I was surprised to read last week that one late payment could possibly lower my credit score by 100 points. How about collections and bankruptcies? Our bankruptcy, due to medical bills, was discharged a couple of years ago and we are working hard to rebuild our credit. It would help to understand how these items impact our credit score and for how long.
— Nancy, Grand Junction
These are great questions and people are always surprised when I mention the potential impact to their credit scores with a late payment.
A few years ago, FICO released information on how derogatory items impact your credit score. While there is still a lot of mystery surrounding the FICO scoring models, this information may answer some of your questions. The reason FICO shared this information was to help people better understand FICO scores and avoid items that have the greatest negative impact to your score.
When I snow ski with my nieces and nephews, I tend to ski a little slower since I have no desire to fall when possible. Maybe it's because I'm older, but I'm 6'3" and they are 5'+, so the taller the person the harder they will fall. The same applies for FICO scores since the higher your FICO score, the more your score will drop if a derogatory item shows up on your credit report.
How much the derogatory item impacts your credit score also depends on your overall credit. And your credit score can change daily depending on when your creditors report to the bureaus (Equifax, Experian, Trans Union). Most consumers are under the assumption that credit scores only change once a month, but the truth is that since different creditors report at different times of the month your scores can change with any new reporting.
According to Fair Isaac (FICO) here are how some common credit mistakes could affect your credit score:
A maxed-out credit card – if your credit score is 680 this could drop your score 10-30 points. If your credit score is 780 it could drop your score 25-45 points. (this is per credit card and a maxed-out card is any card where the balance is at 80 percent of its credit limit)
One 30-day late payment – at a 680 credit score it could drop your score 60-80 points. At 780 it could drop 90-110 points.
Debt settlement or collection – at a 680 credit score this could drop 45-65 points. At 780 it could drop 105-125 points.
Foreclosure – at a 680 credit score it could drop 85-105 points. At 780 it could drop 140-160 points.
Bankruptcy – at a 680 credit score it could drop 130-150 points. At 780 it could drop 220-240 points.
While these numbers are not set in stone, they give us better idea of what might happen if these actions occur. A person with several current late payments will take less of a hit by acquiring another late payment then a person with no late payments to begin with. Just as a person with several maxed-out credit cards will take less of a hit for having one more maxed out card then a person who suddenly has one maxed out card show up on their report.
The good news is that once any of these derogatory items are over 12 months old you will see less of an impact to your score. If you have re-established good payment history, your scores may be back to normal after 24 months from the date of the last derogatory item.
While credit scores continue to be shrouded in mystery, I hope this answered your questions. Plus, it sounds like you are on the right track to rebuild your credit after your bankruptcy..
Cherry Creek Mortgage