Can I Qualify with poor credit?
How negative items affect your credit score
The credit bureaus use your credit history to compute a "credit score." While the exact formula used to compute the score is secret, the score's developers have identified the following factors:
- Whether you pay your bills on time
- How much of your available credit you are using ("credit utilization")
- Age of your credit accounts
- Types of credit used
- Recent credit inquiries
Let's look at how negative items on your credit report can affect your credit score.
The most influential of the factors above is paying your bills on time. The FICO score creators performed a simulation a few years ago to determine the effect of "failure to pay" on a credit score. While the effect depends on one's starting score, the simulation showed that paying your mortgage 30 days late can drop your score between 80 and 110 points. A foreclosure may drop your score up to 160 points, and a bankruptcy a whopping 240 points.
It's important to note that once a negative item appears on your credit report, it stays there for seven years, 10 years for a bankruptcy. However, over time, the effects of negative items wane. The time to recover depends on the significance of the negative mark. In the FICO simulation, researchers found it took 9 months to 3 years for your score to recover from a mortgage late payment.
Remember that even the routine use of credit, such as opening a new credit card or closing an account, can have a temporary, negative effect on your scores, but experience suggests that this effect lasts only three to six months. In the case of opening a new credit account, if you currently have little credit, the positive effect of lower credit utilization can outweigh the negative after a couple months of on-time payments.