“I’m going to play with my credit score a little.”
“WHAT?!? You’re just going to play around with it? Do you know how much impact your credit score can have on your life? Landlords, loans, employment, insurance rates. It is a huge deal and you’re just going to ‘play around’ with it?!? I thought you were more responsible than that. Your credit score is not something to be taken lightly!”
OK, so maybe you haven’t had that exact conversation. But I bet you’ve had something similar, whether it was handing over the keys to the car to your child, watching someone mess around with an expensive gift, or the like. When we see someone be seemingly irresponsible with something so important or valuable, we often can’t help but be protective of it.
Last night my son got a new remote control car. It’s a nice one. It goes fast. But in the confines of our living room (currently filled with a tree, gifts, nativity sets, and other breakables), that little car ran into a lot of things before he got it headed down the hall way. ‘Playing around’ with things is often a great way to learn and get better.
Did you know you can play around with your credit score?
Now, this is in no way an endorsement. I just happen to have a Credit Karma account and wanted to share something I’ve been playing around with. They have a credit simulator that, based on your current credit situation, can estimate what your credit score will do given certain (usually negative) situations. I played with it, and I was surprised by what I found.
Now, a bit of awareness for you. CreditKarma.com is a monitoring service. While free, it does not give you your full report. I just pulled my actual Equifax report and it printed out to 67 pages. CreditKarma is a summary. The credit score that CreditKarma gives you is not the FICO score that the vast majority of lenders use either. Instead, it is based on the Vantage Score model. It isn’t going to be the exact same, but should give you a pretty good idea of where you stand and what could happen. It’s a good way to monitor for any major changes.
So here’s the situation. I have a pretty good credit history and score. Watching my summary in CreditKarma, I have watched my score increase over time. One of the options that Credit Karma gives is their Score Simulator. You can choose to simulate certain credit events and they will show you an estimated impact on your credit score, so that’s what I did.
I played around with it and was very surprised by the results I got.
Were I to increase my credit card limits by a total of 1/3 of what I currently have, my score would go up 24 points. This isn’t terribly surprising since your score is based in part on your credit usage. The higher my credit limits (without using more of it), the lower my usage ratio and things look better.
Conversely, were I to close my oldest credit card (12 years old), my score would drop an estimated 20 points. Again looking at my credit usage ratio, closing a card would increase my ratio without spending a penny. But your score is also based in part on how long you have been able to keep accounts open. The older the account, the more responsible you look and the higher your score. If you close the account you lose that history.
Were I to let my home go into foreclosure, the CreditKarma simulator estimated my credit score would drop by 61 points. That’s a pretty good drop, and it should be since that is a large loan amount. That foreclosure stays on a credit report for the next 7 years (like nearly all negative events).
Now here’s where things get interesting…..
Let’s say life happens and for whatever reason I can’t make a payment. Eventually, a creditor is going to send your debt to a third-party collector. In the simulator, if I let one of my accounts go to collections, it estimated my credit score would drop by 68 points! That’s more impact than a foreclosure. I dare say it’s also much more common than foreclosure. The reality is that, in a foreclosure, the lender has collateral (your house) they get to take to make up for the loss. Most debts in collections don’t have any collateral and so their security in getting paid is much lower. Less likely to get paid means higher impact on your credit score.
But wait! THERE’S MORE!!!
I then simulated what would happen if I simply missed one payment on one of my accounts and let it go past due. No collections, no repossession. Just a ‘past due’. The Credit Karma simulator estimated the impact on my credit score to be a drop of a whopping 105 points! I cleared it out and tried again just to make sure. I got the same result.
Wow! Now that’s some harsh reality. What I would expect to be the most common negative event would have the harshest impact on my credit score. We don’t know exactly how they get to the numbers since, if they were to give that out, we wouldn’t need them to get our credit score. And I can’t say this will be the exact impact on my final credit score were it to actually happen. But even being in the ball park is enough to scare me into keeping everything current.
Financial crisis can force us to make some tough choices. In the course of our credit counseling, we generally encourage people to set debts with collateral as a priority when choosing which bills to pay. After all, a home is a need.
I also think people can be a little too flippant about being late on a payment or even letting it go to collections. “I’ve already got one bill in collections, so I’ll let this one go too so that I only have to make one payment to the collection agency instead of two payments to two different places.” But to get it to collections, you have to first let it go past due before they will send it to collections, compounding the impact on your credit score.
In short, those things that we assume are no big deal can have a big impact on our financial well-being. If you have to make some hard decisions, take time to look at the options and potential impact before committing yourself to a course of action, wherever you do your research. Know the long-term consequences and how they will impact your plans and goals.
If you would like some help working through your credit report and your options, the Center for Financial Resources can help. In a Credit Report Consultation, the counselor will pull your report (one that doesn’t affect your score), and educate you on what it says and what you can do to repair your credit. Remember, anything that can be done to fix your credit report, YOU CAN DO YOURSELF FOR FREE. We’ll just give you some education and direction to get you started.
So go ahead and play around with it. Just know the consequences of your choices.