A recent FTC study of errors in credit reports is getting a lot of press. According to the most recent in a number of studies of the accuracy of credit reports, about 5% of U.S. consumers have an error on their credit report that is serious enough to increase their cost of credit. Although the credit industry is arguing that this is a small percentage (and I agree that this is a lot smaller than I expected), the head of the FTC does not consider it small. “These are eye-opening numbers for American consumers,” said Howard Shelanski, director of the FTC’s Bureau of Economics. “The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don’t, they are potentially putting their pocketbooks at risk.” The industry quickly noted that the errors in the other 95% do not affect people’s credit.
As a association we feel this press is to your advantage since bad press always lends to better results in the short run and disputes may get corrected faster. We’ll keep you posted on any developments.
How much impact does a short sale have on FICO® Scores? How about a foreclosure? Since I frequently hear these questions from consultants that their clients ask and from others, I thought I’d share new FICO research that sheds light on this very subject.
The FICO study simulated various types of mortgage delinquencies on three representative credit bureau profiles of consumers scoring 680, 720 and 780, respectively. I say “representative profiles” because we focused on consumers whose credit characteristics (e.g., utilization, delinquency history, age of file) were typical of the three score points considered. All consumers had an active currently-paid-as-agreed mortgage on file.
Results are shown below. The first chart shows the impact on the score for each stage of delinquency, and the second shows how long it takes the score to fully “recover” after the fact.
All in all, we saw:
- The magnitude of FICO® Score impact is highly dependent on the starting score.
- There’s no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.
- While a score may begin to improve sooner, it could take up to 7-10 years to fully recover, assuming all other obligations are paid as agreed.
- In general, the higher starting score, the longer it takes for the score to fully recover.
- Even if there’s minimal difference in score impact between moderate and severe delinquencies, there may be significant difference in time required for the score to fully recover.
This study provides good benchmarks of score impact from mortgage delinquencies. However, it is important to note that research was done only on select consumer credit profiles. Given the wide range of credit profiles that exist, results may vary beyond what’s in the charts above.