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What is a bad credit score (and what to do about it)

What is a bad credit score? Are you positioned for financial success? We talked to someone who had a bad credit score and what they did to improve it.

Ramit Sethi

What is a bad credit score (and what to do about it)

The world of credit scores can be confusing. It’s filled with esoteric jargon like “credit risk” and “FICO.”

I want to help you cut through all the BS and get down to one really important question:

What is a bad credit score?

The answer? Anything less than 670.

Anything below 670 and you’re at risk for higher interest rates on loans (if you get approved at all), getting denied an apartment rental, or even passed up on a job application.

But there is hope. You can improve your credit score even if your score is less than 670.

We know because we talked to someone who has been there.

How this entrepreneur crawled out of debt and escaped her bad credit score

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Credit score then: 600 – 650

Credit score now: 789

Debt owed: $12,000 in credit card debt and $35,000 in student loans

Meet Kelsey Jones.

Kelsey is a writer, entrepreneur, and founder of a marketing company called Six Stories. Though her business is thriving and she and her husband are on solid financial footing, that wasn’t always the case.

In fact, her credit score took an absolute beating after college due to a problem that happens to many college students: They don’t understand how credit cards work.

This put her in a prime position to fall into debt and kill her credit score before she even graduated.

“I got one of those credit cards you get at a tent with a free t-shirt,” she says. “My parents told me nothing about credit card debt and managing money as I’m sure most don’t, so I had no idea how to manage a credit card and use it to my advantage.”

Due to her inexperience with cards, she didn’t understand the dangers. Like many people with bad credit, she was drawn in by flashy sign-up offers and bonuses. She wound up opening credit cards at stores such as American Eagle and Victoria’s Secret, as well as the major card companies like American Express and Discover.

This behavior eventually led to a sizeable amount of credit card debt. Kelly wound up owing roughly $12,000 in credit card debt when she graduated in 2008 on top of the $35,000 she owed for student loans.  

Her credit score soon plummeted — and was further exacerbated by late payments.

“I sometimes paid my bills late because I just didn’t have enough money,” she says. “I was so broke when I graduated! I vividly remember my paychecks every two weeks were only $730. Meanwhile, I had to pay for my one-bedroom studio, car, cell phone, and all the other bills that come from truly being on your own.”

She adds, “My rent was almost the equivalent of one entire paycheck!”

I felt like I was “less than”

Being in debt and having your credit card debt can take a mental and emotional toll on you as well as a financial one. In fact, researchers have found that there’s a strong correlation between debt and mental health issues.

Debt can be both the cause and symptom of depression and anxiety — and it’s only exacerbated by the fact that many just want to ignore their financial problems.

“I buried my head in the sand for a long time,” she says. “I justified it for a while so I didn’t have to confront the angry feelings I had at myself for getting myself in that situation — specifically from credit card debt.”

For anyone who has ever been in debt, this feeling of anger and guilt should be familiar. When combined, it creates a potent mix that can be debilitating leading to inaction.

That’s why the first step in our system to getting out of debt fast is simply finding out how much you owe. When you confront your debt head-on, you provide yourself with a powerful mental boost that can help you eliminate it completely.

For Kelsey, though, that was easier said than done.

“I felt like I was ‘less than’ because I couldn’t get my shit together well enough to really take care of it,” Kelsey explains. “I felt so out of control of my life and wasn’t ready to be so broke after college. For some reason, I thought things would automatically get better, without me actually having to do anything.”

The wake-up call

It wasn’t until one day when her husband sat her down that she finally had a frank discussion about her finances: Something needed to change.

“Him coming to me about my debt was a wake-up call for me,” she says. “I couldn’t hide anymore.”

Debt is one of the biggest and most common barriers to living a Rich Life. And in their discussion, Kelsey realized that it was getting in the way of everything she and her husband wanted in their lives.

“I wanted to stop being a victim,” she says, “and dreading everything to do with money.”

Credit score improvement game plan

Kelsey’s plan to improve her credit score and escape her financial advice was threefold.

Step 1: Set a goal

First, Kelsey made the conscious decision to escape debt.

“I decided that this was it,” she says. “I was done being in debt. You have to make the conscious decision that you are done being ‘that person.’”

Though it may seem like a no-brainer, many people still put their heads in the sand and avoid their situation entirely — but that’s exactly what your lenders want you to do. They want you to avoid your statements. They want you to just pay off the minimum every month so you owe more interest. That’s how they make money.

Which is why one of our first steps in our credit score improvement system is to find out how much you owe. Once you do that, you’ll know how you can approach paying off your debts.

For Kelsey, the decision to confront her debt was a game changer.

“I went to Staples and bought a huge piece of poster board and bright markers and hung it up in my office,” she says. “I created a bar chart with months at the bottom and debt amount on the side. At the end of every month, I updated the poster board with different colors. It was awesome to see the bar graph trend down.”

Kelsey began to obsess over crushing her debt. She even leveraged this debt calculator spreadsheet whenever she made a financial transaction.

“I constantly updated it when I made payments and even made extra copies of it to test scenarios like ‘What would happen if I paid extra on my Discover card payment?’ or ‘What if I paid off this loan versus the other one?’” she explains. “Just knowing I could be debt-free in X number of months kept me going.”

Step 2: Pay down the debt by any means necessary

Kelsey also made sure that every piece of extra money she received went towards paying down her debt. This meant sacrificing a few things she loved in order to do it.

“We didn’t go on any trips and I didn’t go out to eat with friends as often as I used to,” she explains. “I still didn’t deprive myself, I simply cut down a little.”

