When you’re applying for a mortgage, car loan, or credit card, your credit score matters. It affects your ability to be approved for credit, and if you are approved, it determines how much borrowing will actually cost you. A high score gets you a low interest rate, and a low score gets you a high interest rate. A foreclosure can do serious damage to your credit score, causing long- and short-term consequences.
First, play defense
It’s important to remember that when it comes to foreclosure, you have rights, and it’s important to understand them. Lenders are required to abide by state laws. So, before resigning yourself to foreclosure, study-up on how you might mount a foreclosure defense. Doing so could allow you to stay in your home, or at the very least, minimize the damage done to your credit score.
How much of a hit will my score take?
Fair Isaac Corp., the inventor of the FICO score, estimates the credit-score damage resulting from mortgage delinquencies. You can expect credit hits of: 40 – 110 points if your payment is 30 days late, 70 – 135 points if it’s 90 days late, and 85 – 160 points if you opt for a short sale, a deed-in-lieu or an actual foreclosure. Often, mortgage delinquencies spill-over and cause other credit defaults. All told, the damage to a credit score will be about 250 points.
It’s not just about getting credit
What many people don’t know is their credit standing can impact them in ways that have nothing to do with borrowing, like getting a job or renting an apartment. Some employers look at credit reports to help them decide if a potential job candidate is likely to be a responsible employee. Landlords use it to gauge a prospective renter’s likelihood of fulfilling the terms of a rental contract.
Expect to pay more for insurance
A Federal Trade Commission study concluded that credit scores are effective predictors of a person’s risk of being involved in an auto accident or setting a home on fire. Over 90 percent of insurance companies use credit reports to assess risk and set rates. It’s estimated that a person with a good credit score will save $115 per year for auto insurance and $60 per year for homeowner insurance compared to a person with a mediocre credit score.