How Common Mistakes Impact Your FICO Credit Score

FICO credit scores have been around for decades but consumers have had very little insight on how many points would be lost for the most common negative actions. Credit problems like maxing out your credit cards, late payments, debt settlements, foreclosures and bankruptcies all result in "damage points" that directly reduce your credit score. Thankfully, FICO has released information about just how many "damage points" are given for various problems and how much a borrowers' scores will drop when they make the most-common mistakes.

The data shows that maxing out a credit card has the least numerical affect (as few as 10 points) while bankruptcy does the most severe harm to a credit score (up to 240 points). The higher your credit score the further it can fall. Consumers with an excellent score of (780) are impacted the most with each mistake. For example, someone with an average credit score of 680 who pays a bill 30 days late will see a decline of 60 to 80 points. But for someone with an excellent credit score of 780 of that same mistake can drop their FICO score by over 100 points.

It is important to note that these drops do not reflect every consumer experience and that your own personal experience could vary.

Maxing out a credit card

Since 30% of your credit score is based on utilization, maxing-out your credit cards will negatively impact your credit score. Ideally your balance on each card should be under 30%, when you max-out a credit card your credit utilization is 100% and it can put you at risk for over-limit fees.

Missing a payment

It's essential that you pay all your bills on time. You don't need to pay the entire balance each month, but you do need to make at least the minimum payment. Set up automatic payments or reminder systems so that you're never late. It takes just one a missed payment to give you bad credit. A 30-day late payment will not produce permanent damage to your credit scores. This record will hurt your credit score only when it is reported as "currently 30 days late", unless this is a frequent occurrence.

Debt Settlement

Initially, your credit score will take a hit from the debt settlement. The creditors may mark your accounts as settled or not paid as agreed. Some companies may take months to settle, in which case your payments will have been delinquent for those months. In addition, settled accounts will probably be closed by the creditor, and closing of credit lines causes a drop in your score. Length of credit history makes up 30 percent of your credit score. If the accounts that are settled and closed are old lines of credit, this could be a hit to your credit score. After the debt settlement your credit score may begin to rise because you will no longer have the delinquent payments on your report. The settled accounts will remain on your credit report for seven years. Debt settlement is harmful to your credit rating, but it allows you to start over and repair your credit for the future.

Foreclosure

A Foreclosure can seriously drop your credit score. Most traditional lenders will extend financing for another home after a foreclosure for as much as 12 - 24 months. The damaging effects of a foreclosure can start to be reversed after the 24 month period has elapsed. A foreclosure will usually stay on your credit for at least 7-10 years. You can ask your lender for creative alternatives to foreclosure and they will see if you qualify for any of their programs.

Bankruptcy

A bankruptcy mark on your credit report has one of the worst effects on your credit score. Your score can drop as much as 240 points. Since lenders look at your past ability to pay back your loans in order to determine your future ability to pay your debts, a bankruptcy note may make it difficult to find new lines of credit or get new loans. Chapter 7 Bankruptcy will be reported on your credit for as much as 10 years, and Chapter 13 Bankruptcy is allowed to be reported for seven years.

If you are suffering from bad credit you should work on repairing your credit as soon as possible. Just remember to be patient. Your credit score will improve monthly as you make your monthly payments on time and remove past due amounts. One of the biggest advantages of repairing your bad credit is being able to get lower interest rates and loans. Having good credit means you have more options available. Lenders view you as less of a credit risk and are more willing to give you betters terms and rates.

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