Question

creditworthy scenarios
you are holding the keys to a brand-new car, longing for a cell phone upgrade and planning a trip to disney world. but wait … will doing these things affect your credit? determine how the scenarios below might impact your credit score. (remember—it can go up or down.) justify your reasoning and offer a solution to any negative impacts.

1. scenario 1:

you want to purchase a new vehicle and you have your heart set on a brand-new suv. you take out a loan to pay for the car, but after six months you begin to fall behind on payments and incur late fees.

• does your credit score go up or down? ____________
• why does it go up or down?

____________

• if your score goes down, how can you fix it?

____________

1. scenario 2:

you’ve been eager to buy a new cell phone for months, and now you’re ready to make it happen. you use your credit card to purchase the phone and you set up automatic billing to pay the monthly expenses. at the end of each month, you pay the credit card bill in full.

• does your credit score go up or down? ____________
• why does it go up or down?

____________

• if your score goes down, how can you fix it?

____________

Explanation:

Scenario 1

Does your credit score go up or down?

Down.

Why does it go up or down?

Falling behind on loan payments and incurring late fees shows a lack of responsible credit management. Payment history is a major factor in credit scoring (usually around 35% of a FICO score), so missed or late payments negatively impact this component, leading to a lower credit score.

If your score goes down, how can you fix it?

• Catch up on payments: Pay the overdue amount plus any late fees as soon as possible. Consistent on - time payments going forward will help rebuild the positive payment history over time.
• Negotiate with the lender: Contact the loan provider to see if they can offer a payment plan or waive some fees. This can help get back on track without further damaging the credit score.
• Monitor credit report: Regularly check the credit report for errors related to the late payments. If there are inaccuracies, dispute them with the credit bureaus.

Scenario 2

Does your credit score go up or down?

Up.

Why does it go up or down?

Using a credit card and paying the bill in full each month demonstrates responsible credit usage. Payment history (on - time payments) is improved, and credit utilization (the amount of credit used compared to the limit) is kept low (since the bill is paid in full). Both of these factors (payment history and credit utilization, which is around 30% of a FICO score) positively impact the credit score.

If your score goes down, how can you fix it?

In this scenario, the score goes up, so no fix is needed. However, to maintain or improve it further, continue to pay credit card bills in full and on time, keep credit utilization low, and avoid taking on unnecessary debt.

Answer:

Scenario 1

Does your credit score go up or down?

Down.

Why does it go up or down?

Falling behind on loan payments and incurring late fees shows a lack of responsible credit management. Payment history is a major factor in credit scoring (usually around 35% of a FICO score), so missed or late payments negatively impact this component, leading to a lower credit score.

If your score goes down, how can you fix it?

• Catch up on payments: Pay the overdue amount plus any late fees as soon as possible. Consistent on - time payments going forward will help rebuild the positive payment history over time.
• Negotiate with the lender: Contact the loan provider to see if they can offer a payment plan or waive some fees. This can help get back on track without further damaging the credit score.
• Monitor credit report: Regularly check the credit report for errors related to the late payments. If there are inaccuracies, dispute them with the credit bureaus.

Scenario 2

Does your credit score go up or down?

Up.

Why does it go up or down?

Using a credit card and paying the bill in full each month demonstrates responsible credit usage. Payment history (on - time payments) is improved, and credit utilization (the amount of credit used compared to the limit) is kept low (since the bill is paid in full). Both of these factors (payment history and credit utilization, which is around 30% of a FICO score) positively impact the credit score.

If your score goes down, how can you fix it?

In this scenario, the score goes up, so no fix is needed. However, to maintain or improve it further, continue to pay credit card bills in full and on time, keep credit utilization low, and avoid taking on unnecessary debt.