Bad credit refers to the financial history of a person or business entity that indicates that they failed to make repayment of a loan or credit in time. The descriptive term bad credit is earned by a history of defaulting on loans on the public record. It means that the individual is labeled as a risky recipient for a loan or any credit. Classification of bad credit The financial history of a person is on record in the form of bank records, tax records, court records, and record of bankruptcies by financial institutions. All these records, when collated, can give a picture of a person’s financial history. This is done by companies who do due diligence. It is important for a person or business to understand if a particular person can make payments on time or in simple words if they have a good or bad credit score. These companies are called credit-reporting agencies or credit bureaus. They maintain their own records and different companies’ records on the same entity may differ. Quantification of credit score A credit rating of a person or a business is calculated and quantified through a FICO score. This is a score calculation that was created by the Fair Isaac Corporation. It uses software algorithms to calculate the credit rating of the entity. The score is calculated by taking certain parameters into consideration, namely history of payments, types of credit, current indebtedness, new credit, and length of credit history. So, if an entity has a history of late or defaulted payments, asset repossessed, bankruptcy, a large credit card bill, or a real estate foreclosure, it is natural that the entity will get a lower credit score. Even if there is a defaulted bill at an institution that does not report it, a collection agency could report it, leading to a bad credit score. The result of a bad credit score A bad credit score can negatively affect the willingness of a lender to extend credit. A person or a business with a bad credit score will find it hard to get loans or credit cards. It would also affect the rate that one would be offered by an insurance company. Landlords, utility companies, and cell phone companies would also be wary of a customer with a bad credit rating and may quote higher security deposit rates to compensate. In some cases, one might even get rejected on account of a bad credit score. Improving a bad credit score There are ways to improve one’s credit score. The simplest way is to just give it time as recent financial behavior has more weight than older ones when calculating the score. If there are items on the credit score report that are inaccurate, one should dispute them. Adding new credit to one’s financial profile and proceeding to pay them regularly can also improve a bad credit score.
