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Credit Missteps – How their effect on FICO scores vary

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You may run into financial difficulties that impact your FICO 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 comparison of the impact that credit problems can have on the FICO scores of two different people: Alex and Benecia. Note that their initial FICO scores are 100 points apart.

First, let’s give you a general snapshot of Alex’s and Benecia’s credit profiles:

Alex has a FICO score of 680 and: Benecia has a FICO 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
Alex Benecia
Current FICO score 680 780
Score after one of these is added to 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
Foreclosure 575-595 620-640
Bankruptcy 530-550 540-560

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 Benecia with a high FICO score of 780, declaring bankruptcy could lower her score by as much as 240 points. That’s because the FICO 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.

High scores can fall farther. Notice that Benecia would lose more points for each misstep than would Alex, even though her FICO score starts out 100 points higher. That’s because Alex’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 Benecia.

Settling a credit card debt is the third credit problem listed. It means that the lender agrees to accept less than the amount owed on the account. A settled account indicates a higher level of risk and typically happens only when an account is overdue. So in Benecia’s case, to help make the debt settlement plausible we also added a 30-day delinquency to her credit report. Her new score reflects both changes. Alex’s credit report already included a recent delinquency.

Are you more like Alex or Benecia? Many different combinations of information on a credit report can produce a FICO score of 680 or 780. Depending on what’s on your own credit report, your credit score experience may vary from that of Alex or Benecia. By taking a look at your own credit report and comparing it to the profile of Alex and Benecia, you might be able to learn what to expect if you happen to encounter a credit misstep.

3 ways for you to improve your own credit

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The process of self credit repair is a fairly straight forward and simple if you have the right plan to follow.  However if you go unprepared you may run the risk of failing or damaging your credit further.  The following three tips are proven methods that you can use to repair your credit yourself.

Tip #1 – The easiest way to raise your FICO score is to reduce your limit to balance ratios on your credit accounts.  The  magic number is 30%, this means that if you have a $5000 limit you want no more than $1500 on your balance.  Anytime you go over this ratio, your scores will begin to drop.  The fastest way to reduce your balance to limit ratio is either to pay down your balance or call the lender and ask for a credit line increase.

Tip #2 – Another credit repair tip that works is the piggyback method. To do this you need to find a close friend or relative that has great credit and a credit account that has a low balance to limit ratio.  Have them add you as an authorized user and this will help put a positive history onto your credit report.  Just remember that if your friend or family member suddenly starts missing payments,  it can reflect bad on your credit as well.  So be sure that the person you ask to help you with this method will retain a good credit score.

Tip #3 – Probably the best idea and one that still works great is to use a secured credit card.  This will give you some quick positive history on your credit report.  A secured credit works because it reports just like a regular credit card but is much easier to get.  Basically all you need is a job and the ability to repay the card.  To ensure they do not lose money, the lender holds a cash deposit that is equal to your credit limit in an account.  If you default on the account the lender can take the amount you owe from the deposit, but if you cancel the account or get upgraded to a unsecured account the deposit is refundable.

Just remember everyone’s situation is different.  Every tip may not work for every person, but using these tip can help improve your credit drastically, especially if you are in the market for home financing.  If you would like to speak to a Loan Officer regarding your credit for home financing  call 604-916-2321.

Credit Score Damage Points Clarified

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There was some misinformation floating around the web this week that FICO had revealed its damage points model for credit scoring. There were some hypothetical examples published by several sources that illustrated different score scenarios of negative credit events such as missing a payment, maxing out a credit card, filing for bankruptcy, ect.

Here is an excerpt from John Ulzheimer of in which he clarifies the FICO Damage Points subject:

According According to Craig Watts of FICO, the different score scenarios “aren’t meant to reflect every consumer experience” and that your own personal experience “could vary significantly.”

The ONLY way to determine the impact of changes on your FICO scores is to use their FICO Score Simulator tool that’s within the myFICO website. The downside is that you’d have to buy a credit report from them. The upside is that the score simulations will actually use your credit data and not data belonging to hypothetical consumers.

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