There are a handful of financial missteps that can wreak havoc on your credit score, and in a hurry.
It pays to know what they are. Your all-important credit score is used to determine your eligibility for mortgages, car loans and credit cards, plus how high of an interest rate you’ll pay. Prospective landlords and employers can also pull your credit reports, which is what your credit score is derived from.
Below are missteps to avoid at all costs. The calculations are based on a person with a 680 FICO credit score, which is made by Fair Isaac and used by the majority of lenders.
1. Bankruptcy: If you're drowning in financial obligations and file for bankruptcy, know that the drastic financial move could lower your credit score by 120 to 130 points. It could also take as many as five years to recover from, according to Fair Isaac.
2. Foreclosure: Having your house foreclosed on is the second-worst thing for your credit score. Compared to the all-encompassing nature of bankruptcy, a foreclosure often involves just one account. Expect your score to fall by 105 to 125 points and be depressed for three years.
"Bankruptcies and foreclosures send the same message to lenders, which is that the individual is a tremendous risk," says Bruce McClary, vice president of public relations and communications at National Foundation for Credit Counseling. "It says the person had to walk away from a portion or all of their debt."
3. A 30-day delinquency: When you're 30 days late on a credit card or loan, you can look forward to a drop of 60 to 80 points. It's typically at the 30-day mark that this info gets routed onto your credit reports, where it generally stays for seven years.
4. Settling credit card debt: If you're behind on payments and perhaps facing bankruptcy, you might make a last-ditch attempt to negotiate your credit card debt. If you do succeed in having a portion of your debt dismissed, your score will still suffer, and could drop by 65 to 85 points. You'll also face income tax on the amount your debt was reduced by.
"The success rates are all over the map," says McClary of negotiating your debt. "It depends on how much you owe, the mood of the creditor and the direction the wind is blowing. You're taking the football and throwing a Hail Mary."
Continue paying your bills while you negotiate if you can, says McClary. If you put a halt to it figuring you'll get it reduced and don't, you'll dig yourself into a deeper hole and your credit score will suffer.
5. Maxing out a credit card: Charging as much as your credit limit will allow is less harmful than some other missteps, but could still push your score 10 to 30 points lower. Why? Because of something called your utilization ratio. Experts recommend spending no more than 30% of your credit limit, and less whenever possible. So If you have one credit card and the limit is $3,000, that means you should never have a balance that exceeds $900.
The repercussions from the above credit missteps are much more severe if you have a high credit score. For instance, if you're someone with a 780 credit score, declaring bankruptcy could shave as many as 240 points off your score. This puts you in the same league with someone who started out with a much lower score of 680. It will also take longer to recover.
"It goes back to the old adage: the bigger you are, the harder you fall," says McClary. "It's a huge shock to the system for people going through this." You might find you're unable to get a loan at all, when you're used to getting the best rates.
What you should remember if you've made financial missteps in the past is that hope is not lost and it's all the more important to be on your best behavior now. Keep your accounts in good standing and pay particular mind to making payments on time, since that comprises a whopping 30% of your score. Consider opening new credit accounts, like a credit card, to demonstrate responsible use of credit.
Credit scores from both FICO and VantageScore range from 300 to 850, with anything above 780 considered very good and anything below 600 considered fair to bad.
More from Forbes: 10 Things You Absolutely Need To Know About Your Credit
