Most people do not set out with the intention of harming their own credit scores. It’s not like you up one random Tuesday and think to yourself, “I would like to see what it takes to drop my credit scores by 100 points.” Bad credit is generally the result of either bad decisions or bad luck, rather than a strategic decision.
You don’t need to be a credit expert to know that bad credit can change your entire life, and not in a good way. If your credit scores were to drop by 100 points, which is much easier than you may believe, the impact would probably surprise you. Here is a hypothetical but very realistic look at exactly how a 100-point decrease in your credit scores could affect you.
Starting With a 750…
Meet Mary. Mary is 48 years old and established credit for the very first time about 20 years ago. She has a great habit of paying her bills on time, every single month. However, she does carry around $20,000 in outstanding credit card debt, without which her credit scores would be even higher.
For the sake of simplicity, let’s assume that all three of Mary’s credit scores are the same. Here is a look at Mary’s world with credit scores of 750:
Home – Mary owns a home that is currently on the market to be sold because she is looking to upgrade to a newer larger home. Her current 30-year mortgage on a $250,000 loan has an interest rate of 4%. This puts her monthly mortgage payment with escrow at $1,506.04 per month.
Vehicle – Mary’s current auto loan was extended by her local credit union for 5 years at 3% on a $30,000 vehicle. Her monthly auto payment is $539.06. That’s a great rate.
Credit Cards – Mary currently owes $20,000 in outstanding credit card debt. She has consolidated that debt onto a single credit card with 0% interest for 12 months. Her minimum monthly payment on the card is around $400.
…and Now at 650
Due to her extreme credit card indebtedness, Mary eventually overextends herself financially. When an unexpected car problem occurs she uses the money that she would have normally paid to her credit card and allows the account to become 90 days delinquent. She was able to bring the account current again with a financial bonus from work several months later and she believed that those three months she was late on the credit card would not have much of an impact on her otherwise clean credit reports.
Unfortunately, Mary was mistaken and the late payments on the credit card actually were a big deal where her credit scores were concerned. The 90 day late on that single account on her credit reports dropped her credit scores 100 points, down to 650 each. Here is a look at Mary’s world with credit scores of 650:
Home – Mary sold her original home and purchased a new one, taking out a $300,000 mortgage. She was still able to qualify for the new mortgage with her 650 credit scores, but not at the best interest rate available. Her new mortgage features a rate of 4.758% for 30 years versus the 3.934% rate she would have qualified for at 750 credit scores. As a result, her mortgage will cost her an extra $145 per month, $1,740 per year, and an extra $52,200 over the life of the loan.
Vehicle – Due to continuing car problems, Mary decided to trade her used vehicle in for a newer model. She took out a new auto loan for $35,000 at 5.5% versus the 3% rate she would have been eligible to receive if her credit scores were still at 750. Due to taking out a loan at a higher interest rate she will pay an extra $39.64 per month, $475.68 per year, and an extra $2,378.40 over the life of the loan.
Credit Cards – When Mary went severely delinquent on her credit card account she became ineligible for the 0% interest offer for which she had previously qualified. Her new interest rate was raised retroactively to around 30% due (formally referred to as the “default rate”) to her derogatory payment history. She also cannot qualify for another credit card with a 0% balance transfer option at this time due to her lower credit scores. As a result, her new monthly minimum payment would cost her an extra $200 per month and $2,400 per year. Additionally, if she continues to pay only the minimum payment on the card, it would cost her a total of $98,087.08 in interest over the life of the account to pay off the $20,000 balance.
The moral of the story…don’t ever do anything that will allow your credit scores to drop 100 points.
