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Credit rating declines due to home foreclosures or short sales are not as dramatic as commonly reported. More important, consumers' damaged credit ratings are rebounding most of the way to their original levels in far less than seven years.

According to data from Fair Issac, FICO scores are dropping no more than 150 points due to a foreclosure or short sale, as reflected in the first chart. My own research turns up similar numbers (though I've seen a foreclosure knock as little as 80 points off a FICO score).

FICO-score-after-events

That first chart is entirely FICO data. The second chart is where the numbers get interesting – because rumors of people's credit being completely dead are greatly exaggerated. The next three charts include data collected by me and researchers I hire, highlighted in yellow. FICO's version of "time to recover your credit score" is true up to a point, but the trick word is "fully" [italics in the second chart are mine]. The ~ stands for "approximately."

FICO-score-recovery-780

That first group, with 780 FICO scores, are the "A" grade borrowers. They take the hardest hit to their scores – fair or unfair – but notice the startling difference in recovery times when you substitute "recover 80 percent" for "recover fully."

In hard numbers, this means that someone with a 780 FICO score who drops 150 points to a 630 score might not have the 780 score back for seven years, but they'll up to 750 in as little as two years. And they'll have that "A minus" for a couple of years after that. It's not the end of the world.

(This is not urban legend. The most dramatic example I've seen firsthand was a man who did a short sale with a deficiency in mid-2011. His ultra-high 820 FICO score plummeted 200 points to 620 ... and six months later was back to 780, an "A" grade borrower again.)

Credit scores recover just a little more quickly for a 720 FICO consumer (720 was the average American score before the Great Recession hit.)

FICO-score-recovery-720

In a not-unusual example, one of my readers showed me this sequence of credit scores reported:

1. She started with a 720 FICO score, and suffered a home foreclosure in late 2009. No short sale, no deed-in-lieu, just a straight foreclosure leaving a deficiency behind.
2. She checked her credit in April 2011, and it had rebounded to a 694 FICO score.
3. About that time she was unable to make credit card payments, and defaulted on three credit cards, which created another black mark.
4. Today in March 2012 she's back up to 679 ... only 41 points lower than her starting score, 2 1/2 years after the foreclosure. Over the next couple of years that will rise to 720 again.

By the time we look at people who start with a 680 score – which is actually not too shabby in the Great Recession – they've recovered 80 or even 100 percent of the lost score in no more than three years. This is more like a bump in the road than long-term financial trauma.

FICO-score-recovery-680

The bottom line is that in the current economy most people see their credit restored to near-former levels in about three years – if they don't have any further payment problems. So you'll pay 1 percent more on a new mortgage or 4 percent more on a car loan ... and life gets back to normal. (Assuming you have a job and no medical bills, of course – otherwise you have bigger problems than a bad credit score.)

Conversely, if you do have any more black marks on the way – you think you may not be able to continue with credit card payments, for example – then consider defaulting on those other debts now. That way your credit score will take the hit sooner, and will start the climb back towards normal that much sooner.

###

Research:
1. FICO estimates from http://bankinganalyticsblog.fico.com/... (Bankruptcy scores were deleted to keep the focus on home walkaways. "A" and C" consumer labels were reversed from FICO's chart for more logical presentation.)

2. Hastings Research independent results are from hundreds of interviews with homeowners, realtors, and mortgage brokers. They are supported by online reports from individual homeowners. Anyone wanting to confirm them can use a search engine to search for phrases such as 'fico score recover' or 'fico score rebound'. A lot of the bulletin board posts will be gibberish, but there are plenty where visitors describe their situation clearly, and give exact numbers and dates as they tell their story. (Ignore the web articles written by and for the banking industry; the true story is found in reader posts on smaller websites.)

Nicholas Carroll is the author of Walk Away From Debt for a Better Future.

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Comment Preferences

  •  Credit scores are being used beyond the scope of (31+ / 0-)

    borrowing money.

