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The exact formula that Fair Isaac Company (FICO) uses to determine your credit score is largely a mystery, although credit experts and financial advisers can provide some clues. What makes it even more confusing is that different factors are weighed differently for each individual.
But we do know that on-time payments of your credit cards (revolving debt) and installment loans (mortgages, car loans, etc.) greatly impact your credit score. If you pay late, your credit score will take a hit, and the later you pay, the more points you’ll lose.
If you default on a loan or declare bankruptcy, the black mark stays on your credit report and impacts your credit score for seven to 10 years.
Just how badly does a foreclosure affect your credit score? Can you get other credit following a foreclosure? Another mortgage? Most importantly, what other options are available if you can’t make your monthly mortgage payments, and are they better or worse than a foreclosure?
The Points According to Fair Isaac
Fair Isaac recently shed some light on the deep, dark mystery of credit score calculations and, in an article at CNNMoney.com, provided average figures on the damage you can expect to your credit score if you experience a foreclosure.
Here are the credit score basics for missed mortgages payments and foreclosure. If you are…
- 30 days late… you lose 40 – 110 points
- 90 days late… you lose 70 – 135 points
- in foreclosure… you lose 85 – 160 points
- in bankruptcy… you lose 130 – 240 points
What? Do these numbers make you even more confused? How can someone lose as many points for being 30 days late as for a foreclosure? It all depends on other credit factors.
For someone with a long, established credit history, a 30-day late payment on a well-established mortgage is just a blip. However, higher scores are also hit harder by any sort of late payment. A single late payment for someone with an excellent credit score of 780 or above could put them down in the “good-to-excellent” range with a 100-point loss.
Someone who has a mid-range score of 600, however, may only lose 50 points for the same late payment, but it will put them into a category that shows them as a much greater financial risk. In other words, your score will drop less, but it will put you in a worse position to get new credit.
The interesting thing about the CNNMoney charts is that, in the end, after missed payments of 30 days, 90 days, foreclosure, and an eventual bankruptcy, both borrowers ended up with about the same credit score — between 530 and 560.
Short Sale or Deed-in-Lieu of Foreclosure
If your home is about to be foreclosed on, you do have other options. Unfortunately, both a short sale or deed-in-lieu of foreclosure will impact your score about the same as a foreclosure. Once accounts are 90 days behind, lenders know their odds of recuperating that money is very slim, so late payments of more than 90 days do the most damage to your credit score.
In a short sale, the house is sold for less than the money owed and the bank forgives the difference. In a deed-in-lieu the borrower gives back the property and the bank forgives the rest of the mortgage. Both of these are treated as “partial payments” and impact your credit score badly — but not as badly as a foreclosure.
Find Out More
Want to know how late mortgage payments or a foreclosure are likely to affect your score? CreditKarma.com offers a free credit score simulator that will let you experiment on screen with different scenarios.
If you subscribe to a credit monitoring service like MyFico.com, you can also use their online credit score simulator.
What To Do If You Face Foreclosure
If you can’t make your monthly mortgage payments, it’s tempting to just ignore the problem until foreclosure becomes the only option. But you can work with your creditors, or receive free credit counseling through the National Foundation for Credit Counseling.
If you can’t make your payments, your credit score will be affected, but by moving forward quickly, you can start to rebuild your credit sooner.