Credit.com Cautions Consumers against “Score Suicide”

President Bush announced a plan today to freeze interest rates for up to 1.2 million subprime ARM borrowers in an effort to aid the economy through the housing slump.  To qualify for a five-year rate freeze borrowers must:

• Be no more than 30 days late at the time of the freeze
• Have been no more than 60 days late on the mortgage in the last year
• Have less than 3% equity in their homes
• Have an ARM resetting in 2008 or later
• Be capable of making the lower payments and not capable of making the higher reset payments
• Have a credit score below 660

The credit score maximum included in this plan could incite consumers to commit "score suicide;" voluntarily destroying their credit in order to qualify for the rate freeze. Because credit scores carry negative records for 7+ years, it's possible that worried borrowers may cause lasting damage to their credit.

Credit.com cautions consumers against:

• Closing the oldest accounts on your credit report. This loss of "credit age" could be very hard to recover
• Making 90-day or longer late payments. These late payments will damage credit scores for 7 years
• Applying for credit in excess. You may end up burdened with accounts you don't really want
• Entering the world of collections, judgments or liens. These negative public records cause severe credit score damage for 7 or more years

And consumers shouldn't forget that lowering credit scores could also impact their ability to open new accounts, insurance rates and credit card rates.

What do you think of the ARM freeze program? Do you qualify for a freeze? Would you commit "Score Suicide" to lock in a low rate?  Share your opinions and feedback in the comments section below.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Comments

[thebaglady]

I personally think the mortgage rate freeze plan is just a ploy to squeeze the last bit of money out of stretched borrowers. I wrote an article about it and I stated that it helps only the banks and the government

[Gerri Detweiler]

Great point Emily. Let me get this straight:

First, the borrowers get into bad loans. Then they are forced to harm their credit scores to keep those loans. Finally, they can't refinance in a few years because they had to lower their scores to qualify for the program to keep the loan.

Something doesn't sound right.

[Scott]

I don't see people damaging their credit scores intentionally to qualify for this program, but I suppose it's possible.

Regardless, the interest rate freeze will be widely ineffectual, especially since there likely won't be a bottom to the housing mess until 2010.

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