We All Make Mistakes
Almost everyone has had blemishes on his or her ersonalmoneystore.com/moneyblog/2009/12/29/fico-announces-damage-guidelines-credit-mistakes/">credit history at some point. Since the recession began, it has become more common. Maybe you had to let a payments wait for 30 days, or maxed a credit card or two to float you between paychecks. You might have had to file for bankruptcy or been foreclosed on. Whatever happens, everyone has had to go through it, but what does it cost them?
How much do mistakes cost?
A lot of people have problems with not knowing consequences, or how bad credit ratings are hit by certain actions. For example, people don’t know how much their score will drop if they delay payment for their car or mortgage. They might be unaware of what will happen to their score after a debt settlement. As if that weren’t enough, 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 recently disclosed it’s guidelines for credit score deductions for certain actions – bankruptcy, 30 day late payments, debt settlements, foreclosures, and maxing out credit cards for instance. 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 you have a score of 780 – you lucky devil – 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. The higher your score is, the more damage is done by mistakes. Among the largest reductions are foreclosure and bankruptcy. Foreclosure will deduct between 85 and 105 points if for a score of 680. A person holding a score of 780 will lose between 140 and 160 points for foreclosure. Bankruptcy makes things worse, and a score of 680 will take a 130 – 150 hit, and a 780 score will have 220 to 240 points deducted.
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. They might take a bigger ding to the credit score than you’d think. 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 being higher for higher scores stress the need to keep a high score. The fall is hard and fast, but the climb back up is harder and longer.