A credit score is an indication of the financial status of a person or a company. The credit score can either be categorized into a high score or a low score category depending on how much credit or debt is due. A good credit score is high. It gives investors a guarantee that the person will pay their dues diligently.

In the United States, the Fair Issac Corporation (FICO) is responsible for calculating credit scores. To do this, it receives information from three credible sources namely Transunion, Experian, and Equifax. It strategically weighs out the information obtained to calculate the credit score. The scoring range is from 300 to 850. Any score below 579 is said to be a bad credit score. A high percentage of people have shown to delay payments with bad credit ratings. Bad credit loans default many a time. 579-669 is a decent credit score. When the debtor is illiquid or is on the verge of entering a state of bankruptcy, the bank generally writes off the bad loan. This results in lowering the credit score of the debtor. When banks give loans to people with bad credit ratings, such loans are characterized by higher interest rates, poor quality collateral, and less favorable terms. This has to be done to compensate for the high risk that is associated with such low ratings.

The risk involved in investing in people with bad credit ratings is also known as subprime risk. Such people generally have limited experience in debt, no assets which can be used as leverage, history of delayed payments, default debt and court orders asking to repay their debts. Student loans are a common example of loans with bad credit ratings.