FICO Announces New Damage Guidelines about 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?
What do mistakes cost you?
A lot of people have problems with not knowing consequences, or how bad credit ratings are hit by certain actions. For instance, a lot of people don't know the damage a late payment on the car or mortgage might do. 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. It looks like there isn't any consistency, and no predicting effects of an action. Not knowing the facts and so forth make it hard to make good decisions in hard times.
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 dings people with higher scores than those with low scores. For instance, a 680 score holder might get between 10 and 30 points taken off for a maxed out credit card. 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. 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. A significant deduction that isn't 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 precipitous, but the climb back up is longer and more arduous.
Tags: common credit mistakes, credit history, credit mistakes, FICO