What is considered a bad credit score — and how you can improve your credit

Having a bad credit score isn’t the end of the world, as long as you work toward improving it.

While bad credit may make it more difficult to achieve financial milestones, such as being approved for an auto loan or mortgage, there are steps you can take to repair your credit score.

Lenders look closely at your credit report when determining whether you qualify for credit, such as credit cards or loans. One of the factors they consider is your credit score. This three-digit number is calculated by analyzing your financial actions, such as debt and payment history, to predict your ability to repay money lent to you.

If you have a less than stellar credit score, you should take action as soon as possible, so you can work toward good credit and increase your odds of being approved for financial products like credit cards and loans.

Below, CNBC Select explains what credit score range is considered bad, how to improve a bad credit score and how to get a free credit report.

• What is a bad credit score?
• How a bad credit score can hurt you
• How to improve a bad credit score
• How to check your credit score for free

Credit score ranges vary based on the credit scoring model used (FICO versus VantageScore) and the credit bureau (Experian, Equifax and TransUnion) that pulls the score. Below, you can check which credit score range you fall into, using estimates from Experian. Take note that the credit score lenders use varies, though 90% pull your FICO score.

FICO Score

• Very poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very good: 740 to 799
• Excellent: 800 to 850

VantageScore

• Very poor: 300 to 499
• Poor: 500 to 600
• Fair: 601 to 660
• Good: 661 to 780
• Excellent: 781 to 850

Credit scores are calculated differently depending on the credit scoring model. Here are the key factors FICO and VantageScore consider.

FICO Score

1. Payment history (35% of your score): Whether you’ve paid past credit accounts on time
2. Amounts owed (30%): The total amount of credit and loans you’re using compared to your total credit limit, also known as your utilization rate
3. Length of credit history (15%): The length of time you’ve had credit
4. New credit (10%): How often you apply for and open new accounts
5. Credit mix (10%): The variety of credit products you have, including credit cards, installment loans, finance company accounts, mortgage loans and so on

VantageScore

1. Extremely influential: Payment history
2. Highly influential: Type and duration of credit and percent of credit limit used
3. Moderately influential: Total balances/debt
4. Less influential: Available credit and recent credit behavior and inquiries

Denials for credit

A bad credit score can reduce your approval chances for credit cards and loans, making it difficult to accomplish many goals. If you want to get out of debt with a balance transfer card, such as the Discover it® Balance Transfer, you’ll need good or excellent credit. And if you want to earn rewards or receive luxury travel perks, it’ll be near impossible to find a card that accepts bad credit.

Less favorable loan terms

If you’re approved for credit, odds are you’ll receive less favorable terms, such as high interest rates or annual fees, compared to applicants with good credit. For example, one of CNBC Select’s best credit cards for bad credit, the OpenSky® Secured Visa® Credit Card, has a $35 annual fee; though there are no annual fee options.

Limited credit card choices

Bad credit limits which credit cards you can qualify for; the options you have will be primarily secured cards. While a secured card, such as the Discover it® Secured or the Capital One® Secured Mastercard®, can help you rebuild credit, you’re required to make a security deposit — typically $200 — in order to receive an equivalent line of credit.

Take note that even if your credit score falls within the bad range, that is not a guarantee you’ll be approved for a credit card requiring bad credit. Card issuers look at more factors than just your credit score, including income and monthly housing payments.

If you have bad credit, take some time to review your credit score and identify the cause. Perhaps you’ve missed payments or carried a balance past your bill’s due date. In order to achieve a fair, good or excellent credit score, follow the credit-building tips below.

• Make on-time payments. Payment history is the most important factor in your credit score, so it’s key to always pay on time. Consider setting up autopay to ensure on-time payments, or opt for reminders through your card issuer or mobile calendar.
• Pay in full. While you should always make at least your minimum payment, we recommend paying your bill in full every month to reduce your utilization rate, which is the percentage of your total credit limit you’re using. To calculate your utilization rate, divide your total credit card balance by your total credit limit.
• Don’t open too many accounts at once. Every time you submit an application for credit, whether it’s a credit card or loan, and regardless if you’re approved or denied, an inquiry appears on your credit report. Inquiries temporarily reduce your credit score by roughly five points, though they rebound within a few months. Try to limit applications as needed and shop around with prequalification tools that don’t hurt your credit score.

There are dozens of free credit score services available that offer your free FICO Score or VantageScore. Here are some popular free credit score resources.