The following information appeared in the Wall Street Journal April 9-10, 2011:
Don’t underestimate the harm that even one missed mortgage can do to your credit score. The severe consequences underscore that you shouldn’t shrug off even an accidentally missed payment. Instead, you should pay it and call the lender right away, begging forgiveness before it mars your credit record.
Being 30 days late on a house payment—even if it is an accident—can knock 100 points off a pristine 780 credit score, moving you from qualifying for the very best interest rates to the edge of subprime territory. The actual numerical drop is less severe if your starting credit score is 720 or 680, but the impact is greater, since your new score is likely to sink to a level where new credit is hard to get and very expensive.
FICO scores range from a low of 300 to 850, with scores of about 750 or higher generally qualifying for the best loan terms. FICO says a foreclosure or short sale where the size of the unpaid balance is reported are equally devastating to a good or excellent credit score, reducing it by as much as 150 points, to the high 500s or low 600s.
Recovering your original score takes about seven years. That also is how long the information stays on your credit report, where insurers and potential employers can see it. Returning to a mediocre 680 score may take only three years. Here are some other lessons from the FICO data:
Credit scores are intended to measure the risk that you won’t repay a current or future debt. So your careful payments over many years translate into a higher starting score. However, your score takes a major hit when you are 30 days late on a payment, falling 70 to 100 points.
The best way to rebuild a damaged credit score, ironically, is to use credit. “Avoiding borrowing altogether means you’ve frozen your credit history in a negative state,” says Maxine Sweet, Vice President of Public Education for credit bureau Experian. “You will be better off using a credit card judiciously and paying it off promptly, adding good-behavior points to your record.”
A person with a 620 score would pay almost 12% interest on a four-year $25,000 car loan, compared with less than 5% for someone with a 780 score—a difference of almost $4,000 over the life of the loan. On a 30-year fixed-rate $250,000 mortgage, a person with a 620 score might qualify for a 6% rate, but probably wouldn’t be able to get mortgage insurance, which is required if your down payment less than 20%. A person with excellent credit might land a rate less than 5% and pay about $3,000 a year less.
How to Wreck Your Credit Score
The following information appeared in the Wall Street Journal April 9-10, 2011:
Don’t underestimate the harm that even one missed mortgage can do to your credit score. The severe consequences underscore that you shouldn’t shrug off even an accidentally missed payment. Instead, you should pay it and call the lender right away, begging forgiveness before it mars your credit record.
Being 30 days late on a house payment—even if it is an accident—can knock 100 points off a pristine 780 credit score, moving you from qualifying for the very best interest rates to the edge of subprime territory. The actual numerical drop is less severe if your starting credit score is 720 or 680, but the impact is greater, since your new score is likely to sink to a level where new credit is hard to get and very expensive.
FICO scores range from a low of 300 to 850, with scores of about 750 or higher generally qualifying for the best loan terms. FICO says a foreclosure or short sale where the size of the unpaid balance is reported are equally devastating to a good or excellent credit score, reducing it by as much as 150 points, to the high 500s or low 600s.
Recovering your original score takes about seven years. That also is how long the information stays on your credit report, where insurers and potential employers can see it. Returning to a mediocre 680 score may take only three years. Here are some other lessons from the FICO data:
Credit scores are intended to measure the risk that you won’t repay a current or future debt. So your careful payments over many years translate into a higher starting score. However, your score takes a major hit when you are 30 days late on a payment, falling 70 to 100 points.
The best way to rebuild a damaged credit score, ironically, is to use credit. “Avoiding borrowing altogether means you’ve frozen your credit history in a negative state,” says Maxine Sweet, Vice President of Public Education for credit bureau Experian. “You will be better off using a credit card judiciously and paying it off promptly, adding good-behavior points to your record.”
A person with a 620 score would pay almost 12% interest on a four-year $25,000 car loan, compared with less than 5% for someone with a 780 score—a difference of almost $4,000 over the life of the loan. On a 30-year fixed-rate $250,000 mortgage, a person with a 620 score might qualify for a 6% rate, but probably wouldn’t be able to get mortgage insurance, which is required if your down payment less than 20%. A person with excellent credit might land a rate less than 5% and pay about $3,000 a year less.