People who file for bankruptcy protection covering all their debts -- the mortgage, credit cards, auto loans, etc. -- get hit with declines that are the scoring equivalent of a nuclear bomb: an average 355- to 365-point collapse in their scores. Bankruptcies remain on borrowers' credit bureau files for 10 years.
With all the mortgage delinquencies, short sales and foreclosures experienced by American consumers in the past couple of years, has there been a deterioration of average scores across the board? Absolutely.
For example, roughly 36.6 million of the 213 million consumers tracked by the three national credit bureaus in the first quarter of 2008 had Vantage scores above 900 -- the super-prime credit rung. That select group represented 17.2 percent of the country's consumers. But by the end of the second quarter of this year, just 15.4 percent -- 33.3 million out of 216.9 million individuals' files -- were left among the elite. By credit industry standards, that's huge.
More Americans' scores are slipping into the worst credit category as well. In the third quarter of 2006, 34.4 million consumers were in the lowest segment -- 16.6 percent of 206.9 million individuals. But by the second quarter of this year, 18.3 percent of all files were in that category -- 39.8 million consumers out of 216.9 million.
Most of these changes -- fewer people with excellent credit, more people in the lowest brackets -- have been caused by late payments on home mortgages, serious delinquencies, short sales and foreclosures, according to VantageScore researchers.
But the bottom-line good news about scores is that homeowners facing financial stress can experience minimal dings to their credit if they contact their loan servicer or lender early in the game -- when they first discover that they may have trouble making their monthly payments -- and take the first steps toward a loan modification or refinancing.
"Start that conversation early," said Barrett Burns, a former lender and now CEO of VantageScore. If you wait and fall several payments behind before seeking a modification, "you can lose 240 points on your score" and damage your ability to obtain credit -- on anything -- for years.