How 5 money blunders ding your credit
FICO calls them 'damage points,' and, boy, can they pull down your credit score.
Have you ever wondered how paying a bill late would affect your credit score? Or how many points your score would lose in the event of a foreclosure or bankruptcy?
Because the exact details of how a FICO score is calculated are kept secret, there is a certain mystery that surrounds this three-digit number and how it can affect your ability to get credit and even the auto insurance premiums you pay.
- Calculator: What's your credit score range?
Fortunately, FICO has shed a little light on just how such financial events affect your credit rating. FICO calls them "damage points," and, boy, can they pull down your credit score. The following chart from Fair Isaac reveals some of the most common damage points and their effect on credit scores:
If your FICO score is 680
If your FICO score is 780
Maxed-out credit card
Down 10-30 points
Down 25-45 points
30-day late payment
Down 60-80 points
Down 90-110 points
Down 45-65 points
Down 105-125 points
Down 85-105 points
Down 140-160 points
Down 130-150 points
Down 220-240 points
Let's take a closer look at each example:
- Maxed-out credit card. It may surprise some people to learn that maxing out a credit card could lower your score. The reason is that historical data indicate that a maxed-out card is an indication of financial stress. While not everybody who reaches his credit card limit is in financial trouble, many people are. This is another reason to take advantage of balance-transfer credit cards even while you are working to get out of credit card debt. A balance transfer can help you spread your credit card debt over more cards and allow you to benefit from a no-interest introductory rate at the same time.
- 30-day late payment. This is undoubtedly the most common of credit mistakes, and sometimes falling behind on your payments leads to other mistakes on this list. Even if you can make only the minimum credit card payment, it's better than racking up late fees and possibly over-the-limit fees, all while hurting your credit score. Note that in most cases being a few days late will not be reflected on your credit report, because many creditors report only late payments that are more than 30 days overdue.
- Debt settlement. The most intriguing of financial "mistakes," in my opinion, is debt settlement. Debt settlement involves negotiating with creditors to lower the amount you owe in exchange for agreed payment terms. Depending on your negotiating skills, you may be able to save a substantial amount of money on your debt through debt settlement. If you take this route, however, the money you save now may turn out to be costly as your credit score goes down and interest rates on other debt potentially go up. In addition, there can be tax consequences when a creditor forgives some or all of your debt.
- Foreclosure. If you're considering foreclosure, you probably have a few greater concerns in life than your credit score. Still, an added "bonus" of having to give up your house is the difficulty you'll have for a long time in getting another house because your credit has tanked. As you make the difficult decisions that accompany foreclosure, your credit history and score should be taken into account.
- Bankruptcy. I think the graphic above is slightly misleading in terms of bankruptcy, because someone who declares bankruptcy probably won't have a FICO score of 780. Generally, bankruptcy is a last resort when you've already had multiple late payments and have settled some of your debts, so chances are your credit score will be a lot lower. Regardless, bankruptcy obviously has a major impact on your credit score, and it will affect your ability to get credit for several years.
What's particularly interesting with damage points is that the better your credit rating, the more your FICO score falls when you make a mistake. While a number of factors go into how much your score will be lowered, even one payment that is 30 days late can dock a 780-plus credit score as much as 110 points, according to the data released by Fair Isaac. Thus just one 30-day late payment can easily move you into a higher interest rate bracket when you apply for credit.
What can you do if your credit score suffers from damage points?
- First, make sure the information in your credit file is correct. In some cases, whether through identity theft or a simple mistake, your credit file can contain inaccurate negative information.
- Second, if you think you are at risk of identity theft, consider the services provided by the likes of Identity Guard and Equifax. Both offer free trials to check your credit score and credit reports, and if you like their services, you can sign on with them for an entire year to monitor your credit file.
- Finally, if the negative information in your credit file is accurate, consider two options.
- Contact your creditor to see if it will remove the negative reference. Although the information may be accurate, creditors will sometimes accommodate you to keep a customer happy.
- Recognize that no matter how bad your credit may be, it can always be improved. Negative references do not remain on your record forever, and responsible use of credit will improve your credit score.
With some of the mystery removed from how FICO determines your credit rating, get busy watching over your credit scores. A little effort on your part will help you maintain a good credit score, which will make your life less complicated and a lot less expensive.
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ABOUT SMART SPENDING
Editor Bev O'Shea lives and works in the foothills of the Appalachians. A former copy editor for The Atlanta Journal-Constitution and the Orlando Sentinel, she joined MSN Money in 2007. She's a fan of sunsets, college football and free shipping, among other things.
Having worked as a writer, reporter and editor for more than 25 years, Editor Julie Tilsner is the sort of person who can't help but correct grammar in Facebook postings and on billboards. She's written for BusinessWeek, the Los Angeles Times, Parenting, Redbook, AOL and others. She lives in Los Angeles County with her family and loves to drink wine and practice yoga, although not generally at the same time.
A writer for MSN Money since January 2007, Donna Freedman won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. She also writes about smart money tactics for magazines and on her own site, Surviving and Thriving.
Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
Marilyn Lewis is an award-winning writer with a passion for getting readers clear, straight information that helps them stay out of financial trouble. A former reporter for The San Jose Mercury News, she works from her home in Port Townsend, Wash. Contact her at MarilynLewis@Outlook.com.
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