People wonder just how much a missed payment or bankruptcy is going to hurt their credit scores. Well FICO has produced a basic chart which estimates exactly how much consumers stand to lose as their debt starts to pile up.
Now while the formula that figures out your credit scores is guarded closer than the 11 herbs & spices in the Colonel’s Original Recipe, their approximations certainly shed light on exactly what’s dragging those scores down.
Breaking Down the Cause
While these aren’t the only reason your score is being held back, this is what FICO decided to list. The assumption is that all other negatives were not factored into this scoring model. Derogatory information such as collection accounts, public records and excessive inquiries were taken out of the equation.
Maxing Out Your Credit Cards – Most consumers don’t realize that high balances might lead to lower credit scores. This is because lenders might see the fact that you’re using all of your credit as a sign that you need it to survive financially.
Entering a Debt Settlement Program – This tends to be a Catch-22 since in reality you’re helping your finances by paying off outstanding balances through debt relief. However, depending on your situation, your score may drop a few points. Obviously not nearly as much as a bankruptcy, and not even as much as a missed monthly payment. This is also easy to offset if you can work out a pay for delete agreement which would remove negative accounts completely actually boosting your score in the process.
One Missed Monthly Payment – That right, just one missed payment to one of your credit cars, your mortgage, your car payment, can absolutely destroy your credit profile. If you started with a 680, and you drop to a 600, don’t expect to be approved until you get that score back up. Make sure you make all of your payments on time as this is the most common cause of low credit scores.
Home Foreclosure – Admittedly your credit score might be the furthest thing from your mind if you’re on the brink of foreclosure. But knowing that it’s going to be some time before you’re able to borrow money for another home should factor into your decision.
Filing for Bankruptcy – This is obviously a last resort. And if you’ve gotten to this point there’s a good chance you’ve been ruining your credit score anyway. The problem is that a bankruptcy is going to remain on your credit reports for up to ten years. When considering bankruptcy, make sure that you’ve exhausted all of your other options first.
Improving Your Score Isn’t as Easy
While one momentary slip up in your finances can ruin your credit score, it normally takes a lot of time and patience to build it back up. Factors such as the age of your credit history, or how many active, positive accounts you have open will play a role. Sometimes proper credit repair and debt relief can get you back on track with your finances.
However, don’t think it’s going to happen overnight. It takes a little bit of time and effort to get that credit score up. But knowing what to stay away from should help. And with some hard work you should be able to build and maintain a valuable credit score in no time.