    That needs to stop.

    I could not rent a place I otherwise qualified for because my credit score was too low. I don't use credit cards nor do I purchase anything that requires a long term contract to complete the transaction ie:cell phone services. I'm poor it makes sense for me to not commit myself to a contract that will penalize me for being short on money. If I can't pay my pay as I go phone I don't have a phone, but I'm not charged a poor tax on top of it. For that I am penalized in my ability to find suitable housing and employment.

    That is wrong. So, so very wrong.

    Education is a progressive discovery of our own ignorance.

    by Horace Boothroyd III on Thu May 03, 2012 at 11:21:58 AM PDT

  •  Interesting...many thanks for this! n/t (11+ / 0-)

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Thu May 03, 2012 at 11:23:26 AM PDT

  •  Some advice, please (7+ / 0-)

    How does a small business owner obtain credit, and enough to build a score, without using collateral?

    "A cynical, mercenary, demagogic press will produce in time a people as base as itself." - Joseph Pulitzer

    by CFAmick on Thu May 03, 2012 at 11:29:44 AM PDT

    •  You mean conventional credit? (9+ / 0-)

      I don't know that I've ever seen it happen.

      (I have to allow that all startups I've known have been fairly entrepreneurial -- I've never started a franchise; if you're starting a Mailboxes Etc. or public storage franchise, the parent organization may help lever money out of banks.)

      Whether it's a bank or CU or God forbid the SBA, the rule seems to be that by the time they're ready to lend, you're gone or you don't need them.

      Which is why businesses tend to get started with personal credit cards, personal loans, and hocking your possessions.

      Then they tend to grow with credit from suppliers. The 30 days float from the auto parts stores helped me make rent on an early business. When I was in publishing the leverage from Net 30 on national newspaper ads was phenomenal, since 90% of sales are in 13 days after an ad runs. Online ads also have a float period, and if you sell online, and your processor is paying in 4 to seven days (not monthly!), that can have the same effect.

      So the bottom line is that a primarily product business cares a lot more about supplier credit than bank credit -- and suppliers don't give a hoot about your credit score once you've paid 2-3 times up front ... or if you already have credit with their competitor.

      Which can leave primarily service businesses hurting, the prime example being independent truckers. I don't know any group that has to self-finance so much equipment for so little return on investment ... it seems like a nightmare how hard they work to pay for those semi trucks.

      If I just answered the wrong questions, ask away again!

    •  What Nicholas said (3+ / 0-)
      Recommended by:
      cville townie, rb608, deedogg

      The radical Republican party is the party of oppression, fear, loathing and above all more money and power for the people who robbed us.

      by a2nite on Thu May 03, 2012 at 12:28:50 PM PDT

      [ Parent ]

  •  it's true (5+ / 0-)

    I'm in the high 700s, and that's even with a bogus several hundred dollar "debt" that goes from collection agency to collection agency even as I dispute it.

    But it's off of my credit trackers for awhile now. (I think the fact that the original "debt" allegedly happened in 2000 is probably why).

    •  Thank you, guess I should have made this a poll. (3+ / 0-)
      Recommended by:
      coquiero, Lonely Texan, deedogg

      But I'm new to DK and didn't think of it.

    •  Yes, that's our problem, too (5+ / 0-)

      Our bad debts are past us now, but even though our credit score itself has recovered, different agencies are still incorrectly submitting fresh debt information because it was passed around so much.

      So we can't get a loan of any kind, even though enough time has passed that it shouldn't be an issue anymore.

      A mortgage advisor said we should be able to handle this ourselves with some time and effort, but I inquired about services who claim to do it for you for a fee.

      I worry about accountability, though.  

      It's frustrating.

