FICO Announces Damage Guidelines for Credit Mistakes
We All Make Mistakes
Almost everyone has had blemishes on his or her credit history at some point. In these tough economic times, this is more common than ever. Maybe you have had to let payments slip past 30 days or maxed out a credit card or two to bridge the gap between paychecks. Worse, you may have had to file bankruptcy or been foreclosed on. Whatever the situation, almost everyone has had to live through it, but at what cost?
How much do mistakes cost?
One of the problems many people encounter is that they do not know how bad a credit hit they will take with a given action. For example, people don’t know how much their score will drop if they delay payment for their car or mortgage. They might not know what kind of shape they will be in after a debt settlement in terms of their credit score. To make matters more confusing, it seems like the same mistakes hurt some people more than others. There appears to be no consistency and no way to predict the effects of a given action. Not having clear information makes it difficult for many people to make good decisions during difficult financial situations.
The air has cleared
Finally, FICO has shed some light for the public on just how their credit is affected by common credit mistakes. FICO has recently made public its guidelines for point reductions in credit scores for given offenses: bankruptcy, 30 day late payments, debt settlements, foreclosures, and maxing out credit cards, for example. The formula tends to hurt people with higher scores worse than those with lower scores. For example, if your credit score is 680 a maxed out credit card will cost you between 10 and 30 points. If your score is 780 the damage is between 25 and 45 points.
Big mistakes equal big reductions
As one would assume, the greater the problem the bigger the point reduction is from your credit score. Once again, the higher your score the more damage is done by the same mistakes. Among the largest reductions are foreclosure and bankruptcy. Foreclosure will deduct between 85 and 105 points if for a score of 680. If the score is 780 the foreclosure will cost between 140 and 160 points. Bankruptcy ratchets things up a notch with a 130-150 point reduction for a 680 score and 220-240 for a 780 score.
Settlements can cost you, too
Foreclosure and bankruptcy seem like obvious problems that would cost points on a score. One item that is a significant reduction that may not be so obvious is a debt settlement. People may think they are getting their finances together and making a positive move when they settle a debt for a percentage of the total. However, they may take a larger credit score hit than anticipated. FICO lists debt settlement as a 45-65 point deduction for a 680 score and a 105-125 point deduction for a 780 score; compare this to a 60-80 point and a 90-110 point deduction respectively for a 30 day late payment. At least now people can make an informed decision on whether or not to settle or continue to pay late.
Work hard to keep what you have
Looking at the penalties, one can see how important it is to keep good credit once you have it. The penalties are higher for better scores emphasizing the need to retain a high rating. The fall is precipitous, but the climb back up is longer and more arduous.