Simple Debt-Free Finance

A Simple Approach to Getting Out of Debt & Into Wealth

How Does Debt Settlement Affect Your Credit Score (And More!)

Posted on | December 6, 2009 |

If you’ve ever wondered how things like debt settlement and bankruptcy affect your credit score, look no further.

MSN Money’s Liz Pulliam Weston asked FICO how these and other negative finance moves actually affect your FICO score.

The results are surprising (at least to me). The FICO company (Fair Isaac) is not crazy about giving away too much of its secret formula that determines a person’s FICO score, so Ms. Weston had them respond to a hypothetical situation where two people were hit with the identical situations, but started with different scores. Here’s the result:

Credit score deductions

Effect on a 680 score Effect on a 780 score
Maxed-out card -10 to -30 -25 to -45
30-day late payment -60 to -80 -90 to -110
Debt Settlement -45 to -65 -105 to -125
Foreclosure -85 to -105 -140 to -160
Bankruptcy -130 to -150 -220 to -240

Source: FICO

As you can see, how much a given action affects your overall credit score depends in part on what your current score is. For example, a debt settlement or bankruptcy will hurt your score a lot more if you have a 780 than a 680 to start with. What’s not surprising is that the big events - bankruptcy, foreclosure and debt settlement - can all bring your score down in a big way, but the difference between scores is startling.

The higher your score, the more points you stand to lose from behavior that FICO deems as “bad”. This is one reason why a high credit score is hard to get and can be harder to keep. But that also means preferential treatment for higher scores is even more justified.

Another takeaway here is that when someone tells you that “debt settlement doesn’t hurt your credit score as much as you might think”, you may want to gauge that against your current credit score before accepting that as fact.

BONUS!

Since FICO doesn’t release their algorithm for determining your score, you may be wondering what your score is. Well, you can go to sites like MyFico and pay to find out, or you can head over to BankRate.com’s FICO estimation tool and get a general idea for free. ;-)

Bookmark and Share
Related Posts Related Websites
Category: Credit, Debt
Tags: > > > > >

Comments

2 Responses to “How Does Debt Settlement Affect Your Credit Score (And More!)”

  1. 4 Options For Bills In Collections.
    December 31st, 2009 @ 7:16 am

    [...] upside: It would eliminate the debt obligation completely. The downside: It would cause some damage to her credit history and she may need to hire an attorney, depending on what assets she may [...]

  2. credit blog
    February 5th, 2010 @ 6:34 pm

    The search engines helped me find your site. Glad i found it because i have learned a lot here. Thanks for all your work!

Leave a Reply





  • Search

  • Get Updates

    Subscribe in NewsGator Online
    Add to Technorati Favorites

  • Recent Comments

  • Tags

  • Contact

    If comments aren't enough, feel free to contact me at:

  • Frugal Hackers badgeMoney Hackers Network
    RSSMountain On our way to 1,000,000 rss feeds - millionrss.com Blog directory
    Investing Blog Directory RSS Search Blogged.com hihera.com

  • Blog Catalog Visitors

  • Disclaimer

    The information and opinions provided on this site do not constitute professional advice. This blog is intended to provide general information only about the author's own personal financial journey. While all information shared here is believed to be accurate, the owner/operator of this website specifically disclaims all warranties expressed, implied or statutory, regarding the accuracy, timeliness, and/or completeness of the information contained herein. You are advised to discuss your specific requirements with an independent financial adviser. All posts are © 2008-2011, Simple Debt Free Finance.

  • Unique visits since 2008:

  • ss_blog_claim=f34d742cbb91cfd8bb6b4f0e010113be ss_blog_claim=f34d742cbb91cfd8bb6b4f0e010113be

  • Useful Links: