When it comes to credit scores, it is not just what is delinquent that causes scores to be low, but also what credit as-a-whole contains. Besides your credit age, history, and mix, there is also debt. Before you go ahead and make guesses about what’s best for your credit, it’s important to educate yourself on the possible outcomes from your decisions.

Here are a few scenarios:

1. Having a young credit profile.

   One factor that is considered in your credit score is age. An individual with young accounts, less than two years old, will have lower scores than a person with accounts averaging 10 years old.  The older credit makes you a lower risk due to the long-term practice you gain from managing each account. Of course, even with aged accounts if you have poor pattern payments on your credit, the age will not outweigh the effect of the extreme late payments.

2. Limited variety in your credit mix.

   Another important component of strong credit is having a well-balanced number of accounts. Having a nice amount and variety of credit can add more points to your score once it becomes seasoned. It would be an asset over time to have revolving accounts and some type of installment credit, such as a car loan or lease, a student loan, or even a secured personal loan with your current bank. A mortgage also would be an asset since it is the hardest type of credit to gain approval for therefore adding more points to your score once seasoned.

3. Late payments on revolving and installment accounts.

   Having even one recent late payment can drop scores dramatically. This is especially true if you already had strong scores, this is because they have more room to fall. Someone with a 780-credit score could experience an 80 to 100 point decrease just by having one late payment. Even if you get the creditor to wave the late fee charged, it has nothing to do with your credit report. A late fee and late payments on credit are two entirely different things. They would have to agree to remove the derogatory information from your credit history and would need to contact the credit bureaus and request this change.

4. Carrying high credit card balances.

   Since having high debt ratios is, in many cases, a precursor to default, the score must reflect the risk level it brings. Owing too much money on credit cards can dramatically decrease your credit scores. If your balances are more than 7% of the card’s limit, your scores will start to drop. The closer the balance inches up to the limit, the more your score will fall. Credit scores are sensitive to individual balance-to-limit ratios, but even more sensitive to aggregate balance-to-limit ratios. Your scores will continue to drop until your balance comes down.

5. Closing old and healthy accounts because you do not use them.

   Closing revolving credit can reduce your aggregate limits. This can impact your balance to limit ratio because your total aggregate limit will decrease, altering your balance-to-limit ratio. For instance, if you had a total of $1000 as your aggregate limit and a balance of $200 you would be at 20% balance to limit ratio which cause a minimal reduction to your score. If you closed one account that had a limit of your aggregate limit would drop to $500, now the $200 balance would bring you to a 40% balance to limit ratio. Your scores will drop quite a bit, so you have limited your options. It is best to keep good accounts open, unless directed otherwise by a credit specialist. The higher your aggregate limits are on revolving credit the more balance you can keep without hurting your credit scores.  This allows you to use more credit if needed and have scores drop less when you do so. As long as you use each card once or twice a year they will remain open and help your credit.

6. Considering credit card debt settlement.

   Consider this scenario, you owe a bank money from a revolving account. The bank sold your debt to a collection agency who is now sending you debt settlement offers. What impact will the settlement have on your already damaged credit?

   When you stop paying a credit card and the account goes into default, eventually if the creditor fails to collect they will pass it on to a collection agency. These smaller firms either buy the debt at a discounted price or borrow the debt for a period with the incentive of gaining a commission when the payment is received – the latter is the case in this scenario. Since the debt is only borrowed they are highly motivated to collect payment before it is transferred. This debt can be passed on too many different collection agencies who all update the credit report negatively. As you can imagine, this will wreak havoc on your credit reports. If you pay a reduced amount as settlement on the account a IRS 1099 will be generated. Since you did borrow and use the money the IRS views the amount unpaid as income. This savings will be added to your income and taxed accordingly. If you are going to settle accounts for less than full balance doing it in a year when you have the greatest losses makes the most sense. As far as the credit goes, normally the collection agency will update the credit as “Paid Settlement” or “Paid for less than full balance”. This is not a positive note so your credit will be damaged, but truthfully your credit is poor already from the unpaid accounts so the damage might be less noticeable.

There are a number of factors that impact consumer credit profiles and each persons financial situation is so unique, it’s hard to predict how changes will impact your credit report.