Credit Issues

How does a loan modification effect your credit score?

That question relies on a couple of things.

Were you behind on your payments before your loan modification? Did the bank agree to reduce your principle balance as a part of the loan modification?

A loan modification does not result in a negative report on your credit. A negative rating would be caused by late or skipped payments and not sticking to the agreements of your original credit provisions.  Loan modifications that include a decrease in principle where the bank essentially forgives part of the money owed. In these cases the bank may report the account as paid for under owed, which is not good for a credit rating.

For the majority of cases, delinquent payments occurred before a loan modification agreement. In such cases a loan modification may be advantageous to your credit standing and you will be brought current and the loan will be rated on such for your credit.

Credit agencies are still trying to figure out how to handle loan modifications, as they are relatively new.  A good idea is to incorporate in the loan modification a deal with your bank, which will defend your credit history. When dealing with banks make sure your loan modification is current with the credit offices. The may not agree but it won’t hurt to ask.

Getting a loan modification is often a great first step in getting back in good graces with credit card companies.

Loan modifications help prevent foreclosures and get a fresh start with your bank.

Preventing delinquency is the best thing you can do to improve your credit. So yes, a loan modification could negatively effect credit rating, but in most cases it will only help or ‘lessen’ the pain of bad credit.

Short sales also may or may not affect a credit rating, depending in part on how it is conducted and dependent on the revolving circumstances.