A credit score is a number that denotes the level of trust a potential lender may place in a borrower. Lenders need a guarantee that the borrower is capable of paying off the money they have borrowed within a pre-decided time span. Depending on your creditworthiness, you will either have an excellent, good, fair, or bad credit score. Based on this score, the lender makes a decision about whether or not they should lend money to you.

It also affects the interest rates charged by them. If you are still confused about what a bad credit score is, read on to get an idea about the basics:

1. What does a bad credit score mean?

Having a bad credit score can mean that the borrower was unable to fulfill their credit obligations within the stipulated duration, or it could indicate that they did not pay them at all. In simple words, a bad credit score is a low score in their credit report. A bad credit score is a reflection of the borrower’s past inabilities to keep up with repayments. These repayments need to be made on time, failing which the borrower’s credit score may fall, and they may be unable to get approval for loans in the future. But repayment ability is not the only criteria to evaluate credit scores. This report also includes the borrower’s public records, including federal tax liens, legal judgments, bankruptcies, and even state tax liens.

2. Who is responsible for evaluating the credit score?

Borrowers are often left confused when they learn that they have a bad credit score. They do not know how it gets evaluated and what entities are responsible for calculating this score. The answer to this is simple—a credit reporting agency. They are commonly known as credit bureaus. Credit bureaus evaluate a borrower’s score by getting their credit history and compiling it in a credit report. Each of these agencies maintains separate reports. It is also possible that the credit score may vary from one bureau to another. This may happen due to a lack of relevant information. It may also mean that the credit history has some information which has been omitted by a specific bureau. You would need to apply to these bureaus separately to procure your credit score.

3. What are the factors that lead to a bad credit score?

A bad credit score is often a result of people going through a tough time with their finances. Some of the causes of this may include high balances charged on credit cards, filing for bankruptcy or having a vehicle repossessed. While these events build up over time, sometimes, a single event is enough to negatively affect your credit score. So, you need to ensure that you keep your finances in check to avoid having a bad credit score in the future.