Terrific Article on the Great Recession’s Impact on Consumer Credit
The fine folks at the National Consumer Law Center recently posted a great article concerning the impact of the mortgage crises of 08 and beyond on consumer credit reports. It’s well worth the read. I’ve included some excepts below that really leaped out at me:
Credit reporting has become the determining factor for many essentials in a consumer’s financial life – not only credit (mortgages, auto loans, credit cards) but insurance, employment and rental housing. It is no exaggeration to say that a credit history can make or break a family’s finances. The Big Three credit bureaus (Equifax, Experian, and TransUnion) stand as gatekeepers – and solely profit-motivated ones at that – to many economic essentials in the lives of Americans.
More disturbingly, credit reports are used for other purposes, such as employment, rental housing, and insurance. Thus, the damage from a foreclosure or other adverse mortgage-related event could cause a consumer to be denied a job, lose out on a rental apartment after losing his or her home, and pay hundreds of dollars more in auto insurance premiums. The cumulative impact of these financial calamities could strand a consumer economically for years after the foreclosure itself. It could create a self-fulfilling downward spiral in a consumer’s economic life.
One of the most pernicious aspects of the use of credit reporting is its use as a proxy for “character.” There is a popular conception, not just in the credit industry, but also among employers and the average layperson, that a poor credit score means that the consumer is irresponsible, a deadbeat, lazy, dishonest, or just plain sloppy. However, this stereotype is far from the truth. A bad credit record is often the result of circumstances beyond a consumer’s control, such as a job loss, illness, divorce, or death of a spouse, or a local or nationwide economic collapse.
The effect of a short sale (providing the seellrs are more than 59 days late) on a seller’s credit report is identical to that of a foreclosure. The ding on credit will show up as a foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points. This means a short sale with a previous FICO of 720 will see it fall from 520 to 420. Many banks won’t consider a short sale unless you are late on payments. Most short sales are done after payments have been late. About one third of your credit score is made based upon your payment history, that is, whether you have been 30, 60 or 90 days or more late on any bill that is reported.If you pay your mortgage less than 30 days after the due date, that will not show up as late even though you will pay a late charge. But if you pay your mortgage 30 days or more late, that will definitely lower your credit score. Fannie Mae guidelines allow a seller to immediately apply for a new loan to buy another home if that seller kept the payments current and had no 60-day late pays or greater on record.