Although not as unique as fingerprints or snowflakes, credit scores are highly individualized, and often one of your most valuable assets. Many factors determine your score, which can change overnight depending on everything from last month's credit card balances, to opening a new account, to applying for a car loan. To help explain -- and measure -- how credit scores are determined, it's important to understand the impact that certain negative actions can have on your credit score.
Are All Credit Scores the Same?
Credit scores are all very unique based on each person's individual situation, which makes it difficult to generalize. Take two people with excellent credit scores of 780 out of a possible 850. One might have a mortgage, several low-balance credit cards and a 20-year credit history. The other might have a dozen open accounts, hefty student loan balances and a car loan, but no mortgage. While they have the same score, they have very different circumstances.
What they probably have in common is a history of on-time payments, a low ratio of outstanding debt to available credit, and a cautious attitude toward taking on more debt. They likely have no major negative credit activity either, like late payments over 30 days, tax liens or bankruptcy, all of which can take a significant and long-lasting toll on your credit score.
How is My Score Impacted?
Actual point losses can vary widely depending on your individual situation. In general, certain actions and situations may lead to credit score point deductions:
- Exceeding a credit card limit
- Making late payments exceeding 30 days
- Entering a debt settlement agreement with a creditor
- Losing property to foreclosure
- Filing for bankruptcy
Why Do Credit Scores Matter?
The main reason to be concerned about a low credit score is it could hamper your ability to qualify for a loan or credit card. Also, it may result in lower credit limits, which could cause you to pay higher interest rates.
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