by Aidan Kang, CFA
Senior Writer
UPDATED: April 02, 2022

You've probably heard the phrases “good credit” and “bad credit” before, but what do they mean?

When someone says that your credit is “good,” it means that lenders think you're a good risk to lend money to. When someone says that your credit is “bad,” it means that you might not be able to get a loan at all.

In this article, we'll take a look at how bad credit affects your life and what you can do to improve it.

Your Credit Report

Your credit report is a detailed list of your financial history. It shows where you've lived, how long you've lived there, whether you pay your bills on time, and whether you have any outstanding debts like credit card bills and student loans. 

This is just a small sample of what's in your credit report. It also includes any instances where you've been sued for not paying bills or other debt-related issues in the past.

What Is Bad Credit?

Bad credit is a term that refers to the status of your credit score. Your credit score is based on several factors, including how much debt you have, how long you've had that debt, whether or not you've had trouble with debt in the past, and more. It's a number that represents how good you are at handling debt and paying bills on time. 

A higher credit score is better because it means that lenders think that you're reliable and trustworthy when it comes to managing your debt. Bad credit is a term that describes your credit history, specifically the negative aspects of your credit history. When you have bad credit, it means that you’ve defaulted on payments in the past, which is why lenders consider you a high-risk borrower.

How Does Bad Credit Impact Your Life?

People with bad credit are considered high-risk borrowers because they are more likely to default on their loans. Lenders, as a result, will deny them loans or charge them higher interest rates. This makes it difficult to get approved for a car loan or mortgage and also places limits on the types of credit cards available to you. 

Having bad credit can also hurt your job prospects because some employers look at credit scores to determine if an applicant has been responsible in their financial lives. 

How Can You Improve Your Bad Credit Rating?

Improving your bad credit rating takes time, but it can be done. The first step is checking your credit report for errors and disputing any inaccurate information. Next, you need to make sure that all of your current bills are up-to-date and paid on time. Keep tabs on your score and continue making timely payments over several months and watch it improve steadily. 

If you have a family member or friend who is willing to help, you could also ask them to cosign a loan for you. You can also research how to get a loan with bad credit from a credit union rather than a big bank. Credit unions are nonprofit organizations that offer low-interest rates on loans and other financial products. This will increase your chances of being approved and could help improve your credit score. 

The Benefits Of Having Good Credit

Most people know that having good credit is important, but they may not realize just how beneficial it can be. For starters, good credit can help you get approved for loans and lines of credit. It can also help you get better interest rates, which can save you a significant amount of money over time. 

Good credit can help you get approved for a lease or a mortgage. And if you ever need to lease a car or sign up for utility services, having good credit will make the process much easier. Simply put, good credit can make your life easier in several ways. 

Bad credit can have a significant impact on your life, making it difficult to get approved for loans or credit cards. However, there are steps you can take to improve your rating. Improving your credit score takes time, but it's well worth the effort. So, if you're not already taking steps to improve your credit, now is the time to start.