Wednesday, December 2, 2009
How Do Common Credit Issues Affect FICO Scores?
A common question we are asked during our client consultations is “How will a bankruptcy, foreclosure, and/or short sale affect my credit score?” One common answer is “We have no idea, but there is no way to protect your liability without some negative impact on your credit, which can recover over time.”
Probably a bad answer, but now we have a new answer.
On Thursday, November 26, 2009, FICO (Fair Isaac Corporation) revealed its “damage points” information. Previously, the company revealed only broad categories of factors influencing a consumer’s credit score, rather than the specific number of points at stake for credit mistakes.
FICO is the company that pioneered consumer credit scoring, and is most familiar to all consumers. FICO assigns a three-digit number from 300 to 850, depending upon how well consumers handle credit. Other companies offer consumer credit scoring systems, but FICO’s version is the most well-known and most widely used by lenders in determining whether a consumer can borrow, how much, and at what interest rate.
As the table at left demonstrates, those consumers with excellent credit (780 and above) may suffer a bigger point drop than those with an average credit score (680 points). For example, someone with excellent credit who has a 30-day late payment will suffer a FICO score drop of between 90 to 110 points, whereas someone with average credit will suffer a smaller FICO score drop of between 60 and 80 points.
Unfortunately, given the high rate of foreclosures, record-filings in bankruptcy, short sales, unemployment, and all of the other economic woes outside the control of many consumers, it is difficult to avoid these drops in credit. However, given the information provided last week by FICO, when faced with two difficult decisions it is now easier for consumers to take the least-worst decision, if FICO score is more important to the consumer than liability to any particular creditor.
- Shawn M. Yesner, Esq.