5 ways to kill your credit scores!

One of the questions I’m asked most often about credit scores is exactly how much certain actions affect people’s scores.

Until only recently, the best I could do was say, “It depends.” That’s because the company that created the leading credit score, the FICO, has been wary about releasing specifics.

Fortunately, that recently changed. For the first time, the company (also known as FICO) has released details about how specific actions, from maxing out a credit card to filing for bankruptcy, can affect people with different credit scores.

The company computed the results of those actions for two examples: a person with a 780 score, which is an excellent score on the 300-to-850 FICO scale, and someone with a 680 score. The results:

Maxed-out card: -10 to -30 on a 680 score, -25 to -45 on a 780 score

30-day late payment: -60 to -80 on a 680 score, -90 to -110 on a 780 score

Debt settlement: -45 to -65 on a 680 score, -105 to -125 on a 780 score

Foreclosure: -85 to -105 on a 680 score, -140 to -160 on a 780 score

Bankruptcy: -130 to -150 on a 680 score, -220 to -240 on a 780 score

The results are given in a range because FICO is still a little nervous about revealing too much about its proprietary scoring. But the range is fairly tight, and we can clearly see the disparate impacts of the different actions.

A guide, not a guarantee

Before we go further, I have to make this clear:

Your mileage may vary.

People with the same credit score can have very different credit profiles: more or fewer accounts, a different mix of accounts, a longer or shorter credit history, use of more or less of their available credit, etc.

Because of those differences, the same action – maxing out a card, say – can have different effects on people with the same score, depending on the details of their individual credit profiles.

For the sake of this exercise, FICO assumed both people had several active major credit cards as well as a mortgage, a car loan and student loans.

Maxing out a credit card
Using 100 percent of your limit on any credit card puts you at risk of over-limit fees. It also takes a bite out of your credit score.

Our person with the 680 score might lose 10 to 30 points from this one action, while the 780 scorer could shed 25 to 45 points.

The difference points out an important fact: The higher your score, the more points you tend to lose from “bad” actions. That’s because the scoring formula is sensitive to any sign you’re getting in over your head. Maxing out a credit card is considered one of those signs.

You also should know that it typically doesn’t matter to the formula if you carry a balance or pay off that maxed-out card as soon as you get your statement. What’s usually reported to the credit bureaus is the balance on your last statement. Even if you pay the debt in full before the due date, the maxed-out card will hurt your score.

Skipping a payment
Mailing a payment a few days late normally won’t hurt your score, although you may incur late fees and trigger higher interest rates. The big hurt comes when you miss a payment cycle entirely.

A 30-day-late report would shave 60 to 80 points from our lower-scoring person and 90 to 110 points from our higher scorer. In other words, one lapse of attention could plunge the 680-scorer into subprime credit territory, and our 780-scorer could find credit much harder to get and more expensive.

This is why it’s so important to set up automatic payments to ensure your bills get paid on time, all the time. With credit cards, you can set up automatic payments that take the minimum payment out of your checking account to ward against a late payment. You can always make a second payment that reduces your debt or pays it off entirely. You can sign up for automatic payments on the Web site of your card issuer.

Finally, if you have any of these black marks on your record, remember two things: The impact on your score may differ from what’s shown above, and regardless of how many points you lost, you can rebuild your Credit score over time.

You can buy your Equifax score from www.Equifax.ca

In general, when you’re trying to build a credit score, you should:

Pay your bills on time, all the time.

Reduce your credit utilization; below 50 percent is good, below 30 percent is better.

Have a mix of credit on your reports, including installment loans (mortgages, auto loans and personal loans) and revolving accounts (credit cards and lines of credit).

Refrain from closing accounts.

Apply for new credit sparingly.

Mark Fidgett is a Vancouver mortgage broker and the driver behind www.NotaPennyDown.com

Your Vancouver Mortgage Broker For Life


P.S. Who’s the next person you know who wants to save thousands off their mortgage? Be sure to give me a call so we can help them! 604-273-2002

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