      I blog about my daughter with autism at her website

      by coquiero on Thu May 03, 2012 at 12:02:09 PM PDT

      [ Parent ]

      •  True, FICO isn't everything. (7+ / 0-)

        Nagging bills that keep resurfacing years later have confronted me at a bank, sometimes bills that aren't mine or which should have been deleted from Experian/Equifax/Tranunion reports years ago.

        You are close to a truism here, though: "A mortgage advisor said we should be able to handle this ourselves with some time and effort...." In my experience older mortgage brokers are the masters of credit report cleanup, and I pay heed to their advice. Though I hate the paperwork of harassing the reporting agencies....

        (Younger mortgage brokers don't know anything about the subject, of course, since in the boom years leading to the housing bust, the buyer's credit didn't matter much.)

      •  weirdly I get offers for loans all the time (3+ / 0-)
        Recommended by:
        Lonely Texan, deedogg, worldlotus

        and not the you got bad credit kind.

        I contested it several times and got it permanently off at least one of the credit reports.

        Having said that, I am doing well enough that I don't need loans, and I have no bills (paid cash for my '12 Ford Focus last year) other than rent, food, and whatnot.

        So unless I decide I want a home, and I don't think I am going to do that, then it hasn't been an issue.

        I think the key is to check your credit reports, dispute it constantly, and try and get them to eventually take it off.

        My latest letter from them was this week and was an offer to settle at 30% which is like 200 bucks. That's chump change but I refuse based both on principle and on the fact that the moment you pay you admit you owe it, and often paying doesn't end things...they can sell it off and someone else comes back at you now that they know you will cave.

  •  Very interesting. Thank you n/t (3+ / 0-)
    Recommended by:
    rb608, deedogg, worldlotus

    "Do what you can with what you have where you are." - Teddy Roosevelt

    by Andrew C White on Thu May 03, 2012 at 12:05:38 PM PDT

  •  Yes, but . . . (4+ / 0-)
    Recommended by:
    rb608, coquiero, Lonely Texan, deedogg

    1)  A single negative event is probably not lethal.But, generally, if someone has defaulted on their mortgage, they've defaulted on other things too.  That gets harder to overcome;

    2)  The damage from a foreclosure goes beyond FICO or a credit score--for instance if you default and go into foreclosure, you are ineligible for a Fannie Mae-approved loan for 7 years.

    "[R]ather high-minded, if not a bit self-referential"--The Washington Post.

    by Geekesque on Thu May 03, 2012 at 12:34:33 PM PDT

  •  At the same time Higher Credit Scores are (4+ / 0-)
    Recommended by:
    coquiero, rb608, Lonely Texan, deedogg

    being required by lenders than was the case before the recession.

    The most important way to protect the environment is not to have more than one child.

    by nextstep on Thu May 03, 2012 at 01:13:21 PM PDT

    •  I wrote the piece more to address the emotion. (5+ / 0-)
      At the same time Higher Credit Scores are being required by lenders than was the case before the recession.
      Quite true -- 40-somethings with 800 FICO scores are being grilled like first-time buyers and then often as not given the bum's rush anyway. Lenders are doing every "i" and "t".

      Presumably that will smooth out over the next few years.

      However my main thrust in writing this is the emotion and self-esteem people tie up in their credit score, because along with the "morality" propaganda, it's what keeps them from walking away from crushing debt. And what started as a book I wrote to help individuals somehow metamorphosed into a mission to preserve the capital of the middle class, to rebuild a new economy.

  •  Very worthwhile information. This FICO thing is (2+ / 0-)
    Recommended by:
    deedogg, worldlotus

    just another axe held over the heads of the general consumer who is trying to do the right thing.  Walking away from a bad investment is only something the 1% can do--or that's what they want us all to believe.

    The whole "morality" thing is added to it--again mostly to the general consumer just trying to do his very best.

    I've never read actual statistics on what may be the actual recovery time, and it is good to know.  Especially when you're also programmed to think it will be the end of the world, life-shattering event.

