With many homeowners underwater in their own homes, a lot of people seem to be considering simply walking away from their mortgage. Unfortunately, if you're worried about your credit score, this is one of the worst things you can do. Even a single accidental missed payment can knock a big chunk off of your score - especially if you had good credit to begin with.
According to Fair Isaac, the creator of the FICO score, being a month late on your house payment, regardless of the reasons, can knock a 780 credit score down to 680. If your score is lower than 780, the hit will be somewhat less but it will still likely be enough to knock you down into a bracket where getting new credit is tough. In foreclosures and short sales, the hit is even more severe. Obviously, this means that if you walk away from your mortgage, if your home is foreclosed on and even if you negotiate a short sale, your credit score is going to suffer and it will generally take about seven years to get it back up to a good number.
So what do you do?
The most obvious answer is to simply not be late on your mortgage payments. Always pay your mortgage payments on time, and if you're accidentally late, pay it right away and call your lender and let them know. Your score will get hit with the very first missed payment. In fact, it's the first missed payment that hurts your score the most.
If there's no way out of it, don't worry, you can always rebuild your credit. It's just going to take some time. Believe it or not, the best way to build your credit score back up is...to use credit! If you avoid borrowing completely, your score stays frozen in place at the low end of the scale and if it improves, it does so sluggishly. The best thing to do is to get a credit card and use it sparingly and make sure you always pay it off right away. This will help give your score the bumps that it needs to move up more quickly.
Sometimes people just can't pay for their homes anymore and have no other choice but to walk away. It's tragic but it's happening more and more. It's important to know what such a situation will do to your credit and what you can do to eventually fix it.