We all know, or should know, how important our credit scores are. These three-digit numbers, often referred to as FICO scores, determine whether lenders will loan us money and at what interest rates.
Low scores, below 620, indicate to lenders that you’re irresponsible with your finances and a risk to default on your loans, whether those loans be auto, personal or mortgage ones. High scores, above 720, and you’ll qualify for the best loan products with the lowest interest rates.
Several factors will lower your credit score. If you fail to pay your bills on time, or if you simply don’t make a payment, your score will suffer. If you have a large amount of revolving credit card debt, your score will take a hit.
But there are three sure-fire ways to absolutely kill both your finances and your credit scores: declaring bankruptcy, losing a home to foreclosure and going through a divorce. Each of these actions can wipe out your finances. Each of them, too, can devastate your credit score, foreclosure and bankruptcy directly, divorce indirectly.
Here’s a closer look at how each of these three financial disasters can impact you:
The damage to your credit score from foreclosures doesn’t happen only when you lose your home. It starts far earlier than that. In fact, if you miss just one mortgage payment, you can instantly lop 100 points off your score. When your lender or bank files a notice of default against you, your score will drop even lower. A notice of default, which lenders file at your local county courthouse, serves as the official start of the foreclosure process. These filings are a matter of public record, and will show up in the public records section of your credit report. This is a section that you would prefer to have remain empty.
The final blow to your credit report comes when the foreclosure is final. That’s when lenders and banks report it to the three national credit bureaus, TransUnion, Experian and Equifax.
If you have lost your home to foreclosure, you can at least take solace in the fact that you’re far from alone. According to online foreclosure site RealtyTrac.com, 2009 was a record year for U.S. foreclosures. Several states led the way: In Arizona, one in every 126 properties is in foreclosure, while that number stands at one in every 185 properties in California. Florida suffers from the same foreclosure rate. In fact, California and Florida combined account for 47 percent of all foreclosed properties in the United States.
Bankruptcy is another finance killer. Chapter 7 bankruptcy, which eliminates your debts, stays on your credit report for a full decade. Chapter 13 bankruptcy, in which a bankruptcy judge sets up a repayment plan that allows you to pay off your debts at a rate that you can afford, remains on your credit report for seven years. During these years, you’ll struggle to qualify for loans or credit cards. And when you do, you’ll have to pay exorbitant interest rates because you are now labeled as a risky borrower.
Bankruptcy claims have risen in the United States as the economy has struggled. In March of 2010, for instance, 159,117 bankruptcy claims were filed.
Divorce is not as obvious a finance killer. But a recent 15-year study reports that people who remain married built up nearly twice the net worth of couples who divorced. People who married and then divorced actually saw their net worth fall lower than the net worth of people who never married. The study reported that divorced people’s net worth was a whopping 77 percent less than the net worth of single people.
It is possible for people to rebuild their net worth following a divorce, but it’s not easy. It also takes a long time. The study reported that the net worth of divorced people 10 years after their divorce stood at a median of $10,000. Couples who remained married had built up a median net worth of $43,000 after 10 years.
Divorce rates vary by sex and age. Males younger than 20, for example, tend to get divorced 11.7 percent of the time, while females in the same age group had a divorce rate of 27.6 percent. Males 20 to 24 years old had a divorce rate of 38.9 percent, while females in the same group suffered a divorce rate of 36.6 percent.
The divorce rate for males 25 to 29 years stood at 22.3 percent. Females in the same age range had a divorce rate of 16.4 percent. Males 30 to 34 years had a divorce rate of 11.6 percent, while females in the same age range had a rate of 8.5 percent. Males 35 to 39 years had a divorce rate of 6.5 percent. Their female counterparts had a divorce rate of 5.1 percent.