In a recession, many homeowners struggle to keep up with their monthly mortgage payments. According to TransUnion, in August 2010, 6.7% of American homeowners were at least 60 days behind on their payments. For a lot of people, this can lead to foreclosure. However, even if you catch up later, missed payments will severely hurt your credit score.
Your Credit Score
Your credit score is a three-digit number that tells lenders how much of a risk it is to lend you money. The higher the score, the more creditworthy you are. People with high credit scores find it easier and cheaper to borrow money. People with low scores struggle to get loans, credit cards and, in some cases, even jobs. A score of 700+ is considered to be good, though you may need one as high as 740 to get the best interest deals. A score of less than 500 will make your financial life difficult.
Calculating a Credit Score
Credit bureaus use complex formulas to calculate credit scores. The exact formulas are a closely-guarded secret, but the factors that go into them are not. Your credit score reflects your payment history from the last seven years, your total debt compared to your income and available credit, the length and diversity of your credit history and the number of new credit applications. Different bureaus weigh each type of information slightly differently. You have not a single credit score but three, one from each of the major credit bureaus: Experian, Equifax and TransUnion.
Missed Mortage Payments and Credit Score
If you've missed a mortgage payment or were late by as little as a few days, it will likely appear on your credit report. Lenders like reliable borrowers who pay their bills on time. A couple of missed payments may not seem like a big deal in the larger scheme of things, but this can lower your credit score by as many as 100 points. The exact damage depends on many factors. If it's a one-off, your score may only drop a little. If you've missed a few payments, it will drop a lot. If you're more than 90 days behind, you are in trouble. Lenders consider this "seriously delinquent" behavior.
Catching up on payments later won't make a huge difference. The missed payments will still be on your credit history for the next seven years. However, if you can pay off a large chunk of the mortgage, this will raise your score, as it reduces your total debt.
Alternatives
If you're worried about making next month's mortgage payment, talk to your lender. Many banks are will work with borrowers in a difficult economy. They don't want borrowers to default on their debts. Some lenders let you renegotiate your mortgage to lower your monthly payments. Others may even give you a short break from having to make payments so you can get back on your feet. This is preferable to missing payments without informing the lender of your financial difficulties.
Warning
There are many unscrupulous companies that prey on financially vulnerable individuals by promising to erase missed payments from their credit reports and raise their credit scores. Don't believe them. Unless the information is incorrect, you cannot remove it from your report until it officially expires, nor can these companies. They best you can do is continue making payments on time every month. After a while, your credit score will go up.
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