FICO Credit – Revealed: How Common Credit Mistakes Affect Scores

December 5, 2009

Credit Basics

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.

FICO credit

  • Did you max 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.

FICO, the company that pioneered credit scoring, assigns consumers a three-digit number from 300 to 850, depending on how well they handle credit.   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.

In order to show just how badly a drop in your FICO score can hurt your wallet, some 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 were presented to auto and home mortgage companies.   The results are below:

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.

While knowing the numbers may not keep you filing for bankruptcy if given no other choice, the information may help you make the best decision when faced with a bad situation.

FICO scores — and the access to credit they provide — are a valuable asset to consumers and supply a safety net when incomes are stretched. It’s an asset that needs to be protected, even if job loss or catastrophic illness makes bill paying problematic.   In that period of time, paying down debt is the last thing on your mind. Paying the minimum payment may also be the last thing on your mind, but you’ll be doing yourself a big favor if you do.

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