Credit Scoring Example
The negative impact of a financial misstep varies depending on each person's unique credit profile. Identical events (such as a single missed credit card payment) typically will have a greater impact for a person with a very high credit score than for person with a lower score. While each credit profile is unique, this example should help you understand what to expect if you experience a credit misstep.
From time to time, you may run into financial difficulties that impact your score. Some difficulties may change your score by a small amount; others can drop your score significantly. What your score was before the difficulty appeared on your credit report also can make a difference.
Here is a sample comparison of the impact that credit problems can have on the scores of two different people, Jeff and Michelle. First, let's give you a general snapshot of Jeff and Michelle’s credit profiles:
*Note that their initial FICO scores are 100 points apart.
|Jeff has a score of 680 and:||Michelle has a score of 780 and:|
|Has six credit accounts, including several active credit cards, an active auto loan, a mortgage, and a student loan.||Has ten credit accounts, including several active credit cards, an active auto loan, a mortgage and a student loan.|
|An eight-year credit history.||A fifteen-year credit history.|
|Moderate utilization on his credit card accounts (his balances are 40-50% of his limits).||Low utilization on her credit card accounts (her balances are 15-25% of her limits).|
|Two reported delinquencies: a 90-day delinquency two years ago on a credit card account, and an isolated 30-day delinquency on his auto loan a year ago.||Never has missed a payment on any credit obligation.|
|Has no accounts in collections and no adverse public records on file.||Has no adverse public records on file.|
Below is an example of how the scores may change if Jeff and Michelle max out a credit card, miss a payment, settle a credit card debt for less than the full balance, suffer a home foreclosure, or file for bankruptcy.
|Current FICO Score||680||780|
|Scores after one of these is added to the credit report:|
|Maxing out a credit card||650-670||735-755|
|A 30-day delinquency||600-620||670-690|
|Settling a credit card debt||615-635||655-675|
As you can see, maxing out a credit card has the smallest impact of these credit missteps. Declaring bankruptcy has the biggest impact to their scores. For someone like Michelle with a high score of 780, declaring bankruptcy could lower her score by as much as 240 points. That's because the scoring model generally gives the most weight to payment history when calculating the score, and bankruptcy is included in one's payment history. Also, a bankruptcy often involves more than one credit account, compared with a foreclosure which often involves just a single account.
Notice that Michelle would lose more points for each misstep than would Jeff, even though her score starts out 100 points higher. That's because Jeff’s lower score of 680 already reflects his riskier past behavior. So the addition of one more indicator of increased risk on his credit report is not quite as significant to his score as it is for Michelle.
NOTE: The information contained herein is for educational purposes only and is not legal advice. You should seek advice from a legal professional regarding your particular situation.
Source of information – www.myfico.com (Credit Education)