What is Credit?
Before we understand what bad credit is, let’s look at credit. Your "credit" usually refers to how attractive you appear to lenders. They don’t know you, so they examine your credit to judge whether or not they think you’ll repay.
What is credit made of? It’s mostly information about your borrowing history. If you have not borrowed much in the past, you may need to build credit to appear more attractive to lenders.
What is Bad Credit?
If credit is information about you, what is bad credit? Bad credit is data that suggests you’re a more risky borrower. If you’ve failed to repay loans, declared bankruptcy, regularly been late on payments, or maxed out your credit lines you appear more risky.
What does bad credit look like? In most cases, it means you have a low credit score. Since lenders don’t want to sort through your history manually, they have a computer spit out a number that tries to predict your creditworthiness.
Credit Report Mistakes
Even if you’re a stellar borrower, you may appear to have bad credit if there are errors on your credit reports. Lenders may report that you haven’t paid (even when you have), or your credit files may have been mixed up with a less responsible borrower’s. You have to monitor your credit reports to make sure everything is accurate, and fix any errors that ding your credit.
Risks of Bad Credit
What if you have bad credit? Does it really matter? For most of us, the answer is yes.
Loans with bad credit will be more expensive, you have fewer options, and you’re a target for predatory lenders. In addition, employers and insurance companies may look at your credit when deciding to hire or insure you.
Some people choose to ignore their credit, arguing that they’ll never borrow money. While this may be true, it’s nice to keep your options open.