How 5 Common Credit Blunders Hurt Your Credit Score

Everyone slips up with their credit once in a while. Maybe you switched banks and forgot to change your automatic monthly-payment settings. Or perhaps a more serious event -- such as a liability lawsuit, job loss or sudden illness -- forced you into filing for bankruptcy protection. But whether it’s a bonehead mistake or a genuine financial crisis, it’s going to dent your credit score.

Your credit score is the key to determining the rate of interest you’ll pay to borrow money from lenders. (Your score is also used for other purposes, such as determining your insurance premium or serving as part of a background check. But that’s fodder for another story.)

Since lenders use a variety of different credit-reporting companies to track credit scores, there’s no such thing as a “perfect score” — or, for that matter, a consistent number that all lenders use to separate people with good credit scores from those with poor credit histories. But recently credit-scoring company Fair, Isaac and Co., creator of the widely used FICO credit score, gave consumers a general idea of how common credit scoring mistakes can hurt your credit score.

FICO scores borrowers based on a numerical system between 300 and 850 -- the higher the number, the better the score. Fair Isaac said back in the mid-‘00s that the national median FICO score was 723. (It no longer calculates the median score, but with the recent economic downturn and widespread employment it’s very likely that number has decreased.) These days, you’ll generally need a score of 740 or higher to qualify for the best loan terms, and anything lower than the mid-600 range will push you into subprime loan territory (aka, loan shark rates).

Here are five examples of common credit mistakes, and the point damage done, according to Fair, Isaac:

One Late Payment (30 Days): Borrowers with a credit score of 780 or more will see their scores drop between 90 to 110 points for one late payment. If your score is 680, your score could drop between 60 to 80 points.

Maxed-Out Credit Line: If you reach the limit on just one of your credit cards, your score will drop by 25 to 45 points for someone with a score of 780. You’ll lose 10 to 30 points if your score is in the 680 range.

Debt Settlement: Now you’re getting into serious damage. You’ll shave 105 to 125 points off your 780 score with a debt settlement agreement, and between 45 to 65 points off a score of 680.

Foreclosure: If your score was 780 before the foreclosure, it will drop by 140 to 160 points afterward. A score of 680 will lose 85 to 105. With record numbers of people losing their homes in the last few years, this type of financial crisis has no doubt dragged down credit scoring averages nationwide.

Bankruptcy: This event will cause the most severe and lasting damage to your credit score. Borrowers with a credit score of 780 or more will see their scores drop between 220 and 240 points. If your score is 680, your score could drop between 130 to 150 points.

Fair, Isaac said that in general a person with a score of 780 has 10 credit accounts in total, or more, and a 15-year credit history; uses up to 25 percent of his or her total credit line; has never made a late payment; and has no negative events, such as collection accounts or judgments. The unfortunate fellow with the 680 score has six or fewer credit accounts and an eight-year credit history; uses up to 50% of his or her credit-card limits; has been 90 days late on an account at least two years ago; and was 30 days late on an account one year ago or less. (This booklet provides more details on how FICO scores are calculated.)

Remember, these are just general guidelines -- not all credit-tracking companies use the same scoring methods. Still, the data can help you figure out how badly your score will be impacted in the event you suffer a mishap in managing your debt.

Fair, Isaac introduced a new program to let consumers see their FICO score for "free" (there's a catch). By registering to receive your free FICO score, you’re also signing up for a 10-day trial membership for the company’s Score Watch credit-monitoring service. For the score to be truly free, you need to cancel your membership with that 10-day period, or you’ll be billed $12.95 a month thereafter.