This isn’t quite the falling of the Berlin Wall, but in the credit scoring world, it’s close. Apparently, for the first time ever, FICO, the company that has its famed credit scoring model, has released details on how a financial goof-up actually affects your credit score.
First, before I go on, credit for making credit scores a little less mysterious goes to Liz Pulliam Weston, a prolific and well respected columnist with MSN Money. She asked FICO for details on how they determine how late fees, bankruptcies, foreclosures and so on affect one’s credit score, and they decided to actually be upfront about it. Or at least more upfront than they used to be.
Every time you make a financial mistake, these are known as “damage points.” And the higher credit score, the more points these mistakes will cost you, which is interesting. In other words, the slide descending into bad credit can be faster and more pronounced than someone already on their way down.
Some of the damages and points taken away include:
Maxed out credit card. If you had a 680 score, and suddenly your card is maxed out, you might see your score slide 10 points or even 30. But if you had a 780 score, you’ll drop a minimum of 25 and as much as 45 points.
But, OK, if you had a 780 score and now have 735, that’s still very good. No reason to worry too much yet. Unless, of course, you also are late on a 30-day credit card payment. You could then potentially lose 90 to 110 points, or perhaps not quite as much if we’re going with the idea that you now have 735 points instead of 780.
If you had a 680 credit score, and you’re late with a 30-day late payment, you can see your points plunge 60 to 80 points.
If you settle a debt, where you pay, say, $3,000 of a $10,000 debt, you’ll lose anywhere from 45 to 65 points (if you had a 680 credit score) and 105 to 125 points (if you had a 780 credit score).
Foreclosure — 85 to 105 points lost for the person who has or had a 680 credit score. And if you have a 780 credit score but suddenly wind up in foreclosure, you’ll lose 140 to 160 points.
Bankruptcy? Your 680 credit score will plunge 130 to 150 points, and your 780 credit score will drop 220 to 240 points.
But, obviously, and Weston makes this point or implies it: all of this should be taken with that proverbial grain of salt. Everyone’s credit histories are different.
For instance, I found myself thinking that few people who go into bankruptcy likely have a 780 credit score. Maybe some, especially those who find themselves in a scenario where suddenly they have a $100,000 debt to a hospital that they can’t pay, but most people, if you’re declaring bankruptcy, you’ve probably already had several — and maybe dozens — of late payments under your belt, not to mention debt settlements, maxed out credit cards and everything else imaginable. Which means your credit score is nowhere near 780 or 680 for that matter.
I’ve been pretty upfront when writing for WalletPop that I’ve had my own serious credit challenges over the years, and I can guarantee that if I had lost 60 points every time I was late a payment, I’d have wound up with a credit score in the negative numbers. But the lowest possible credit score is 350, and to the best of my knowledge, I’ve never been anywhere near there.
So these are general guidelines, but interesting and educational nonetheless. FICO has shown more clearly what we’ve suspected all along. If you’re considered a good credit risk, do everything you can to stay that way. One or two errors can really cost you.
Geoff Williams is a regular contributor to WalletPop, often writing about banking and credit issues. He is also the co-author of the upcoming book, “Living Well with Bad Credit.”