CNNMoney is reporting that Fair Isaac, the company that created the FICO
credit-scoring system, has finally released some numbers to indicate how
mortgage defaults and foreclosures may impact your credit score. The numbers
are based on two hypothetical borrowers, so they may vary from person-to-person.
the article, consumers with shorter credit histories and fewer open credit accounts
tend to be hit harder by negative marks on their credit reports. This
is because there is less good credit to pad a negative report.
The amount of damage that a delinquent mortgage or a
foreclosure does to a consumer's credit is also related to time. A prolonged period
of non-payment will have a greater impact on a credit score than a single
missed mortgage payment. Based on the Fair Isaac numbers, doing absolutely
nothing may be the worst possible decision a person could make.
A mortgage that is 30 days past due will generally cause a credit score
to drop by 40 to 110 points.
A mortgage that reaches 90 days past due will cause another dip of 70 to
A delinquent mortgage that resolves in a short sale, deed in lieu or a
foreclosure will shave off another 85 to 160 points.
A bankruptcy will cause a credit score to drop by 130 to 240 points.
Interestingly enough, filing a
bankruptcy before things get bad may represent a larger one-time reduction in credit
score, but also represents a lower overall reduction. Totalling up the
high end of the other three categories results in a 405 point drop in
an individual's credit score, 165 points more than the "worst
case" scenario for an individual filing for bankruptcy.
What the CNN article fails to note is that there are ways to rehabilitate
a damaged credit score. We have provided a handy guide that can be found
here. By far the best point that the article makes is one that cannot be repeated
enough: do not wait until things get bad. The longer you wait, the worse it gets.