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Disclosed for the 1st time, 'damage points' taken off for late payments
Borrowers
already knew that late payments hurt their credit scores, but for the
first time, they now know the extent of that damage.
Did
you max out your credit card? Expect a credit score drop of 10 to 45
points. Declare bankruptcy? Your score will plummet by up to 240
points, and your odds of getting credit will nosedive with it.
The
"damage points" data, unveiled recently by FICO, are part of the most
revealing glimpse into the firm's once-secret -- and still mysterious
-- credit scoring model. The new information discloses how many points
borrowers' scores will drop when they make the most-common mistakes.
'Help People Understand' Scores
"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
greater transparency about FICO scores is important because American
consumers' ability to get credit rises and falls with the number. FICO,
the company that pioneered credit scoring, assigns consumers a
three-digit number from 300 to 850, depending on how well they handle
credit. Other companies also offer scores, but FICO's version is the
most widely used by lenders in determining whether a consumer can
borrow, and at what rate.
FICO's credit score has been around for
decades, but only within the past decade have consumers gradually
gained access to theirs. Though the raw numbers can be purchased, how
they're figured remains a FICO secret, as closely guarded as the
formula for Coca-Cola. Until Thursday, FICO revealed only broad
categories of factors influencing the score, but not the number of
points at stake for consumers who fail to pay as agreed. The "damage
points" information, revealed in a report by personal finance writer
Liz Pulliam Weston, will be made available through its myFICO.com Web
site starting this weekend.
FICO's information shows that
bankruptcy does the most serious damage to a credit score (up to 240
points), followed by foreclosure (up to 160 points) while maxing out a
credit card has the least numerical impact (as few as 10 points).
Those
with good or excellent credit -- so-called prime borrowers -- put more
points at risk with each mistake. For example, someone with an average
credit score of 680 who pays a bill 30 days late will see a drop of 60
to 80 points. But for someone with an excellent credit score -- 780 --
that same delinquency can send a FICO score tumbling by 90 to 100
points.
The Cost in Dollars
In order to
show just how badly a drop in your FICO score can hurt your wallet, we
spoke with members of the home mortgage, auto and credit card lending
industries. We presented hypothetical scenarios of a consumer who
decided to apply for a $200,000, 30-year mortgage; a $20,000, five-year
auto loan and a credit card. While all the industry insiders stressed
that a FICO score isn't the only factor in determining who gets credit
and at what cost (other factors they cited include the borrower's
debt-to-income ratio and whether they have already established a
relationship with the lender), they were able to provide an idea of
what a borrower who had the following credit scores could expect.
For a Consumer Who Started With a FICO Score of 780:
- Following
a 30-day late payment, the consumer's car loan rate would jump nearly 3
percent, costing the borrower $26 more each month.
- Following a debt settlement, the consumer would pay as much as $109 more each month on a home mortgage.
For a Consumer Who Started With a FICO Score of 680:
- Following a 30-day late payment, the consumer would pay $41 more each month for a car loan.
- Following a 30-day late payment, the consumer would pay as much as $95 more each month on a home mortgage.
- Following a debt settlement, the consumer would no longer qualify for a credit card.
Some Surprised By the Details
Consumer
advocates say it's important for borrowers to know what can damage
their FICO scores. "If they know it in advance, they won't go out and
step in a pile of doo-doo. They won't go out and do some of these
things," says Linda Sherry, director of national priorities with
advocacy group Consumer Action. Even experts found some surprises in
today's news. "FICO imposes bigger hits than I would have thought for
being maxed out or 30-days late just once, reinforcing my view that it
is a cruder, blunter instrument than they like to claim. Nevertheless,
it is a powerful, widely used crude blunt instrument," says Ed
Mierzwinski, consumer program director for the U.S. PIRG consumer
advocacy group.
Of course, knowing the impact on a FICO score and
actually avoiding these mistakes are two separate things: Amid rising
unemployment and other daily financial struggles, paying bills and
staying on-track financially becomes a much bigger challenge for many
borrowers.
"Some of these things are out of their control," Sherry says of consumers.
Additionally,
as Weston points out, consumers with identical FICO scores can have
different credit histories. That means the same slip-up -- such as
maxing out a credit card -- could have different impacts on consumers
who have the same FICO score. In the examples they provided, FICO
assumed each borrower had several active major credit cards, a
mortgage, car loan and student loans.
Sherry acknowledges the
benefit of putting a number to a financial blunder. "I don't think we
necessarily knew the numbers that a bankruptcy could apply to a credit
score," Sherry says.
Helping You Make Better Decisions
While
knowing the numbers may not keep you filing for bankruptcy if given no
other choice, the information may help you make the best decision when
faced with a bad situation.
FICO scores -- and the access to
credit they provide -- are a valuable asset to consumers and supply a
safety net when incomes are stretched. It's an asset that needs to be
protected, Sherry says, even if job loss or catastrophic illness makes
bill paying problematic.
"In that period of time, paying down
debt is the last thing on your mind. Paying the minimum payment may
also be the last thing on your mind, but you'll be doing yourself a big
favor if you do," Sherry says.