FICO scores are a credit rating system that was designed in the 1950's by Fair Isaac and Company to analyze a person's credit risk. The Daily Interest website says that credit scores can range from the low 300s to 850, which is perfect credit. People with good or excellent credit pay lower interest rates on home and automobile loans. There are a number of factors, however, that can cause you to lose points on your credit score.
High Credit Card Balances
According to the Credit Cards website, your debt should not exceed 30 percent of the available credit on your account. If you have a high balance on your credit cards, you might be viewed by a lender as being too deeply in debt to be able to handle another loan balance, or at a high risk of defaulting on a loan. This can cost points on your FICO score.
Late Payments
Late or missed payments can damage your credit score. According to David Ellis, a writer for CNN Money and the author of the July 2006 article "5 Ways to Destroy Your Credit," 35 percent of your credit score is based on your credit history, and missing even one payment can cause your score to drop dramatically.
Debt Settlement
Money Zine explains that debt settlement is an arrangement between you and your creditors that allows you to pay off a debt at a reduced amount. This arrangement can damage your credit rating because part of the arrangement often involves a negotiation period, and during this time the minimum monthly balance on the card is not being paid. The missed payments can damage your credit score.
Short Sale/Deed in Lieu
The short sale of a home or a deed in lieu of foreclosure can damage your credit as well. A short sale is an agreement between a debtor and a mortgage lender that allows you to sell your home for less than your purchase amount, while a deed in lieu is when you sign your house back over to your mortgage holder. Both of these options can harm your credit because there are usually missed payments involved in the process.
Bankruptcy
Bankruptcy is one of the most damaging things you can do to your credit report. A bankruptcy will relieve you of your credit card balances and many of your loan obligations, and the Mortgage Credit Problems website indicates that it will temporarily stop foreclosure procedures against your home. Your credit will suffer because of the payments that you miss during bankruptcy proceedings, as well as because of the bankruptcy itself.
Foreclosure
Having a bank foreclose on your home will severely damage your credit rating. In addition to the payments that you missed during foreclosure proceedings, the foreclosure itself will cause you to pay higher interest on credit. You will pay more interest on car loans, your credit cards and personal loans will have higher interest rates, and it might be several years before you are able to purchase another home, according to Mortgage Credit Problems.
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