The Difference Between Bad Credit and Good Credit 

Updated: November 23, 2023 Author:

Quick Answer: Bad credit makes it difficult to obtain finance at good rates. Good credit makes it easier to be approved for loans, credit cards, mortgages, car finance, and bank accounts with an overdraft. Raising your credit score is the only way to move from having bad credit to good credit.

    Good and Bad Credit Defined

    Good and bad credit is based on how lenders assess you. Lenders consider an applicant with a good credit score as someone who is likely to make repayments on time, and reliably. Applicants with bad credit are considered to be higher-risk borrowers. Legacy lenders are likely to reject applications by applicants with a low credit score. Those who do consider approving finance applications will have less favourable terms, such as higher interest rates, and/or, a lower credit limit on credit cards to begin with, but increase your spending power incrementally when the account is kept in good standing. 

    Credit Score Ranges

    In the UK, there are only three credit reference agencies that matter for credit scoring. Each has different scoring ranges. 

    Experian Credit Scores

    • A good score is 881 and 960
    • Fair or average is 721 and 880

    To be in the bad credit region with Experian, you’d have a credit score below 721.

    Equifax Credit Scores 

    Equifax used to score from 0 to 700. They changed that in 2021. Now, Equifax credit scores are 0 to 1,000. 

    • A good credit score is 531 to 670. 
    • Poor / bad credit scores are below 438. 

    Between bad and good, your score is “fair”.

    TransUnion Credit Scores

    TransUnion credit score ranges are scored from 0 to 710, but you’ll only see that if you use one of their partners. The Statutory Credit Report from TransUnion does not provide a score or rating. Only three partners do. Credit Karma, Totally Money, and the (for-a-fee) Check My File service will show you the TransUnion score.

    • A good score is 604 to 627
    • Scores below 565 “needs work”. 

    Notice how they don’t call it a bad credit score, instead using the “needs work” wording? Different terms are used with credit reporting that mean the same thing. Poor and bad credit are the same, as is adverse credit

    How Credit Scores Are Actually Calculated

    Each of the credit reporting agencies have different credit scoring models. That’s why you have different scores for each. Perhaps, the most logical explanation of all three comes from TransUnion where they explain credit scoring using the scorecard model. 

    In the example given, you start with a score of 200. Points are added and deducted based on your personal circumstances. For example, being on the Electoral Roll for 1 year, 20 points could be awarded. After being on the Electoral Roll for 5+ years, 60 points could be awarded. The longer your details are registered and correct, the better your credit score becomes. 

    On the topic of Electoral registration, it’s important to understand that points are based on your personal circumstances. A bad credit score doesn’t affect your address. When you move home, your credit history goes with you. It doesn’t matter if the person who previously lived in your new home was bankrupt, had multiple arrears, defaulted on the mortgage, or committed insurance fraud. Your address has no bearing on your credit score.

    The Impact Bad Credit Has on Your Finances 

    Many believe that being impacted by bad credit limits your ability to obtain finance. It doesn’t. It makes it more expensive. You can still be approved for bad credit loans, credit cards, and car finance. Just at either a higher interest rate or a lower spending limit – until you prove you can manage your account. 

    Realistically, it puts constraints on affordability. With bad credit, you’re kind of forced into considering whether you really need to apply for finance, because decisions are almost never instantaneous. They need manual reviews rather than being approved through automated processes. 

    Numerous products are handy for building your credit history by paying things on a credit account and then making timely repayments to have that reported on your files. It builds on the positive reporting on your credit reports. The more experience your credit files show you have in managing finances, the better your credit score becomes. Use credit cards, mobile phones, or SIM-only deals (on contract), and check the accuracy of information on your credit report. 

    Any discrepancies you have can be disputed by contacting the credit reporting agency and the creditor. CRAs require the permission of the business to make amendments to your report. If you do raise a dispute with a creditor, notify the reporting agency because they’ll add a record showing lenders searching your file that the information is disputed. You can also add a Notice of Corrections to your credit file to give a brief explanation of your circumstances that led to a default, missed payment, or in the case of partially-settled accounts, that your account was referred to debt collection and settled at an ‘agreed’ discounted rate. It’s not uncommon!  

    The term ‘partially settled’ informs lenders that the account was settled for an agreed figure lower than the full amount owed.  It shows that the business lost money so that will have a bearing on a lender’s decision to approve or reject applications for credit accounts. 

    Strategies to Improve Bad Credit 

    Raising your credit score relies on being approved for finance so that timely repayments can be reported on your credit files. It’s easier to be approved for finance on products than it is to secure a loan. The reason is, there’s security involved. If you finance a new car with Hire Purchase (HP) and don’t make the repayments, it can be repossessed to be sold at auction to repay some of the capital owed. 

    Hire Purchase is only one type of car finance for people with bad credit. There are others. Lenders can’t repossess cash. When it’s gone, it’s gone. That’s why you’ll get products financed easier than you will loans. 

    Credit cards are even easier and handier for building a positive credit history because it’s a rotating debt that is updated every month on your credit report. When you spend on credit cards, your credit utilisation rises. When you repay it on time, your utilisation increases, and you get the added bonus of the account being reported as being in good standing. It’s when you miss payments your credit score takes a hit. 

    That said, it is possible for your credit score to decrease when you haven’t missed any payments. This can happen when you close unused accounts as that increases your credit utilisation. Credit scores usually take a hit when your balances exceed 25% of your total available credit across all accounts. How long it takes to improve your credit score depends on the length of time left before negative entries are dropped, which is six years from the date of issue for most delinquencies.  During that time, it is wise to continue building your credit profile so that when negative entries drop, you get the best boost to your credit score possible.