Hello everyone and thank you for tuning into Ask Abby, our live show where we answer all of your questions about credit, debt and your finances. We are waist-deep into our series on CREDIT SCORES. We have talked about the basics and done 2 full shows answering questions like; Why should you care about your credit score and How do you improve your credit score fast and quick.
This week, we have TWO great shows for you. Today we are talking about credit score specifics – answering the question: How much do certain actions affect your credit score? Someone asked this question during one of my last shows, so we are going to get this answered today. So, for example, if you close a credit card account, how many points will your score fall? If you pay your mortgage on time, how much will your score increase? These are all great questions and we have answers for you today, so don’t tune out.
But before we get into that, if you’re still thinking “why should I care about my credit score? Watch this video. Why should you care about your credit score? Here’s why: https://www.facebook.com/114214120221201/videos/666221233933527
Then come back, and let me know what you think, if I was able to convince you to care or why you still think it’s not important, I want to know! If you have no idea what a credit score is or how it works, watch this awesome video by Basic Finance: https://www.facebook.com/114214120221201/videos/297509481376175
Let’s dive into today’s topic and answer some pressing questions on EXACTLY how much each action your take or how each credit score factor affects your score.
5 major factors come into play when determining your credit score:
- Payment history
- Amount of debt (credit utilization ratio)
- Age of account or credit history
- Mix/types of accounts
- New credit inquiries
Today we are going to talk about the exacts of three of these, but if you have specific questions about how a certain action might affect you, make sure to throw it in the comment bar and I’ll get that answered!
Today we are going to talk about the exacts of three of these, but if you have specific questions about how a certain action might affect you, make sure to throw it in the comment bar and I’ll get that answered!
Payment history accounts for 35% of your credit score. Your creditors and lenders usually report to the credit bureaus every 30 days. So, the question is, how much will one late payment affect my score? Well of course, it depends. And it depends on a variety of factors.
- How long ago did the most recent late payment occur?
- How severe were the late payments (30 days, 60 days, charged off, etc.)?
- How many accounts on the credit report have had late payments?
So, while all of those are factors in this case, the weird part about all of this is, that the better your score is, the more your score will decrease due to the effects of something like a missed payment. For example, credit.com said that a FICO score of 780 could drop by 90 to 110 points due to a late payment.
That said, because a missed payment accounts for such a huge percentage of your score, other actions might not negatively or positively affect your score more than that. According to Vantage Score – a credit scoring model- payments are the #1 impacting factor, followed by credit utilization ratio, closing an account and lastly, applying for/opening an account.
So, while your score might not go up or down by an EXACT number of points with a late or on-time payment, you can assume that to increase your score to your started place will probably take about 9-12 months. Which means in the case of the person with a 780-score, they will increase by about 10-12 points for every month of on-time payments if you’re trying to repair.
The next factor that really affects your score is your credit utilization ratio. So, let’s say that you have a maxed-out card. What effect does that have on your score every month and if you pay it off, how much will your score change?
Well, credit utilization accounts for 30% of your overall score, which means that it has about as much effect as your payment history. So, if you have a maxed-out card, that means your credit card utilization is at least 100%. The magic number for credit utilization is 30% or lower. So, if you have a credit card with a limit of $1000 and you pay off $700, your credit score will increase – assuming that all of your other accounts are in good standing or moving in the right direction.
In a particular study, someone had a maxed-out credit card with a balance $3600 in October. By December, they paid off the account and their credit score increase by 42 points. They still have a fairly significant balance on one of their other cards, in fact, had increased that balance a bit and were still able to improve their score by focusing on that one card with the highest credit utilization rate.
As you can probably see by now, the calculation of your credit score is very circumstantial. If you’re wondering exactly how some of this will affect you based on your credit score, Credit Karma has a really cool free tool that will take your credit report into account and give you options to simulate these different articles. Credit score simulator tool: https://www.creditkarma.com/tools/credit-score-simulator
Paying off debt to improve y our credit score is much easier said than done and I get that. So, if you’re looking at your total debt, facing a layoff or furlough, and realizing you’re not in a position to just start paying down your cards, Credit and Debt has free credit and debt coaching available. If you call us, our coaches will talk through your situation, work to understand your exact circumstance, and then lay out some options for you. We have different programs available and will explain in detail how each of them works and walk you through the process and how your credit score can improve and your debt can be reduced.
- Call our coaches at 866-250-6624 or go to creditanddebt.org to learn about our free credit and debt coaching.
If you’re just curious about how you can improve your finances, go to our site and sign up to be one of the first people to be notified when our platform goes live! You’ll be able to sync your accounts and use some awesome tools that you can’t find anywhere else. The tool basically gives you all the benefits of coaching without taking the time to make a call if you’re too busy! The best part? If you end up having questions, our coaches are all available.
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Another factor that will change your credit score measurably is applying for new credit. This factor only accounts for about 10% of your total score, but it’s still something to watch out for. If you’re applying for a credit card, your score will likely drop by about 5 or 10 points. In the case of credit card applications, sometimes your score will decrease even less than 10 points but sometimes more like if you have a lot of other recent inquiries (1 year or less). If you’re new to building credit, a hard inquiry can affect your score more, but don’t be discouraged! It will still bounce back.
It takes 2 years for a hard inquiry to fall off your report and there’s nothing you can do to speed up that process. But, if you are keeping an eye on the amount your score dropped after a hard inquiry, it usually only takes about 3-6 months for your score to bounce back. The big question is: let’s say you had 6 hard inquiries this year for just credit cards– which can be a big red flag on your report – in 2 years, when those fall off your report, how much will your score go up? The short answer in this case is, it probably (and hopefully) won’t. Why do I say hopefully? Because usually, hard inquiries have less effect on your score the longer they are on your report. So hopefully, by the time they drop off after two years, your score has already fully recovered. Ultimately, the bigger factors after about 1 year fall back to your payment history and credit utilization and credit history. If you rack up major balances on those 6 new credit cards, your score will go down. If you utilize your cards under the magic 30% number and keep them paid off, your score will increase. Keep in mind, this example is just relative to credit card inquiries, home loans, personal loans and auto loans are another topic that we will talk about!
So, we only talked about those three main factors today in regards to how actions relative to each of them affect your score. Just to summarize, if you have a late payment but then continue to make payments on time from there, your score will increase by about 10-12 points for every month of on-time payments. If you decrease your credit utilization ratio significantly by paying off a maxed-out card, your score could increase dozens of points! Remember that magic number is 30% for credit utilization. And lastly, your hard inquiries for credit cards, which are much easier to keep a handle on, can decrease your score by about 5-10 points each time, so just make sure to keep track of those and try to avoid applying for more than 2 cards per year!
That’s our show today guys. I hope I answer some pressing questions about credit score factors but if you still have questions, please don’t hesitate to ask! You can post a comment on this post or email me directly at askabby@newsite.dev.creditanddebt.org. Please share this video because I have gotten so many questions about this topic. And take just 1 second to punch that thumbs up button! Lastly, don’t forget to tune in on Friday for our Ask Abby special feature going out to all those college students out there. Thank you again for watching – see you soon!