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Related topics: debt, credit cards, bad credit, credit score, Liz Weston

Clawing your way back from a credit disaster isn't easy. And the higher your credit scores were, the longer it will take to restore them.

Those facts are made abundantly clear in new charts released by Fair Isaac, the creators of the leading FICO credit score. The charts detail how many points people with mediocre, good and excellent scores lose when they suffer certain credit setbacks, and how long it takes their scores to recover.

Let's look at the first chart, which shows the variable damage inflicted by skipping mortgage payments, short sales, foreclosure and bankruptcy:

 
 Consumer AConsumer BConsumer C
Starting FICO680720780
FICO score after these events:
30 days late on mortgage600-620630-650670-690
90 days late on mortgage600-620610-630650-670
Short sale (no deficiency balance reported)610-630605-625655-675
Short sale (with deficiency balance reported)575-595570-590620-640
Foreclosure575-595570-590620-640
Bankruptcy530-550525-545540-560

As you can see, the same events have different impacts. Consumer A, with a mediocre score of 680 on the 300-to-850 FICO scale, loses fewer points with each negative action than Consumer B, who has a good score of 720, or Consumer C, who has an excellent score of 780.

That may seem unfair, but it's how credit scores work. A lower starting score reflects the fact that the person has had some credit troubles in the relatively recent past, indicating a greater likelihood of defaulting again. People with higher scores are seen as less risky, so their scores react more dramatically when negative events occur.

Another fact to note: A short sale on a home (selling it for less than what you owe) results in slightly less damage than a foreclosure only when no deficiency balance is reported to the credit bureaus. Because a short sale by definition creates a deficiency balance, pretty much the only way you'll escape the full damage is if you can persuade your lender not to report the deficiency to the credit bureaus.

Image: Liz Weston

Liz Weston

Otherwise, a short sale has exactly the same impact as a foreclosure on your credit scores.

Also, if you enter a loan modification program with your lender, you may well hurt your credit scores. Many lenders report borrowers as "late" when they're in the modification's initial trial period, because the borrowers aren't paying as originally agreed. As you can see, reports of late payments can really trash your scores.

Now let's move on to the second chart. Here's how long you'll need to recover:

 
 Consumer AConsumer BConsumer C
Starting FICO680720780
Time for FICO to recover after these events:
30 days late on mortgage~ 9 months~ 2.5 years~ 3 years
90 days late on mortgage~ 9 months~ 3 years~ 7 years
Short sale (no deficiency balance reported)~ 3 years~ 7 years~ 7 years
Short sale (with deficiency balance reported)~ 3 years~ 7 years~ 7 years
Foreclosure~ 3 years~ 7 years~ 7 years
Bankruptcy~ 5 years~ 7-10 years~ 7-10 years

Once again, people with better scores suffer more: It takes them much longer to regain lost ground.

A person with a mediocre score can return to 680 in about nine months after a skipped mortgage payment, while the person with the 780 score may need three years to return her score to its once lofty peak. (The person with the lower score has fewer points to recoup, and adding points is typically much more difficult than losing them.)

More serious infractions can depress scores for as long as they are legally allowed to remain on credit reports: seven years in most cases, and up to 10 years for Chapter 7 liquidation bankruptcies.

Furthermore, your scores won't mend themselves automatically. You'll need to have and use credit responsibly if you want to restore your scores to their former glory. Using credit irresponsibly, or not using credit at all, will delay the healing.

So how do you recover from a credit setback? Take the following steps:

  • Review your credit reports. You can get your annual free look at your credit reports from the three major credit bureaus at -- and only at -- AnnualCreditReport.com. Other sites that tout free credit reports are typically come-ons for other services, such as credit monitoring, that usually cost money. Dispute any serious errors on your credit reports, such as accounts that are not yours, payments showing as late although you paid them on time, bogus collection accounts, and accounts not showing as "included in bankruptcy" although they were.
  • Use credit cards. You don't have to carry balances or pay credit card interest to improve your scores, and you shouldn't. Not paying your credit cards in full every month is a bad, expensive habit. So if you still have open credit cards, use them lightly (charge no more than 30% of the credit limit; 10% or less is even better) and pay them off in full each month. If you don't have a credit card, getting a new card might be tough because of your battered scores, so check out secured cards that give you a line of credit in exchange for a deposit you make at the issuing bank. CreditCards.com, CardRatings.com, LowCards.com and other sites list current secured card offers.
  • Get an installment loan. If you don't have an active home, auto or student loan showing on your credit reports, consider applying for a small personal or auto loan (a $1,000 loan, paid back on time, is enough to start helping your credit). You'll pay a high interest rate, but having an active installment account on your credit reports can help rehabilitate your scores.
  • Don't close credit accounts. Closing accounts can't help your scores and may hurt them, so try to keep your credit accounts open.
  • Apply for credit sparingly. Each application can be a hit on your scores, so don't apply for accounts willy-nilly or in rapid succession. If you must open a new credit account, wait several months for your scores to recover before applying for another.
  • Pay your bills on time, all the time. Skipped payments can undo all your hard-won progress, so make sure they don't happen. Set up automatic payments and don't let payment disputes wind up in collections. Pay particularly close attention to medical bills, since medical providers are increasingly willing to turn these over to collectors when insurers drag their heels on payment.
  • Piggyback on someone else's good credit. Being added as an authorized user to another person's credit card can help improve your credit, if the card issuer is willing to export the information to your credit reports. (Not all issuers are willing to do so, and some will export the information only for spouses or other family members of card holders.) Don't go overboard, though, since piggybacking abuses led Fair Isaac to limit the number of authorized user accounts that can be used to improve your scores.
  • Practice good financial hygiene. In addition to paying off your credit card balances every month, take steps to ensure you don't run into trouble again. That means you should build up an emergency fund that you can use to pay your bills if times get tough, and you should limit your borrowing to what you can pay back easily. You shouldn't max out your credit cards, even if you pay in full every month, or co-sign for another person's loan, since that person's behavior can hurt your scores.

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As you've learned, the bad thing about credit scores is that they change. That's also the good news. As long as you handle credit responsibly going forward, there's no credit calamity from which you can't recover eventually.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.