She continues, “Any additional extra money, like tax returns, birthday gifts, and even the brand new MacBook I won in a contest, all went toward debt. It was extremely sad to ship that new MacBook to its new owner after I sold it on eBay — but I was obsessed.”

Step 3: Earn more money

Kelsey also leveraged a tried-and-true IWT method of attaining a Rich Life: Earning more money.

“I had my own digital marketing business at this time,” she recalls. “So the amount of money I made was completely up to me. I went into overdrive mode. I asked existing clients for more work and I sent pitch after pitch to potential new clients. I worked probably 50 hours a week … often until 9 or 10 at night and on the weekends, to hit my goals.”

The results

This diligence and hustle ultimately paid off when nearly two years later, she found herself debt-free.

“I still vividly remember sitting on my bed and submitting that last payment to Sallie Mae,” she says. “I promptly had a dance party in my bedroom for a few minutes, and then immediately started making my credit cards work for me.”

That meant putting in place a proven system of (say it with me):

Automated finances

“I set all recurring bills I could to be paid via credit card for the points and I paid off the balances completely each month,” Kelsey says. “Knowing how hard I worked to pay off that debt, I never wanted to get into that situation again. Now, about five years later, I still have never carried a balance over on a credit card more than one time.”

And to people with a low credit score, Kelsey has three pieces of advice:

  1. Stop lying to yourself or justifying it. By confronting the uncomfortable truths about your credit score, you can take the steps to improve it. “Put yourself on an all cash budget or open a new checking account that only has your spending money for groceries, fun, etc.,” she suggests. “Your other checking account can be used to pay your credit card balances and other bills like rent.”
  2. Ask yourself, “Where do I want to be a year from now?” It’s easy to make bad financial decisions when you don’t keep the end goal in mind. “Think about if going into more debt is worth it,” Kelsey says. “Will that new computer really make you feel better or will you feel worse because you’re even more behind on your debt?”
  3. Think about your loved ones. Often times, debt doesn’t only affect you. It also affects your loved ones. “Having a child with our income and debt I had would’ve been irresponsible […] Think about how your debt could impact your spouse and your freedom as a family to make decisions and move forward in life.”

Now that Kelsey’s out of debt and she has a good credit score, she’s now in a great position to live her Rich Life.

What is a bad credit score?

Just like with Kelsey, a bad credit score can be emblematic of many financial issues. To understand why a credit score like 670 is bad though, you need to understand how credit scores work.

Your credit score is a number that lenders use to determine how much of a risk it is to lend to you.

This number will typically be between 300 and 850. The higher your credit score, the better you are situated for things like home and car loans.

The actual number is determined by the following information and their associated weight in relation to your score (credit score formula courtesy of Wells Fargo):

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • How many types of credit in use: 10%
  • Account inquiries: 10%  

Check out these ranges from Experian, one of the three main credit reporting bureaus, to see how your credit score shapes up:

  • 800 – 850 (Great credit score). I want to take this credit score out to a nice seafood dinner, propose marriage to it, and live out our days in the country. It’s that good. If your credit score is in this range, you’ll have no problems getting a home loan or nailing a fantastic interest rate on your mortgage.
  • 740 – 799 (Good credit score). The credit score you’d be happy to bring home to your parents. This is a pretty good spot to be. Though it’s not the best, you’ll still have no problem getting approved for loans and attaining good interest rates.
  • 670 – 739 (Okay credit score). This credit score range is fine for the short term, but you’re going to want to upgrade soon. At this point, any hit to your credit score will be a bad one.
  • 580 – 669 (Bad credit score). In this range, you’re considered a “subprime borrower,” which means you’re likely not to be considered for a loan at all and will struggle getting approved for simple things like apartments.
  • 300 – 579 (Really bad credit score). Immediate swipe left on this credit score. In fact, delete the app entirely. You are a “deep subprime borrower” and won’t get any good rates and won’t likely get approved for any loans. You’ll want to stick around to find out how exactly you can improve your score.

If you want to be approved for any conventional mortgage, you’re going to need a credit score of at least 620. That’s why any credit score below 670 is a bad credit score. At that point, even the smallest hit to your credit score can affect your interest rates and loan approvals.

Miss a payment? Those missing payments affect 35% of your score.

Close down a credit card? That affects 10% of your score.

Even the lender simply opening up an inquiry to your credit hits your score by 10%.

That’s why it’s so important to be aware of your credit score and improve it when it’s bad.

“I have a bad credit score! What should I do?”

If your credit score is bad, you’re not alone. Nearly a third of Americans have a credit score of less than 600.

Also, there’s a chance that you might even be typical for your age range. Check out the average credit score by age as of early 2017 (courtesy of Time):

Age range

Credit score

18 – 29

652

30 – 39

671

40 – 49

685

50 – 59

709

60+

743 

No matter what your credit score is, remember one thing: No credit score is too low to improve.

We want to help you do just that by taking a look at someone who had a low credit score — and the exact steps they took to improve it.

What is a bad credit score? The one that stops you from your Rich Life.

Debt is the number one barrier to living your Rich Life. If you’re in debt and have a bad credit score, we want to help you.

Check out our resources below to get started improving your credit score today:

Be sure to check out Ramit’s video on negotiating your debt too so you can pay it off even faster.

To help you even more, we’d like to offer you something: The first chapter of Ramit’s New York Times best-seller “I Will Teach You to Be Rich.”

It’ll help you tap into even more perks, max out your rewards, and beat the credit card companies at their own game.

It includes the tools and word-for-word scripts to fight back against the huge credit card companies. To download it free now, enter your name and email below.

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