Working Paper

The Impact of Missed Payments and Foreclosures on Credit Scores

Abstract: This paper debunks the common perception that ?foreclosure will ruin your credit score.? Using individual-level data from a credit bureau matched with loan-level mortgage data, it is estimated that the very first missed mortgage payment leads to the biggest reduction in credit scores. The effects of subsequent loan impairments are increasingly muted. Post-delinquency foreclosures have only a minimal effect on credit scores. Moreover, credit scores improve substantially a year after borrowers experience 90-day delinquency or foreclosure. The data supports one possible explanation of this improvement: the absence of mortgage payments relaxes the borrowers? budget constraint, allowing them to restore other forms of credit.

Keywords: Credit Score; Foreclosure; Delinquency; Crisis;

JEL Classification: D1; G2; R2;

https://doi.org/10.26509/frbc-wp-201423

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2014-10-27

Number: 1423