By Christopher Maag
Did you lose your house during the recession? You may be less of a credit risk than your credit score makes you appear.
And it’s not just your spouse or a consumer advocacy group saying so; it’s people who help define your credit score. TransUnion, one of the three major credit reporting agencies, recently discovered that losing a house to foreclosure may cause more damage to consumers’ credit scores than it really should.
That’s because a credit score uses past information about how you use credit to predict future behaviour. Traditionally, creditors believed that a low credit score means a person is habitually terrible at making loan payments on time.
But the current double-dip recession in housing market is making TransUnion think twice. Maybe it’s so bad that even responsible people who usually pay their debts are losing their homes.
Their credit scores may be trashed, even if their actual ability to pay debts remains unchanged.
“The forces exerted on consumers by the recent recession were quite severe,” the report finds. “Certain consumers who defaulted on a mortgage in the recent recession only did so because of the recession—they are otherwise good credit risks.
A foreclosure might actually make people better credit risks, since they have more money to spend now that they no longer have expensive monthly mortgage payments. Many lenders currently believe this rebound in liquidity is only temporary, TransUnion writes, since people can save money during the time they live in their house without paying the mortgage, but this liquidity goes away when people buy another house or start paying rent.
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Not so, the study found. Even a year and a half after foreclosure, delinquency rates on things like car loans actually decreased somewhat over time. That result holds true no matter what credit score the consumer has. What’s more, people who default only on their mortgage, and not on other things like auto loans and credit cards, have credit scores that rebound faster than people who default on multiple loans at once.
All of which means that people who defaulted on their mortgages may not be deadbeats after all. They may actually be an untapped market for lenders looking to make loans, TransUnion found.
“The recent recession is a great example of exceptional behaviour,” TransUnion found. “Mortgage-only defaulters may not be as bad as you think.”
Christopher Maag is Credit.com’s Staff Writer. Chris graduated with honours from the Columbia University Graduate School of Journalism, and has reported for a number of publications including The New York Times, TIME magazine and Popular Mechanics.
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