Decoding Your FICO Score
For years FICO® scores, and how debt management actions influenced them, were unobtainable by consumers. For years, Fair, Isaac & Co., the creator of the system, wouldn’t give any guidance on how these credit scores were affected by adverse events.
There are in fact three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax. Each credit bureau keeps on file about you that will influence their score. As this information changes over time, good or bad, credit scores change as well.
When considering the importance of these scores in real estate – lenders use them to determine whether to lend to you – and the interest rate you will pay, the scoring mystery made debt management planning difficult to impossible.
However, little by little information has trickled out – mostly informally. Recently a FICO spokesman and one of the credit bureaus provided illustrations on how certain events would influence the scores of two hypothetical borrowers.
Starting with a person with a sub-prime, 680 score (e.g., eight years of history with two delinquencies):
- Maxing out a credit card – decrease of 10 to 30 points;
- A 30-day delinquency – 60 to 80 points;
- Settling a credit card debt for less than the full balance – 45 to 65 points;
- Short Sale or compromise of balance due on a mortgage – 55 to 75 points;
- Home foreclosure: a decline of 85 to 105 points;
- Bankruptcy: 130 to 150.
If the consumer starts with the excellent score of 780 (never missed a payment in 15 years):
- Maxing out a credit card – 25 to 45 points down;
- A 30-day delinquency – 90 to110 points;
- Credit-card debt settlement – 105 to 125;
- Short Sale or compromise of balance due on a mortgage – 115 – 135 points;
- Going through a home foreclosure: a decline of 140 to 160 points;
- Filing for bankruptcy: 220 to 240.
These examples show how difficult it is to get a good FICO score, and how fragile that score can be.
Moreover, they show how “bad” debt management behavior hurts creditworthy people to a greater degree. Why that is so was not explained.
Note that these are hypothetical consumers, so you can’t rely on these exact point totals being applied in your individual case. Every customer, and every FICO score, can be different.
What is discouraging is the potential impact of a short sale on your score. This is because the common alternatives to foreclosure, such as short sales and deeds-in-lieu of foreclosure, ordinarily will be reported by the lender as “not paid as agreed.”.
The effect of a loan modification is even harder to predict. Whether a loan modification alters the borrower’s FICO score depends on whether, and how, the lender chooses to report the event to the credit bureau, as well as on the person’s overall credit profile. FICO states that it could potentially “have little to no impact on the score.” Obviously if the borrower has missed payments prior to or during the modification, then that delinquency information on the consumer’s credit report could cause the consumer’s FICO score to decrease.
So even though a short sale transaction or a modification with the home loan lender is consensual, the lender, it may be reported as a “not paid as agreed.” Nothing requires lenders to report a short sale or modification any particular way, so the borrower may have the ability to influence the ultimate entry on their report. Therefore, how the lender decides to report what happened is critical to what its impact will be on a FICO score.
You can read more about FICO and credit scoring at Fair Isaac’s website: www.myfico.com.
At SimplySold, we will attempt to get the lender to agree to the most favorable available method of reporting your short sale. If you are considering selling your home, whether “short” or not, or just need more information about short sales in general, go to our “Short Sale” page at our website, www.simplysoldaz.com.
– N. Mark Kramoltz © 2015