How Adverse Actions Affect Your Credit Score

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How much does it really hurt your credit score if you are late on your mortgage? What if you default and are foreclosed upon? Until recently, all we knew was that it was “bad.” Canceling a credit card was “bad.” Missing a payment was really “bad.” Defaulting was one of the worst “bads.” What we didn’t know was how bad it actually was because the FICO credit score equation has always been a black box.

Well it turns out that we might get a little peek into the black box.

Fair Isaac Corporation, creator of the FICO credit score, recently released some data on how your score is affected by certain “adverse actions” – being 30 days late on a mortage payment, a foreclosure, bankruptcy, short sale, etc. They also estimated how long it would take to fully recover from the action. I personally think it’s a little odd because, well, FICO created the score and the equation that calculates it. 🙂

Either way, the data is still compelling:
Impact to Credit Score
Estimate Time to Recover

First off, it’s always been believed that the better your score, the a negative event would hurt you more. This seems to be the case as a 780 becomes a 540-560 after bankruptcy, a fall of 220-240 points, whereas a 680 falls to 530-550, a fall of 130-150. In this case, it seems like a bankruptcy just pulls you down into the mid-500s and the only reason a higher score is hurt “more” is because they started off at a higher number. A bankruptcy, regardless of where you start, will put you into the low to mid-500s. That makes more sense.

Next, it’s important to note that foreclosure seems to be a better option than bankruptcy, from a credit score perspective. This makes sense because foreclosure just affects your home, bankruptcy can wipe away a wide range of consumer debt. This means that bankruptcy should be something considered only as a last resort.

The biggest gem was in recovery time – the higher your score, the longer it takes to recover. Again, this makes sense because a 780 is supposed to be a very safe credit risk and so when you miss a payment, it’s not surprising it takes more time to recover your higher score.

One key missing point? I’d really like to see a chart for the recovery time that takes into account the score recovery over time. In other words, I want to know how Consumer C’s (780) score moves after being 30 days late. I imagine the score probably recovers fairly quickly for the first few dozen points but then the “score growth rate” falls tremendously.

All in all, some good gems in the tables and it could help some people make more educated decisions.

Big thanks to for writing about the subject or I’d probably never have seen it!

{ 8 comments, please add your thoughts now! }

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8 Responses to “How Adverse Actions Affect Your Credit Score”

  1. Augiebball says:

    Thank-you for this post. I recently was able to complete a short-sale w/ no deficiency and my credit score went from approximately 760 to 640. It sucks that it’s going to take me 7 years to recover, but it’s much better than the alternative of foreclosure or bankruptcy. Let the recovery begin!

  2. Wilma says:

    Great post. Would love to see their formulas for canceling 1 or more credit cards at the same time, opening a credit card, opening a store line of credit compared to a regular credit card, late payments on bills and car loans. This should all be up front and transparent. This score is our life so we should be able to sit at home and calculate our scores.

  3. Sun says:

    A more practical metric would be how much a car loan will cost and how much a home mortgage interest would be based on the FICO score.

    Still, saving as much as you can before making a purchase is the better deal in my mind. You don’t pay the bank all this interest and you can redirect that surplus toward other goals.

  4. Jeremy says:

    Hey Jim,

    Thanks for the hat tip!


  5. Strebkr says:

    I can attest to the 90 days late on a mortgage payment thing. It hurt our credit score bad. BUT the problem was that we didn’t even have a mortgage with that company anymore. It was a mix up. Once we fixed it the score went back up, but it was quite annoying to be “late” on a mortgage you didn’t even have.

  6. skylog says:

    wow! that is a little eye-opening. i suppose i never gave it thought, but those drops for a 30 day are severe. i was also shocked to see the time required to gain back those losses.

    some great information!

  7. Sun says:

    What are the chances that you will actually be reported for late payment? Many companies seem to have a grace period before they start reporting you to the credit bureaus.

    CreditKarma will give you a free overview of your credit report and also has a credit simulator so you can see based on your current credit score (although not FICO) what kind of changes to your score would occur with various factors. I saw that late payment is a big factor and also paying down your debt (debit to credit ratio) will improve your score.

  8. Kalev says:

    I don’t understand, why does consumer B’s score often end up 5 points lower than consumer A’s score. Is it sometimes better to start with lower credit?

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