Missed House Payments and Evictions: How Do They Affect Credit Scores?
Many households across the nation continue to face economic uncertainty, so what are the short and long-term effects of missing a rent or mortgage payment? Can an eviction or a missed mortgage payment affect a credit score?
Factors That Contribute to a Credit Score
Let’s first have a look at the factors that contribute to a credit score. While there are dozens of credit models and several different scoring methods used by lenders, the following five factors have become generally accepted as the main drivers affecting a credit score, regardless from which bureau the score was generated:
- Payment history. This is the most important component of a credit score, as it is the strongest measure of the likelihood that the borrower will repay a debt.
- Credit utilization. Also known as the debt-to-available-credit ratio, credit utilization is how much of a total credit limit a borrower uses. Typically, this should be kept between 10 and 30 percent in order to stay in good standing.
- Credit history. This is how long credit accounts have been open. In general, the longer the consumer has had accounts open — and in good standing — the better.
- Credit mix. A lesser — and lesser-known — factor contributing to a credit score is credit mix, which measures the diversity of credit accounts. Credit scores take into consideration the various types of accounts like car loans, credit cards, student loans, mortgages or other credit products.
- New credit. This measures the number of new credit accounts that have recently been opened, in addition to any hard inquiries lenders make when borrowers apply for credit. While not as important a contributor to a credit score as payment and credit history, too many inquiries indicate an increased risk.
How an Eviction Affects a Credit Score
Eviction can result from several reasons, such as failure to pay rent or violation of the terms of a lease, such as damaging the property or subleasing without approval. While an eviction might not directly show up on a credit report or background check, eviction-related information can. For example, if the landlord uses the courts to evict you by obtaining a judgment against you, the judgment is a matter of public record and can appear in some background checks.
While a background check is not a credit report, an eviction can affect a credit score if your landlord sends any unpaid rent to a collection agency, which will show up on a credit report and will lower a credit score. Like most other types of negative information, the eviction can stay on your credit report for up to seven years. If the statute of limitations for unpaid judgments is more than seven years in your state, the eviction can be reported up until the statute of limitations runs out.
How a Missed Mortgage Payment Affects a Credit Score
A late mortgage payment typically doesn’t affect a credit score until it’s 30 days past due. Logically, a 30-day late payment will have a lesser impact than will a 60-day or 90-day late payment, all other factors held equal. As with any adverse behaviors related to credit, such as a bankruptcy or maxing out a credit card, late payments matter less as they age. For example, a late payment from a few months ago will have a greater impact than a single late payment from five years ago.
A late mortgage payment affects those with stellar credit more so than those with lower scores. Simply put, the higher your credit score is before you miss a payment, the more dramatically your credit score will be affected than if your score were just average or poor when the missed payment occurred. Of course, before missing a mortgage payment, it’s best to call your lender and negotiate a short-term solution. In fact, missing a mortgage payment might not have any adverse impact on a credit score at all. Thanks to CARES Act, most mortgage borrowers are legally entitled to a mortgage forbearance for up to 12 months during the COVID-19 pandemic.
Credit Simulations and Credit Modeling
Because each credit agency calculates its own credit score using its own models, differences between reports can produce vastly different credit scores. Most borrowers seek the highest score possible, of course, and one that is consistent. The ability to view, understand and manage your credit is key to putting yourself in the strongest position when applying for loans.
Borrowers should consider utilizing a tracking tool, such as SmartCredit, that provides monitoring of credit scores and helpful suggestions for actions to increase your score. Such a tool can help individuals understand the dynamics of credit and the impact of open and closed credit accounts on their overall score.