Credit Scores & Their Effects on Interest Rates

?Short sales, foreclosures and bankruptcies have become problems that an ever increasing number of American homeowners are now facing in the stagnant U.S. housing market. The problem of underwater mortgages has spiraled out of control in the U.S. over the last three years and unfortunately many of the people that do experience these financial hardships are in the dark as to how those events will impact their future credit scores and the interest rates they will be facing when they attempt to purchase anything on credit again in the future.

Fortunately, reliable information on how those different financial events might impact a person’s credit score are now readily available from the Fair Isaac Corporation (FICO), one of the first credit scoring companies that started working with credit ratings all the way back in 1956. The FICO agency provides the information on how short sales, bankruptcies, and foreclosures will affect your credit score in the form of two easy-to-read charts that show the effect of financial impacts on two hypothetical credit scores, one at 680 and the other at 780.

FICO Chart for persons starting with a credit score of 680 points:

30 days late on mortgage results in a lower score of 600-620.
90 days late on mortgage results in a lower score of 600-620.
Short sale, no deficiency results in a lower score of 610-630.
Short sale with deficiency or foreclosure results in a lower score of 575-595.
Bankruptcy results in a lower score of 530-550.

FICO Chart for persons starting with a credit score of 780 points:

30 days late on mortgage results in a lower score of 670-690.
90 days late on mortgage results in a lower score of 650-670.
Short sale, no deficiency results in a lower score of 655-675.
Short sale with deficiency or foreclosure results in a lower score of 620-640.
Bankruptcy results in a lower score of 540-560.

The FICO chart makes it easy to see the different credit score impacts resulting from the negative financial events like a bankruptcy that can cause a person with a credit score of 680 to suffer a 130 to 150 point drop, while someone with a 780 credit score gets hit even harder with a 220 to 240 point drop. For the purpose of most mortgage calculations, the removal of several hundred points on a hard-earned credit score is never a good thing. However, the damage is never permanent and despite the fact that bankruptcies are reported for ten years, most people see an improvement in their credit scores within just one year of completion of a bankruptcy.

Although it will probably take some time to see any improvement in your credit scores depending on the specific type of negative financial event that occurred, there is no denying the fact that a bankruptcy, short sale, or foreclosure will all have definite negative impacts on your credit score and your ability to get loans in the future. However, for those borrowers who really have no possible way to pay off a large debt like a home loan, entering into a bankruptcy could be the best and possibly only way, to reestablish their good credit ratings.