Top 5 ways to damage your credit — and by how much
We all know that we shouldn’t pay bills late or max out credit cards. We know it is damaging to our credit score.
But just how great a toll do these missteps take? Will the score drop 50 points or 10 if the bill is 30 days late? Bankruptcy is bad, sure, but just how bad? Until now, there was only speculation about the effects of common mistakes on credit scores. However, FICO is now revealing the story behind the numbers, taking away some of the mystery behind the three numbers that in many ways determine our financial power.
“I hope this information will help people to better understand FICO scores and the value for them of avoiding credit missteps. It illustrates key points such as the higher your score, the farther it can fall if you stumble,” says FICO spokesman Craig Watts. “Getting and maintaining a good score isn’t complicated. We all just need to pay our bills on time, keep credit card balances low and take on new debt sparingly. “
The five most damaging actions to ruin your credit score:
1. Maxing out a credit card
2. Skipping a payment
3. Settling a credit card debt
4. Losing a property to foreclosure
5. Filing for bankruptcy
MSN Money reporter Liz Pulliam Weston requested that FICO release details about specific actions, based on two examples:
- A person with a 780 score, which is an excellent score on the 300-to-850 FICO scale
- Someone with a 680 score
Read the complete details of the report here, as well as the specifics on how critical factors hurt credit scores. Of course, credit history and debt ratio, for instance, are also influencing factors.
Will knowing more about how damaging mistakes will be help people avoid them?
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11 comments Add your comment
Shan
December 1st, 2009
4:41 pm
As a young woman I can honestly say that I feel victim to maxing out my credit cards or missing a payment. Thankfully I paid off all of my accounts and currently have no credit card debt. If I could go back in time, I would never have applied for credit in the first place, but I do think that your post helps educate people about the importance of using credit wisely.
Catie
December 1st, 2009
5:42 pm
My credit score was lowered by about 20 points between this year and last. The difference: I got one card, limit 12K, and put everything on it I can (groceries, some bills, purchases) in order to get the “rewards” benefit offered by the card (which is 1% to 4%, depending on the retailer) into a 529 account. My balance never exceeds 5K and it is completely paid off every month; still, they say that because I use a significant proportion of available credit, it lowered the score. I have two other cards I never use (combined limit 28K), but still, my score took a hit.
Fin
December 2nd, 2009
2:04 am
@ Shan—I hear you. If I could only turn back the hands of time and not get some of the credit that I got as young man. These articles help, but how many teens do you think would read this. I think that there should be classes in high school that show students the downfalls of having bad credit. Another thing I think would be important would be to NOT ALLOW credit card companies on college campuses. I remember when I was at Georgia State, @ the beginning of the semester, and the first week after spring break when it was warm, all of the Credit card companies were on the plaza pulling students in.
Prootwadl
December 2nd, 2009
2:07 am
Credit scores… Who even cares anymore? Ever since I was laid off the last time, we’ve had to move across the country to find work and we’ve been swimming in debt, and I’m just happy we can continue to pay the bills. Anything above that is gravy, as far as I’m concerned.
bevers
December 2nd, 2009
10:27 am
I agree. High Schools should have a mandatory personal finance class that teaches about credit, insurance, and money management. People are so uneducated about it and so are their parents, obviously, so you cannot say it is the parents’ responsibility, because they need a class as well! High school should also make an automotive class mandatory so we all know how to change oil, tires, and can have some kind of knowledge when a mechanic is trying to rip you off. Knowledge is power! Keats is important and so is mitosis, but education should also involve the daily applications that really hit us in the pocket.Have a happy Wednesday!
Brad
December 2nd, 2009
10:32 am
I think we are moving into an era in which credit scores are of no consequence, as we shift from a society which values credit to a society which views credit as a liability. I have paid off my debt, and I plan to never owe another dime. A credit score means nothing to me.
DW
December 2nd, 2009
10:59 am
@BRAD.. That will never happen as credit is the life-blood of an economy. Things may be rosy for you right now, but think of credit as a nuclear option:: you may hope to never have to use it, but it sure is nice when you need it!
Tinytam
December 2nd, 2009
11:06 am
I went to a Dave Ramsey seminar and talked about paying off debt but I worried that doing so would harm my credit score. I’ve done a pretty good job of keeping my credit score high but worry about the day when I can’t make some payments or fall into the gray area where I’ll pay more for credit. I understand Brad’s comment entirely though. If you don’t have outstanding debt to worry about, who cares about a score.
Rita
December 2nd, 2009
12:44 pm
Oh, Brad, you’ve got it all wrong. Your credit score is not going away and you should definitely care if you have a blemished score. Your credit score can determine whether or not you get a job (financial related or not), insurance rates, even medical insurance. Unless your a member of the Billionaire’s Club, you better be concerned about your credit score now and in the distant future. This recession cannot be used as an excuse either. Just saying …
Ole Guy
December 2nd, 2009
12:51 pm
Catie’s got the right idea…pay it iff, in full, every month. Unfortunately, it seems almost a rite of passage for young adults to get into debt on credit card abuse, only to, at some point, “see the light” and get their act together. I would say the biggest hurdle to overcome is the “bandwagon effect”…the advertising gurus have their “tricks of the trade” refined so as to generate the feeling/the impulse that if one doesn’t purchase a service or product of some sort, than they will, somehow, miss the “boat of life”, that is, they will have missed the bandwagon…now what teen/young adult would wontanly and willfully do that…and in front of all their friends, much less? So don’t think of credit, and credit cards, as evil. As DW so-aptly pointed out, credit is like nuclear energy…control it; use it wisely and you’re good to go…allow it to get out of control and you’ve got problems.
Bevers has a good point on which I hold mixed feelings. Yes, I believe basic business and personal finance issues should be addressed in the early years. However, I’m not too sure if public high school is the place to do so. At this point in time, what with the woeful state of education, the schools hardly appear successful in teaching the basics, the “threeaarrs”. Unfortunately, many parents are, themselves, the products of the same stumbling education system and, in fact, may not be all-that savy on the issues themselves. I would think the school guidance personnel, in conjunction with home room (they still have such a thing, don’t they?) would be the best way to fit personal finance education into an all-too-short educational pipeline. Either way, though, Bevers is absolutely correct…KNOWLEDGE IS POWER. How you assimilate that knowledge is up to you. One thing today’s students, and students of recent vintage have (which my era did not have) is the computer (and Google). GOOD LUCK!
Paul
December 7th, 2009
3:09 pm
Unfortunately for some of us, or most of us, it is nearly impossible to not hurt our credit due to the economic crunch in this country, partly or mostly due to these banks and credit card institutions that play a big role in credit scores, etc.
How ironic.
-Paul
http://www.fortune3.com