What is a Bad Credit Score?

Updated: April 02, 2024 Author:

Quick answer: Experian categorises bad credit as a credit score between 561 and 720. With TransUnion, it’s a score below 565 and is categorised as “Needs Work”. A credit score below 367 from Equifax is considered a bad credit score. 

    How to Find Your Credit Score

    Your credit reports can be accessed directly from any of the three main credit reference agencies. Experian, Transunion, and Eqiufax. Free reports can be accessed through partner companies. Credit Karma provides free credit reports with information obtained from Transunion. Clearscore provides credit scores with information obtained from Equifax. Experian provides access to your credit report through its free account service. This used to be available through the Money Saving Expert Credit Club, however, they parted ways in 2023, opting instead to partner with Transunion. To obtain all three credit reports for free, use the free account options from Credit Karma, Clearscore, and Experian. The scores will be different because they use different scoring models. 

    The Credit Score Ranges for Each Credit Reference Agency Explained 

    Experian and Equifax have five bands of credit ranges. Very poor, poor, fair, good, and excellent. TransUnion has four bands starting with “Needs Work”.

    Before applying for credit of any type, it’s a good idea to know what your score is because it indicates the likelihood of having your application approved or rejected. With a bad credit score, mainstream lenders are off the table and it’s the subprime finance market you’d need to look at for finance. Anything below a “good” credit score can make it difficult to obtain finance. Bad credit is considered to be a score below the “fair” credit score range. 

    What Causes a Bad Credit Score

    Numerous factors go into creating your credit score. Positive and negative entries that are reported to credit reference agencies to build your credit history. The negative entries are the cause of a bad credit rating. This is things like breaching a credit agreement, paying late, or even only making the minimum payments towards debt balances. More serious entries that have a strong impact on reducing your credit rating are legal consequences such as CCJs (Decrees in Scotland), bankruptcy, and voluntary insolvency arrangements (IVAs). The only way to get and maintain a good credit score is to have credit and pay more than the minimum payment every month. As a rule of thumb, any short-term debt – anything other than a long-term secured loan – aim to pay the balance off in full within 3 years. Credit card firms are actively attempting to prevent customers from being in persistent debt. By paying more than the minimum payment, this can be avoided and potentially help maintain positive credit reporting. 

    The Effects of a Bad Credit Ccore

    Having a bad credit score is not the end of the world. It will make it more difficult to access affordable finance because lenders view customers with a bad credit rating as high-risk customers. When attempting to obtain finance, there are two types of lenders. Mainstream like banks, and building societies, and subprime lenders. All favourable credit deals are geared towards low-risk customers, who are those with good, very good, and excellent credit ratings. The subprime market is for customers with credit scores in the very poor, poor, and in some instances, having a credit score in the category of fair credit. Anything less than a good credit score can make getting approved for finance problematic. 

    Even if you don’t intend to take out secured loans, car finance, or any other type of debt, there are additional side effects of having a bad credit score, including difficulties being approved for renting a property without a guarantor, getting a job or being promoted from within current employment if a credit check is a prerequisite for the role. 

    Is a 500 Score Bad?

    When you look at your credit report, the first thing that’s shown is your credit score. The scores differ between each credit reporting agency. A credit score of 500 from Equifax is good. If the credit score is from Experian or TransUnion, then a 500 credit score is bad. Experian categorises a 500 credit score as “Very poor”, whereas TransUnion would label it with the wording on your credit report as “Needs Work”. A score of under 565 from TransUnion is in the poor credit category.  Poor credit is the same as being considered to have bad credit.

    Why is My Credit Score Low When I Have No Debt

    You can have no debt and still have a bad credit rating. A common reason is a lack of reporting. Without sufficient credit history showing on your credit reports, lenders will be unable to perform a thorough risk assessment. It’s better to have no credit vs bad credit because it’s easier to build credit than it is to fix a bad credit score. In some instances, reparations can take years, such as if bad credit is caused by a CCJ or bankruptcy. Most financial records come off your credit report after six years.

    If you leave the country for an extended period, on return, you can be credit invisible because credit reports are only built within the country you reside. They don’t travel with you when you move overseas. On return, or recent entries to the UK with no financial history will start with a credit score of zero. You don’t need credit to build your credit score. You do need a permanent UK resident address, and it is preferable to have your details registered on the Electoral Roll as that is proof that you’re allowed to work in Britain. Without being able to work, how can you repay debts? That’s the logic. 

    How Long Does it Take to Repair a Bad Credit Score? 

    The length of time it takes to improve your credit score depends on the reason for it being low. If you’ve only turned 18 and starting with no credit history, improvements could be seen within months by obtaining any sort of finance. Most credit accounts report monthly to credit reporting agencies. Registering on the Electoral Roll may take several months for your credit report to be updated. Also, note that your score can worsen before it improves because the more credit searches are done when applying for finance will decrease your credit score. For low credit scores with no serious entries like accounts in default, or CCJs, it will be faster. How long it takes to repair your credit after adverse entries are recorded can take several years. The most weight is applied to the most recent entries, therefore, missed payments several years ago won’t have the same effect as missing a payment within the last year. 

    One of the fastest ways is using credit cards to improve your credit score because you start with a credit limit, can repay in full monthly, and have that payment reported every month. The longer you have the account and keep it within 25% of the credit limit, the better your score becomes because lenders see it as evidence that you can borrow responsibly.