    Also an interesting comment in the thread noting that the people who have paid off everything, owe only a little on their house, no revolving debt, etc., can actually have a lower credit score than someone who has a lot of outstanding credit but pays on time.

    I hope the Consumer Protection Bureau really studies the whole FICO issue and brings it more into line with today's economic realities and makes this kind of information more generally known.

    If the plutocrats begin the program, we will end it. -- Eugene Debs.

    by livjack on Thu May 03, 2012 at 03:16:06 PM PDT

    •  If the CPB gets the budget! (0+ / 0-)

      I've been on good terms with a lot of FTC people for years, and fully believe them when they say that with 10 or even 100 times their budget, they could barely make a start on persecuting(sic) every crook in America. About all they can afford to do is take down a prominent crook and get it on the front page of the NYT and WSJ, and hope the small fry get scared.

      (Persecuting rather than prosecuting, because the FTC can't bring criminal charges, only civil actions.)

      Hope the CPB is well funded.

  •  Very interesting (3+ / 0-)
    Recommended by:
    Lonely Texan, deedogg, worldlotus

    Thank you.

    I'm puzzled when I see the hit being the same for 30 and 90 days late. 90 days seems to clearly indicate some financial stress, but 30 days can just be a slip-up. I have been a month late on my credit cards a few times, and it's always been because of an oversight of some sort like forgetting to mail a check, and not any money trouble.

    I always thought the hit to my credit score for these things was excessive. After all, they collected interest and penalties, and I was never really any riskier a customer just because I can be absent-minded. Any comparison of my assets and liabilities would make it obvious that I was going to pay.

    We decided to move the center farther to the right by starting the whole debate from a far-right position to begin with. - Former House Majority Leader Tom DeLay

    by denise b on Thu May 03, 2012 at 03:24:29 PM PDT

    •  Hit for 30 days late, I don't understand either. (2+ / 0-)
      Recommended by:
      denise b, worldlotus

      The banks' computer programmers are perfectly capable of writing code that correlates a string of travel expenses ending two days after the bill is due with the fact that the people simply got home after the bill was due! There should be no credit ding in that case, it's just stupid.

      Or would appear to be stupid. Without beating up all cops, there are many who would like nothing more than to have all Americans on probation for something, just so they can poke into their lives in disregard of the 4th and 5th amendments. Perhaps the lenders just want to "have something on you" to justify higher interest rates.

      (Hmm. That gets less and less paranoid as I review the post.)

      •  I'm usually pretty paranoid myself (0+ / 0-)

        but in this case I think it's probably just statistical, similar to the way auto insurance companies charge higher rates to people in different occupations. Does their occupation make them more likely to file a claim? Of course not. But there's some correlation of certain occupations to some other factor or factors that makes it work to the company's advantage.

        My insurance rates, BTW, went up when I went on Disability a few years ago. Apparently I had an occupational discount that I wasn't even aware of and I lost it when I stopped working. Does not working make me more likely to file a claim? I'm the same driver I always was, except that now I drive half as many miles as I used to. But pay more.

        We decided to move the center farther to the right by starting the whole debate from a far-right position to begin with. - Former House Majority Leader Tom DeLay

        by denise b on Thu May 03, 2012 at 08:42:01 PM PDT

        [ Parent ]

        •  It's whacko. (0+ / 0-)

          Yeah, I pay a bit more because of a statistic I don't understand. My neighbor pays a bit less, despite having totaled 5 cars -- but he never got the ticket. So it was just coincidence x 5. Right.

          And I haven't bent metal since I was 16!

  •  My sister just bought a house with 3 bankruptcies (0+ / 0-)

    in her past with- NHFHA- she's a shopaholic etc., so I guess things have really changed..

    and my millionare sister just went through foreclosure..go figure- seems very crazy out there

    "Time is for careful people, not passionate ones."

    "Life without emotions is like an engine without fuel."

    by roseeriter on Thu May 03, 2012 at 11:58:27 PM PDT

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