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The Impact of Missed Payments and Foreclosures on Credit Scores

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  • Yuliya Demyanyk

Abstract

This paper debunks the common perception that ?foreclosure will ruin your credit score.? Using individual-level data from a credit bureau matched with loan-level mortgage data, it is estimated that the very first missed mortgage payment leads to the biggest reduction in credit scores. The effects of subsequent loan impairments are increasingly muted. Post-delinquency foreclosures have only a minimal effect on credit scores. Moreover, credit scores improve substantially a year after borrowers experience 90-day delinquency or foreclosure. The data supports one possible explanation of this improvement: the absence of mortgage payments relaxes the borrowers? budget constraint, allowing them to restore other forms of credit.

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  • Yuliya Demyanyk, 2014. "The Impact of Missed Payments and Foreclosures on Credit Scores," Working Papers (Old Series) 1423, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1423
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    1. Yuliya Demyanyk & Dmytro Hryshko & Maria Jose Luengo-Prado & Bent E. Sorensen, 2015. "The Rise and Fall of Consumption in the 2000s," Working Papers (Old Series) 1507, Federal Reserve Bank of Cleveland.

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    More about this item

    Keywords

    Credit Score; Foreclosure; Delinquency; Crisis;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G2 - Financial Economics - - Financial Institutions and Services
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

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