A credit score is your financial identity – it notifies 3rd parties (usually banks and credit card companies) how fiscally responsible you have been in the past which, in turn, gives them an idea as to how responsible you will be in the future. Banks and credit card companies have an enormous amount of customers, all which carry with them varying levels of risk. So how do they sort through them and discriminate via higher and lower interest rates? They check your credit score.
Banks and credit card companies make a simple calculation when they offer you a loan or a credit limit. The rate that you receive is inversely related to your credit score – the higher your score the lower your rate and vice versa. This is because when you don’t make payments on time to banks or credit card companies they must put in man hours to collect from you and, under special circumstances, they have to hire a collection agency to collect your money. The more it costs them, the more it will cost you to borrow money. On the other hand, those with high credit scores have shown that they are fiscally responsible and will most likely make payments on time; the bank will not have to put in time to collect from them, which lowers their burden and thus, lowers the amount of the customer’s payments as well.
Unfortunately, many people are unaware of what affects their credit score. Then, all of a sudden they are hit with high interest rates when they try to get a loan or a credit card and are quite surprised. So what are the biggest things that can kill your credit score? Check out the following credit events, as I will call them and make sure you are aware of how dangerous they can be with regards to your credit score.
Foreclosure
Foreclosure is one of the most significant credit events that can kill your credit score. After a foreclosure your credit score will most likely drop quickly, which will make it very difficult for you to get any type of financing at a low rate; foreclosures can result in a loss of anywhere between 80 and 160 points. Essentially, a foreclose leaves a warning sign on your credit report that is not missed by anyone considering you for financing.
Making late payments on your credit card debt
Making late payment on your credit card debt would seem to most people to be alright – not a credit score killer at the very least. However, for a person with a credit score of at least 750, a late payment could drop their credit score to a meager 650. Someone with a history of late payments, under the same circumstance, would expect to see a drop between 60 and 80 points.
Settling a debt for less than what you previously owed
There are many debt consolidation commercials on the air right now, a lot of which can actually help you lower your debts but most of which will probably lower your credit score in the process. Reducing the amount you pay on a debt will help you in the short term but in the long term your credit score will suffer.
Maxing out a credit card
Spending up to and even over your credit limit could leave you with a much lower credit score. Banks want to lend money to people who are not so volatile with their spending habits; try and keep the spending under your limit for your credit score’s sake!
