A perfect FICO credit score is now 850. And anything between 740 and 850 is considered “Excellent.” That “Excellent” opens a lot of doors for consumers. They can get the lowest interest rates on loans for major purchases, such as homes and cars. They can get new credit easily. Their insurance rates are lower. They are considered better job applicants. In fact, some positions are out of reach if applicants have poor credit ratings.
Building a solid credit rating takes time and consistent responsible spending and making payments. Even for someone with consistent financial responsibility, however, one major mistake can turn a good credit report into a bad one very quickly. Here are the most common causes of a big plummet in a credit score.
Everyone has monthly bills with due dates. There are also extra fees when payments are late. Here are important things to remember when you are thinking about skipping payments or paying late.
- Many companies report late payments to the bureaus. While these do not cause big drops in credit scores, they will shave over points over time.
- Late/missed payments are usually those that go beyond 30 days after the due date. These are always reported and can take a huge bite out of a formerly good score. An average score, for example, is about 670. One mortgage payment that goes over 30 days late can lower a score as much as 150 points. An excellent score can go from 780 to 620.
- The number of points dropped due to a late/missing payment depends on upon other details of the overall credit report, such as maximized credit cards, which indicate that someone is heading for financial trouble.
Avoiding late or missed payments is critically important for anyone considering a major purchase in the near future. These issues stay on a report for 12 months, and the score goes back up very gradually. All other payment records must be perfect during that 12 months in order to get that score back up.
Other sacrifices must be made to keep all payments current. It may mean cutting back on all other purchases during a month in which things are financially tight. And, if you do online payments through your bank, set up alerts so you do not forget them.
If you think that credit bureaus do not have solid information about your income, think again. And they look very carefully about how much credit you are utilizing. There are red flags that will automatically lower your score:
- Once you go above 50 percent of your credit limit on your credit cards, your score will begin to drop — significantly.
- The more credit cards that are close to maximum, the lower your score will go.
- Once you get beyond 90 percent utilization, your score will drop into the 500s.
- Over-utilization will cause lenders to believe that you are wading into troubled financial waters and they will fear that you will not be able to make payments on a loan they give you. You may not get that new car loan.
To figure your utilization, simply divide your combined credit card balances by the combined credit limits. This will give you a percentage. Ideally, that percentage should be below 30 percent.
Credit limits are actually listed on the credit report, so if a potential lender pulls your credit report, he or she can easily see your utilization ratio. And it can be hard to get a mortgage loan if that percentage is high.
The best payment procedure if you have several cards is not to work on getting balances down to “0,” one at a time. The best strategy is to pay them down so that the utilization percentage falls below 30 percent on each one.
Zero utilization is also looked upon as a negative. If you have multiple credit cards with no balance, charge just a small amount on each one and then pay those balances in full when the bills come in. This kind of responsibility really pumps up that score.
People purchase vehicles for two purposes — for personal use or business use. And both individuals and businesses need vehicles and/or trucks that will be reliable for years to come. When these vehicles are financed, that loan immediately goes onto a credit report, and payment history is tracked every month.
If payments are missed for 90 days, the vehicle will be re-possessed. Re-possessions are all coded on a credit report. They begin with late payment reports, and each of those can lower a good score by as much as 100 points. Then, when the re-possession takes place, there can be another 100 points gone. And even then, it is not the end of a credit report problem. Here is what else may happen.
- The lender may sell the car at auction and get far less than you still owed on the car at the time of possession. You are then responsible for the balance. This can show up on your credit report as another “loan.”
- If you cannot pay the balance, which is usually demanded in full, the lender may then go to court and get a judgment against you. That is another hit on your score.
Generally, re-possessions and judgments stay on your credit report for seven years. Over that time, your score may increase gradually, in very small increments, so long as you are making all other payments on time. It is a long haul back from a re-possession, and you can plan on high insurance rates when and if you do manage to get another car. You are well-advised to contact your lender and try to re-finance your loan — most would rather do that then re-possess something they then have to sell off and go to court over.
Ouch, and double ouch! Other than bankruptcy, a home foreclosure is perhaps the worst thing on a credit report. Why? Because a lender stands to lose the most from this. More than from a default on a credit card or a car. Here are a few facts:
- Depending upon the initial credit score, a foreclosure can lower a score by more than 200 points.
- The lowering of your score will begin as soon as you are more than 30 days late; these late/missed payments continue to lower your score, and some foreclosures take as long as a year.
- The lender can also charge you for its legal fees, set this up as a new financial obligation and then turn that debt to a collection agency. This will also go on your report.
- The foreclosure will stay on your report for seven years
- You will be unable to get any credit at a decent interest rate for a long time to come.
Recovering from a foreclosure requires steady and solid commitment.
- If you have a car loan or other credit loans, make all payments on time — no exceptions.
- If you don’t have credit card debt, here is a good way to establish that debt with a good payment record. Get a pre-paid credit card from a bank. This means that you put an amount on the card up front and then can only charge the amount on the card. The debt will show up as a credit card on your credit report and show payment in full each month. This will begin to inch your score up
- About two years out from a foreclosure, you may be able to get credit, for a car loan for example, but expect to pay a high-interest rate.
In addition to credit card debt, car loans, and your mortgage, many people also have personal loans. These include loans taken out to make purchases, such as furniture or new appliances, student loans, etc. Such loans go into default when payments are not made for a period of 90 days. At that point, the lender will re-possess items and/or go to court to get a judgment.
This is a double whammy. First, you score drops a lot because you are over 90 days late; second, once that judgment is obtained, that goes onto your credit report as well.
- Defaults and judgments fall off after seven years
- Student loans never fall off. They are not even forgiven by a bankruptcy
Recovery is much the same as it is from a car re-possession or a foreclosure, and you should take the same steps as recommended above.
Credit bureaus do not like to see a bunch of credit cards, even if there are several with low or no balances. This situation will hurt your credit score, because it is understood that, should you experience financial stress, you have a lot of unused credit and could quickly run up balances.
Be cautious about the number of credit card accounts you open. Each one can lower your score just a bit. There is certainly the temptation when a retailer offers a card at the checkout lane with a nice discount on the current purchases. Resist this urge, even if you plan to pay off the entire balance. That credit sits on your report and, with a zero balance, can be seen as a negative.
Every time you close a credit card account, your score will take a small dip. And if a company closes the account, the hit will be a bit larger. The reasons are as follows:
- Credit bureaus don’t care or ask why an account has been closed. They can assume that you closed an account because you were worried about your finances.
- Likewise, credit bureaus will not ask a company why it closed your account. Usually, it is because of failure to use the card for a lengthy period of time.
To avoid taking these hits, charge a small amount on those cards you don’t normally use and pay off the entire balance. Do this every few months. This strategy can actually raise your score, because you look like a responsible borrower.