I frequently get asked the questions, “How does a Short Sale affect my credit score?”, or “What’s the difference between a short sale and foreclosure with my credit?”.  These are great questions and the answers are often convoluted.  Here’s the real skinny.

While a short sale may be a good move financially when you can’t find someone to buy your home for the full loan amount, it still has very serious credit implications. It is very likely that your credit scores will suffer greatly because of the short sale and believe it or not, may have the same implications as a foreclosure.

The reason that your scores will suffer is because of how your mortgage lender will report the loan to the credit reporting agencies.  Remember: Credit scores are smart…but they are only as smart as the information reported by your lenders.

The ONLY way that credit scores know that you’ve disposed of your mortgage via a short sale is if your mortgage lender chooses to report that to the credit bureaus.

There are two ways that the loan can be reported:

1. “Settlement accepted on this account.”
2. Or  “Settled for less than the full loan amount.”

The exact verbiage will vary by bureau but they all mean the same thing…that the loan was not paid in full according to the terms of the original loan agreement.  Short sales and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by the scoring model.  Scoring models will consider short sales or deeds in lieu to be a serious negative item, and in fact, will come out just as bad for your credit or FICO scores as a foreclosure.

To make a long story short:  short selling, deed in lieu, and foreclosure all affect your credit score the same way.

If you are in a situation like this, contact us at Wellness Credit to see what credit solutions we have for you.

Most people assume that if you make a lot of money, you’ll automatically have great credit scores. This is a common misconception about credit scores and it’s easy to understand why one would think income would be a factor. It sounds reasonable …and makes perfect sense, so why wouldn’t we assume that income plays a part in our credit scores?

The fact is, income is not a factor in determining your credit scores. In all actuality, it’s impossible to use income in the credit scoring calculation. This is because the information used to determine your credit scores is derived solely from the information contained in your credit reports. It’s also important to understand that just because it can go into your score doesn’t mean that it actually does go into them. The information must be predictive, legal, and it must be readily available on your credit reports.

Let’s take a quick look at exactly what makes up your credit reports. All credit reports can be divided into the following sections:

• Personal Identifying Information – this section includes your name, address, social security number and date of birth. It can also include employment information, previous addresses and other known aliases. This information is reported by your creditors and comes directly from the applications that you submitted when you applied for credit with them.
• Account Information – this section includes all of your credit accounts – which are also commonly referred to as trade lines. This is the bulk of the information that makes up your credit report and contains the type of account, the date the account was opened, the credit limit on your revolving accounts or the loan amount on installment accounts, the balance and your payment history – all of which are used in determining your credit score.
• Public Records – this section includes bankruptcies, judgments and liens. There are many other types of public records but these are the only ones that are reported in your credit report and therefore, are the only ones that are used in the credit score calculation. A word of advice: public records can never be good – they are always bad so you should avoid them at all costs.
• Collections – this section includes collection accounts that are reported by collection agencies. As with public records, collections are never good and they are most certainly used in the credit scoring calculation.
• Inquiries – this is a listing of anyone that has accessed your credit report and on what date. Inquiries remain in your credit report for two years and occur whenever you apply for credit. These hard inquiries are included in the credit scoring calculation but only those that have occurred in the last 12 months. You may also see promotional or soft inquiries, which occur whenever a lender orders your report in order to make a pre-approved offer of credit in the mail. These types of inquiries are not counted in the credit score calculation.

Now that we know what’s included in your credit reports, let’s go over what’s NOT included. Your race, your salary and your level of education – all of these things are not included in your credit reports. As such, none of these things can be used in the credit scoring calculation. Some people would argue that your salary, race, and level of education have an indirect impact on your credit scores because they play a part in how you establish and manage credit. This is probably true, but the fact remains the same. Race, salary, and level of education are not on your credit reports and therefore do not have any overt impact on your credit scores.

The bottom line is that your credit score only looks at information that is contained in your credit reports. And guess what? Your income is NOT included in your credit reports. You could be the world’s richest person but if you don’t manage your credit wisely, you could also have one of the world’s lowest credit scores.

1. Only open new credit accounts when you really need them. Don’t open accounts for the purpose of improving your credit or getting a discount on a purchase – it probably won’t raise your credit score. In some cases, it may even lower your score.
2. Pay your bills on time. Remember that payment history counts for 35% of your score. Derogatory payment information can and WILL have a major negative impact on your scores for 7 to 10 years.
3. Watch your credit card and/or revolving account balances! High outstanding credit card debt can really hurt your credit score. Your debt levels account for 30% of your score. Keeping your utilization (percentage of credit limits used) around 10% will give you the most points in this category.
4. Avoid the transfer game and pay off your debts rather than moving them around from one credit card to another. Transferring your debt doesn’t affect a total revolving debt figure – it’s best to pay it down.
5. Don’t close unused credit cards as a short-term strategy to raise your FICO scores. This approach almost always backfires and lowers your credit scores.