Monday, March 22, 2010
Credit Score Recovery After Foreclosure or Short Sale

It has now become the million-dollar question despite the fact that only yesterday it was a 25 cent question because everyone already knew the answer.  How long does it take for your credit scores to recover from a short sale or a foreclosure?  Years, right?  These incidents remain on your credit reports for 7 years and short sales are reported as either charge offs or settlements.  Those two events as well as foreclosures are all seriously negative and could significantly damage your credit scores for many years.

So why has this become a topic of debate, discussion, and conflicting answers?  Well, to put it bluntly, someone thinks that you can repair your credit scores in as little as 9 months after a foreclosure or short sale.  Normally that kind of bold statement would be coming from a credit repair company trying to convince someone that they can work magic and convince the credit bureaus to remove the offending item from your credit reports.  No, this one didn’t come from Joe’s Credit Repair Depot and Emporium.  This one came from Barrett Burns, the CEO of VantageScore Solutions, the company that wants so desperately to unseat FICO as the king of the credit score. 

In March 23^rd’s American Banker Burns stated “…it can take borrowers as little as nine months to repair their credit score after a short sale or foreclosure.”  Wow, that’s great news…or is it?  Since this seemed to be unbelievable I interviewed Craig Watts from FICO and I wanted to get the company’s take on how long it takes to repair your credit scores after such an event.  Here’s the full transcript of my interview, unedited.

Ulzheimer:  Is FICO willing to go on the record discussing the impact of a foreclosure and/or a short sale on a consumer’s credit score?

Watts:  “FICO has consistently found that past payment history is the single most predictive category of information when we empirically develop credit scoring models using consumer credit histories. As an example, we recently looked at a sample of about 10 million credit reports representing a highly diverse U.S. population. We examined that group's most recent, twelve-month performance window. We found a default rate of 2.9% for the subset of all consumers with a clean credit record, and a default rate of 49% for the subset of all consumers who had had a recent foreclosure. In other words, consumers who recently experienced a foreclosure were about 17 times more likely to default on a credit obligation in the next 12 months than were people with a clean credit record. Obviously, recent credit defaults are vitally important when one is objectively assessing default risk.”

Ulzheimer: How long does it take for a consumer’s score to recover after a short sale or foreclosure?  And by recover I mean fully recover.

Watts:  “A consumer with a foreclosure or similar default on her credit report can expect her score to begin recovering after a couple of years if she consistently pays all her bills on time, keeps any credit card balances low, and takes on new credit only when needed. As the default event ages on her credit report its influence on her score will diminish, until the credit bureau removes the record from her file after seven years.”

              The bottom line is this... you can't fully repair your credit score in as little as nine months unless you can convince the credit bureaus to remove the items from your credit reports.  And as long as  the items are accurate they will remain for 7 years.  Your scores will begin to recover in time as the item gets older and older and therefore loses predictive value, but just not after 9 months.