although there are two types of credit cards, both secured and unsecured, this guide will focus on an unsecured credit card as that is the financial product that generally requires more scrutiny over your credit history when trying to obtain credit. Both banks and financial groups offer credit card products with different rates and terms and whether or not you can get approved is really all about your credit history. Some lenders are more flexible than others when it comes to giving an approval, but overall there is a general guideline about good and bad credit.
In the credit card business excellent credit based on the FICO scoring system is having a score of 780 or more. At this level you are likely to be able to choose and get approved for any credit card you want. With a score of 700 to 780 you are considered to have good credit, and can likely get approved for most credit cards if you have reasonable balances. Scoring from 600 to 700 there are still many lenders that will provide you with a credit card, however, in this bracket you are susceptible to denials and will have to find a card issuer that is known for approving higher risk applicants. Below 600 you are considered to have bad credit and are likely only eligible for a secured credit card. For more information and resources about this topic check out this article.
The next type of financial product that analyzes your credit history to obtain a loan is a mortgage. Although receiving this type of credit analyzes several other factors such as income, amount of deposit, and many other details, credit history still plays a significant role. Also, as with credit card issuers, there are a large amount of mortgage providers and programs available with different credit expectations, but sampling one of the larger pools of data can shed light on how credit is looked at in the mortgage industry.
A good way to gauge how your credit score will affect a mortgage is analyzing the details of disbursement from the FHA of mortgages given based on credit score. The statistics show that 33 percent of mortgages given are to applicants with a score of 720 or above, almost 24 percent of mortgages were give to applicants that scored between 680 and 719, and almost 40 percent was distributed to applicants that scored between 620 and 679. These numbers are based on applicants with fair to excellent credit, however, the big difference between obtaining credit from credit cards and mortgages can be found with applicants that have lower credit scores.
Unlike borrowing through a credit card where the applicant requires a reasonable credit score to get approved, borrowers seeking a mortgage can obtain a loan with little or no credit. The percentages for applicants getting approved for an FHA mortgage with low credit scores are small and will likely require a larger down payment for a loan with higher rates, but the availability of financing exists. To highlight this point there are recent FHA statistics that showed how more than 3 percent of their mortgages were given to applicants with a score ranging between 580 and 619, and less than 1 percent received a mortgage having a credit score of 500 to 579. What these numbers show is that bad credit has a completely different meaning for mortgage applications than it does for credit card applications. For more information on FHA mortgage statistics visit the FHA website.
The final financial product we will look at is a business loan. As with the two previous financial products, bad credit looks completely different to business loan providers. As with the other two financial products mentioned there are many business loan providers with different credit expectations, but a guideline exists to demonstrate what good and bad credit means to these lenders.
There are two main types of business loans, those that are acquired through a bank, credit union, or government agency, and business loans that are obtained through private financial companies. When it comes to determining bad credit when applying for a bank business loan it is easy, you either have excellent credit or you have bad credit, there is no middle ground. Most experts will tell you that you should have a credit score close to 800 if you want a bank business loan. The private or alternative business loan option is completely different.
There are countless financial companies on the internet that provide business loans. Each lender has different credit expectations; however, your credit score only plays a role in what rate and terms you receive and not whether or not you get approved. This is because all of the business loans provided by private financing companies are bad credit business loans because the borrower is not eligible for prime lending or bank type business loans. The difference between the two types of loans is simply rates and terms. What this means is that there is no bad credit score when a borrower seeks financing in the private lending industry. For more information about how bad credit affects business loans here is a great resource.
What all of these financial products demonstrate is that the term bad credit has different implications depending on what type of credit a borrower is seeking. Whereas a credit score below 600 will get you approved for a private business loan or a mortgage, it will not get you approved for an unsecured credit card or a bank business loan. Bad credit is more about the lender and the financial product offered and less about the score itself.