At Last!! FICO Reveals How Much Late Payments and Bad Credit Reduce Your Credit Score

Have you ever wondered how late payments or other bad credit affects your credit score. We all know that bad credit does not help our credit score but do you know exactly how many points get shaved off your credit score because of different infractions such as a bankruptcy or a payment which is 30 days late?

Well now FICO the company that invest the FICO score has revealed how the process works. For years people have been trying to figure out this ancient scientific formula. No one could seem to get a handle on how this works. They have now laid out some groundwork that will help you determine how much your score goes down once because of adverse action on your credit file

It also turns out that the higher your credit score is the more points you lose. For example if someone has a credit score of 650 and someone else has a score of 750, and a payment is 30 days late the credit score of 750 will lose substantially more points.

As a review a credit score is what lenders use to determine your credit worthiness. They use this score which is an algorithm to determine the likelihood that you will default on a loan. A FICO score determines your level of risk. You always want to keep your score as high as possible. Credit scores or FICO scores range from 300 to 850.

So let's get some specifics. If you have credit cards and you max them out, taking them right up to the limit your scores can be damaged as a result because your credit usage is increasing. A credit score of 680 can drop anywhere from 10 to 30 points. A credit score of 780 will drop anywhere from 25 to 45 points which is substantial.

How about a payment that's received 30 days late? Your credit score of 680 will drop anywhere from 60 to 80 points because of one payment which is 30 days late. That is very significant. A credit score of 780 will drop 90 to 110 payments because of the same late payment. The higher they are the harder they fall.

When you settle a debt your score can take even a bigger hit. Many credit card companies allow you to settle your debts anywhere from 20 to 75 percent of the balance. There are many other problems with debt settlements. First of all if your forgiven debt is $600 or more you may have to report the debt as taxable income. Let's say you have a credit card balance of $8,000 and you settle with a credit card company for $5,000 that means $3,000 is forgiven. As long as the forgiven amount, which in this case is $3,000, is greater than $600 you may have to report that debt as taxable income. Two exclusions to this is if you are insolvent or bankrupt. A credit score of 680 will drop approximately 45 to 65 points because of a debt settlement and a credit score of 780 will drop 105 to 125 points.

Let's look at a foreclosure. Your score of 680 will drop 85 to 105 points a score of 780 drops 140 to 160 points. When you take hits like this on your credit score you may have to rebuild your credit using high cost credit cards which carry a number of fees, high interest rates, and annual fees. Some may have to be secured using your bank account as the security.

Last but not least, in fact it's the most, are bankruptcies. When you file a petition for bankruptcy your 680 credit score can drop anywhere from 130 to 150 points and a score of 780 drops anywhere from 220 to 240 points and that's a lot. Just imagine a score of 780 is reduced to 540.

Drops in your credit score can cause you to pay higher interest rates for mortgages, auto loans and credit cards. Your monthly payments for mortgages and auto loans will also increase significantly.

http://www.creditcards.com/credit-card-news/fico-credit-score-points-mistakes-1270.php