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THE AFFECT OF LATE MORTGAGE PAYMENTS ON CREDIT SCORES
FICO scores, the credit-scoring system used by the Fair Isaac Corporation to help banks and other lenders determine a borrower's creditworthiness, can fluctuate for many reasons. Your debt-to-income ratio, whether or not you make only minimum payments, how many inquiries you have, new credit cards, and other factors each play a part in determining your overall score.
But nothing impacts credit scores like a missed payment. Your payment history accounts for 35 percent of your FICO score. According to the Ask Experian Team, a missed payment will also have the longest lasting impact. The more recent the missed payment occurred, the greater the impact and the more missed payments you have, the longer it will take to restore your scores.
The most recent research on how badly late payments affect credit scores was performed by FICO's analytics executives back in 2011. However, the numbers still work. The researchers simulated various types of mortgage delinquencies and then ran the numbers using three credit bureau profiles. The consumer profiles scored 680, 720, and 780 respectively before they missed the first mortgage payment. If a borrower were 30 days late on a mortgage payment, their revised credit scores dropped between 600-620, 630-650, and 670 to 690.
For the best-scoring consumers, the drop in credit scores is the most punishing. The first consumer's credit takes 9 months to return to the 680 level, but the second consumer's score doesn't repair itself for 2 ½ years. And for the best-scoring consumer? It takes 3 years to restore scores to the 780 range.
In general, the higher the starting score, the longer it takes for the score to fully recover, says the researchers.
Not only does the information stay on your credit report for years, but if the delinquent homebuyer wants to buy another home, their scores may keep them from qualifying for good rates. Borrowers with poor credit may pay higher interest rates, or they could be refused a loan because they may not qualify for mortgage insurance. In addition, the borrowers will pay punishing interest rates for all credit, including car loans and credit cards.
Experian advises delinquent borrowers to make the account current as quickly as possible. Then they should continue to demonstrate a current history of on-time payments. Borrowers should use at least one credit card, paying in full each month to avoid finance charges. These on-time payments will add positive activity to offset negatives from the past.
Over time your credit scores will rebound. The length of time it takes to recover will depend on how serious any other negative issues were.
Written by Blanche Evans on Thursday, 09 October 2014 12:50 pm
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