November 17, 2014

Which Hurts Your Credit Score More-A Missed Mortgage Payment or Foreclosure?

A working paper from the Cleveland Federal Reserve Bank reaches a surprising conclusion.  Using individual data from a credit bureau and mortgage loan data, the author “debunks the common perception that ‘foreclosure will ruin your credit.’”
The author concludes that:
  1. the first missed mortgage payment causes the biggest reduction in a person’s credit score,
  2. later payment problems cause smaller credit score reductions, and
  3. foreclosure has a minimal effect (by this time, a person’s credit score has already fallen substantially).
The author also found that “credit scores improve substantially a year after borrowers experience 90-day delinquency or foreclosure.”  The author believes this may be due to borrowers’ financial ability to rebuild their credit when they no longer have mortgage payments to make.

Read the full working paper here.