Dear Liz: I am confused about your recent article about a person who did a short sale and questioned its effect on her credit. You said that if she started with a score of 680, it would take about three years for her FICO numbers to return to normal. You then said, “If your scores were high, say 780, it would take about seven years to restore them to their old peaks.” This doesn’t make sense to me. Why would it take longer to recover if you started with better credit?
Answer: Think of credit scores as a mountain that gets steeper the higher you climb. Not only does it take longer to achieve the lofty peaks, but if you tumble down the mountain, it will take you longer to return to those peaks than to achieve some intermediate stage.
The FICO formula is designed to reflect your likelihood of default. If you’ve recently missed a payment, had a bill go to collections or had a foreclosure or short sale, the formula assumes you’re much more likely to default on another bill than someone who doesn’t have those black marks on his or her record, and your scores fall to reflect that higher risk of default. As time passes and you handle credit responsibly, your scores will begin to slowly rise, but it will take more time to regain your peak scores if they were high.
Something else to understand is that the penalty for most negative credit events is greater for people with high scores than those with lower scores. Missing a single payment can knock up to 110 points off a 780 score but might deduct just 60 points from a 680 score. That’s because a higher risk of default is already “baked in” to the lower score. The higher score presumes you’re less likely to default. If you do miss a payment, the formula is set up to punish you more. In most cases, though, you won’t “fall down the mountain” as far as someone who started with a lower score. After the missed payment, the 780 score could be 670, while the 680 score could be 620.