Have you ever wondered how paying a bill late will affect your credit score? Or have you considered how many points your credit 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 that will affect everything from getting credit to auto insurance premiums.
Fortunately, FICO has shed a little light on just how these 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 affect on credit scores:
Maxed Out Credit Card Down 10-30 points Down 25-45 points
30-Day Late Payment Down 60-80 points Down 90-110 points
Debt Settlement Down 45-65 points Down 105-125 points
Foreclosure Down 85-105 points Down 140-160 points
Bankruptcy Down 130-150 points Down 220-240 points
Let’s take a closer look at each of these examples:
- Maxed Out Credit Card – It may surprise some to learn that maxing out a credit card could lower your score. The reason is that historical data indicates that a maxed out card is an indication of financial stress. While not everybody who reaches their credit card limit is in financial trouble, many 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 0% 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 only make 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 only report 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 goes 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 that 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 for a person with a credit score of 780 to declare bankruptcy doesn’t make much sense. 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 is 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+ credit score up to 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. You’re good credit score can become bad in the matter of a few seconds.
So what can you do about 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 simply 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 GoFreeCredit.com. They offer a 7-day free trial to check your triple credit score, 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. First, contact your creditor to see if they will remove the negative reference. Although the information may be accurate, creditors will sometimes accommodate you to keep a customer happy. And second, 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.
Published or updated March 14, 2013.