That’s a great question and many borrowers really don’t know. So let’s start with the basics (if you don’t know much about what a credit score is, you can read “What’s a Credit Score?” here).
First of all, credit scores range from 350 to 800 and the higher your score, the better your credit rating. Here’s a quick breakdown of the different credit tiers. (Lender use tiers more than they use specific scores to evaluate borrowers. A tier is a range of scores.)
Keep in mind that every lender decides what they consider good and bad credit depending on their standards, but here are some general guidelines for figuring out what kind of credit score you have.
300-629: Bad credit
630-689: Average credit
690-719: Good credit
720 and up: Excellent credit
If you have excellent credit you can apply and get approved for just about any loan and you’ll get offered the lowest interest rates. If you have good credit, you can still qualify for most loans and credit cards, but you’ll pay a higher interest rate. Once you drop to average credit, it gets harder and harder to get a decent interest rate, but you can likely still get a home loan, auto loan or credit card if you have a stable job, good income and some type of down payment. After your score dips below the 630 mark, you will pay a lot more in interest and may not qualify for a loan or credit card.
However, there are still lenders who won’t look at your credit report. Instead, they examine your job and your paycheck. If you have a job and make at least $1,000 a month, you can probably qualify for a payday loan or cash advance. These are short-term loans and you’ll pay higher interest, but for a shorter period of time.
Another way to get a loan when you don’t have a good credit score is to secure the loan with collateral. Collateral is something of value that backs the loan. If you don’t pay the loan back as agreed the lender can repossess or take back your collateral. For example, if your car is paid for you could get a loan based on a percentage of the car’s value. If you failed to pay it back, the bank would take your car and sell it to make up for what you still owed. Or if you have equity in your house, meaning it is worth more than what you owe on it, you can sometimes qualify for a loan based on the difference in what you owe and what the home is worth. BUT — and this is huge — if you don’t pay it back you can lose your house. The bank can foreclose on it to repay the debt. So this can be a really risky strategy.
You can also secure the loan with an expensive piece of jewelry or something else of value, but it will depend on the lender. Typically the lender will not loan on the full resale value of the item but on a percentage of it. Banks are not in the business of selling but lending and they want to make sure they can sell the item fast. This means they will have to sell it for less than what it’s worth. So don’t expect to get a secured loan that matches the real value of the item you use as collateral.
Now that you have an idea of what bad credit is, let’s look at how it affects your interest rate. Think of your interest rate as the cost of the money you borrow.
According to bankrate.com, mortgage rates can vary greatly based on the quality of your credit score.
|760 to 850||5.78%|
|700 to 759||6.002%|
|660 to 669||6.286%|
|620 to 659||7.096%|
|580 to 619||8.538%|
|500 to 579||9.494%|
If you review the table, you’ll notice that in the top tiers, the rates go up just a little (about 0.2 percentage points until you get below 660), then the rate changes nearly 0.8 percentage points.
The same is true for car loans. According to FICO, here is how rates increase, as your credit score gets lower.
|Credit Score||Interest rate|
|760 to 850||3.756%|
|700 to 759||3.978%|
|680 to 699||4.155%|
|660 to 679||4.369%|
|640 to 659||4.799%|
|620 to 639||5.345%|
Again small changes (about 0.2 percentage points per tier until you fall below 660), then rates go up twice as much for each tier (from 0.2 percentage points to 0.45 percentage points).
The short answer is it depends. Some lenders consider your credit score bad or poor once it falls below 630, while others may classify a score as bad after it dips under 660. The key to getting an affordable loan is to do your best to keep your score above the 660 mark. This enables you to avoid big interest rate increases.
If you’ve already dipped below that level, I encourage you to read the next lesson in our credit guide. “How To Fix a Bad Credit Score.”