Recent Credit is Critical

It is amazing how much weight the credit scoring models put on recent credit. Let me give you three examples:

1. In the first scenario, an individual who had perfect credit (car, student loans, house, all perfect resulting in a score exceeding 780), had three student loans go bad six months prior to applying for a loan – each had 90 day late payments. There was also a car loan that was late the month before the application. His score had dropped from the high 700’s to low 500’s.

2. Another individual whose score was over 690, dropped to 615 thanks to one 30 day late payment on a car loan two months before buying a home.

3. A third individual had a bankruptcy (chapter 7) from 2 years prior, a short-sale that took place about the time of the bankruptcy, multiple late payments on various accounts leading up to the bankruptcy, and only one new credit item opened since the bankruptcy (a small credit card opened a year before application). Yet her credit score was over 680.

If you compare the first scenario to the third scenario, there is a spread of over 150 points in score. The third individual committed what most would consider a much more egregious action from a credit standpoint – bankruptcy and short sale to go along with multiple late payments. The first individual always had great credit. And the issue causing the score drop was “only” late payments. There was no collection, judgment, foreclosure or bankruptcy. He was just late. The difference – time frame. For the third individual, whose score is over 680, all the derogatory credit issues occurred 2+ years before credit was checked. Yes, they were certainly much worse in the extent of the lack of payment, but because there had been 2 years with no negative issues, the score had moved back up. Same thing goes for the second individual referenced here as the first individual. One minor late payment dropped the score by 75 points, making qualifying nearly impossible. And it was simply because the late payment was so recent.

I give these examples simply to show illustrations of how devastating it can be to a credit score when late payments are recent. Our clients need to be aware that paying bills on time is critical – particularly the closer they get to wanting to buy a home.