How Common Credit Mistakes Affect Your Credit Scores

by Mark

I want to clear up some confusion about credit repair and how it affects your credit scores.

As many of my readers know, your bad credit doesn’t just improve when you delete negative information from your credit file. You must also add positive information and the right types of accounts in your file to achieve the highet possible FICO scores.

You also know that Fair Isaac Corporation or FICO keeps the credit scoring algorithm Top Secret!

Under pressure from both the governmental watchdogs and consumers, FICO has been releasing limited information about how credit scores are impacted by common events in one’s personal finances.

Recently they disclosed for the first time ever the extent of damage done to a credit score with some of the most common credit mistakes that happen to most Americans.

Borrowers already knew that late payments hurt their credit scores, but for the first time, they now know the true extent of that damage.

Thinking of “maxing out” your credit card? Expect a credit score drop of 10 to 45 points. Declare bankruptcy? Your score will plummet by up to 240 points, and your odds of getting credit will nosedive with it. (at least that what some people think :) )

The “damage points” data, unveiled recently by FICO, are part of the most revealing glimpse into the firm’s once-secret — and still mysterious — credit scoring model. The new information discloses how many points borrowers’ scores will drop when they make the most-common mistakes.

Here is a sample of that chart from Fair Isaac –

fico1.jpg

FICO’s information shows that bankruptcy does the most serious damage to a credit score (up to 240 points), followed by foreclosure (up to 160 points) while maxing out a credit card has the least numerical impact (as few as 10 points).

Those with good or excellent credit — so-called prime borrowers — put more points at risk with each mistake. For example, someone with an average credit score of 680 who pays a bill 30 days late will see a drop of 60 to 80 points. But for someone with an excellent credit score — 780 — that same delinquency can send a FICO score tumbling by 90 to 100 points.

The Real Cost Of Bad Credit in Dollars –

In order to show just how badly a drop in your FICO score can hurt your wallet, below are some examples from the home mortgage, auto, and credit card lending institutions.

The examples represent hypothetical scenarios of a consumer who decided to apply for a $200,000, 30-year mortgage; a $20,000, five-year auto loan and a credit card. While all the industry insiders stressed that a FICO score isn’t the only factor in determining who gets credit and at what cost (other factors they cited include the borrower’s debt-to-income ratio and whether they have already established a relationship with the lender), they were able to provide an idea of what a borrower who had the following credit scores could expect.

For a Consumer Who Started With a FICO Score of 780:

  • Following a 30-day late payment, the consumer’s car loan rate would jump nearly 3 percent, costing the borrower $26 more each month.
  • Following a debt settlement, the consumer would pay as much as $109 more each month on a home mortgage.

For a Consumer Who Started With a FICO Score of 680:

  • Following a 30-day late payment, the consumer would pay $41 more each month for a car loan.
  • Following a 30-day late payment, the consumer would pay as much as $95 more each month on a home mortgage.
  • Following a debt settlement, the consumer would no longer qualify for a credit card.

So as you can see, learning how to improve credit scores puts REAL dollars in your pocket and can save you thousands of dollars over the life of any loan or credit card you may have.

Until next time,

Mark

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