How a Change in Terms Affects a Credit Score

According to MyFico, your FICO credit score ranges from 300 on the lower end to a high of 850. The higher the score, the better your credit is considered to be. Lenders, landlords and even some employers check your credit score before doing business with you; therefore, it's beneficial to learn how a change in your credit terms affects your credit score.

Identification

Your FICO score contains five components. The first 35 percent of your score measures how well you pay your bills. Thirty percent reflects the amount of debt that you have. Another 15 percent is the length of your credit history. Ten percent is how much new credit you've recently applied for, and the remaining 10 percent measures the credit mix present on your report.

Significance

If you have credit cards, a change in your credit limit can negatively impact your score. If you have debt on the card and the lender lowers the credit limit to the amount of your debt, this decrease in available credit while having no corresponding decrease in debt on the card will make it appear as though you are maxed out on the card. According to Bankrate, a maxed-out credit card can lower your FICO score by as much as 45 points.

Considerations

When you have credit in the form of a credit card, for example, lenders are free, by law, to change the terms of that card and increase the amount of your minimum payment due on that debt as long as they give 45 days' written notice first. If you fail to make that increased payment on time, the late payment will appear on your credit report. Thirty-five percent of your FICO credit score measures how well you pay your bills. A late payment can drop you score anywhere from 60 to 110 points, according to Bankrate.

Warning

Some credit issuers reserve the right to increase your interest rate if you fail to honor the terms of your credit agreement, such as not making payments on time or after the expiration of an introductory rate offer. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 allows credit card issuers to raise your rate if you're more than 60 days late on a payment. An increase in the interest rate will lead to higher finance charges and thus, it will increase the amount of debt that you owe to that creditor. Your debt load is 35 percent of your credit score and if it increases, this can lower your score, depending upon the other factors present within your credit report.