People ask, how much will a late payment affect my credit score? 100 points? 150 points? What effect will high utilization have on my credit score? The answer to all of these questions is that it depends.
The Fico scoring model is built to be able to match your credit file with the credit file of millions of other consumers and compare you with a group of consumers that have similar factors on their report.
For example, if you have 10 open accounts, with the oldest account being 10 years old and you had 3 late payments two years ago, Fico will match you up with a group of people that have such similar factors on their report and see statistically, how much percent of those people ended up defaulting on a loan. Your score will be calculated based on these percentages.
All these groups which Fico pre-grouped in their scoring models are called scorecards. Each Fico scoring model has about 10-12 different scorecards in which consumers are categorized.
Depending on which scorecard a consumer is, that’s how much of an effect a late payment will have on his/her credit score. For example, if you don’t have any previous late payments on your report and you have credit history for ten years, a first late payment will have a smaller effect on your credit score than someone who has a history of making late payments.
The same will be also true about the positive. Your credit score may go up a lot once your credit cards reach a year old or after you have opened your third credit card. That’s because the 12th month of the third credit card brought you in to be in a new scorecard and your score is now being calculated using the new scorecard model.
How to change yourself to a new scorecard
The Fico scoring model formula is 100% confidential, therefore any information on what exactly will change your scorecard is unknown. But these are some things that I recommend to change in order to trigger higher credit scores.
- Having 2-3 credit cards. If you don’t, then open new ones.
- Having at least one open installment loan.
- Having at least one credit card with a zero balance.
- Getting added as an authorized user to a credit card that is older than your own oldest credit card (for mortgage loans only).
- Lower your credit card balances to below 29% of your credit limit (it’s even better for it to be below 9%).
These are actions you can take immediately to change your scorecards to a better one. But in general, the longer you have credit and the more tradelines you have, and the better you manage your credit, you will slowly be pushed into better scorecards. And once you get into better scorecards then a single late payment (if god forbid it ever happens) will recover much faster due to you being in the higher scorecards.
If you have any questions regarding the fico scorecards please enter it below in the comments and I will respond.
What’s installment loans
Mortgages, auto loans, or any loan that has a fixed amount that needs to be paid every month