What's now a million-dollar question was only a 25-cent question yesterday, because everyone already knew the answer: How long does it take for your credit scores to recover from a short sale or a foreclosure? Years, right? These incidents remain on your credit reports for seven years and short sales are reported as either charge-offs or settlements. Those two events, as well as foreclosures, are all seriously negative and could significantly damage your credit scores for many years.

So why has this suddenly become a topic of debate, discussion, and conflicting answers? Because in March 23rd’s American Banker, Barrett Burns, the CEO of credit score provider VantageScore Solutions claimed, "...it can take borrowers as little as nine months to repair their credit score after a short sale or foreclosure."

Wow, that’s great news! Or is it? I found this difficult to believe, so I interviewed Craig Watts from FICO – credit score inventor, and VantageScore’s prime competition – to get the company’s input on how long it takes to repair your credit scores after such an event. Here’s the full transcript of my interview, unedited.

Ulzheimer: Is FICO willing to go on the record discussing the impact of a foreclosure and/or a short sale on a consumer’s credit score?

Watts: "FICO has consistently found that past payment history is the single most predictive category of information when we empirically develop credit scoring models using consumer credit histories. As an example, we recently looked at a sample of about 10 million credit reports representing a highly diverse U.S. population. We examined that group's most recent, twelve-month performance window. We found a default rate of 2.9% for the subset of all consumers with a clean credit record, and a default rate of 49% for the subset of all consumers who had had a recent foreclosure. In other words, consumers who recently experienced a foreclosure were about 17 times more likely to default on a credit obligation in the next 12 months than were people with a clean credit record. Obviously, recent credit defaults are vitally important when one is objectively assessing default risk."

Ulzheimer: How long does it take for a consumer’s score to recover after a short sale or foreclosure? And by recover, I mean fully recover.

Watts: "A consumer with a foreclosure or similar default on her credit report can expect her score to begin recovering after a couple of years if she consistently pays all her bills on time, keeps any credit card balances low, and takes on new credit only when needed. As the default event ages on her credit report its influence on her score will diminish, until the credit bureau removes the record from her file after seven years."

The bottom line is this: You can't fully repair your credit score in as little as nine months unless you can convince the credit bureaus to remove the items from your credit reports. And as long as the items are accurate they will remain for seven years. Your scores will begin to recover in time as the item gets older and older and loses predictive value, but unfortunately it won’t happen after only nine months.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

When I started at FICO in 1997, the company was going through a growth spurt. Most notably was the increase of FICO® score usage by mortgage lenders thanks, in part, to the adoption of FICO® scoring by mortgage industry giants Fannie Mae and Freddie Mac. Many mortgage industry players will tell you that Fannie and Freddie force-fed FICO scores to the industry, and they’re not entirely wrong about that.

Now that we're a good 12+ years into the mortgage industry's use of FICO scoring for underwriting, there still seems to be some misunderstandings about the tool. So in this edition of FICO Mythbusters we'll dedicate some digital ink to clearing up circa-1997 misunderstandings.

1. Income Matters – Nope, not in your FICO score. Remember that the FICO score is a CREDIT BUREAU-based scoring model. This means that it can only take into account what’s on your credit reports – and income isn’t. Income was being purged from credit reports when I started in the credit industry in the early '90s, and it hasn’t reappeared since. So whether you make $1,000,000 or $15,000, there’s no direct influence on your FICO scores. Those that complain about this assume, incorrectly, that capacity equal credit worthiness.

2. Risk-Based Lending is Unfair – …because it makes credit for higher-risk borrowers more expensive or unattainable. Duh! Lending is not a charitable event. Lenders have to make money or, well, they don’t need to be lenders. The following statement will eliminate me from any future presidential ambitions: nobody deserves credit. Credit is not a right. Credit is an earned privilege. Those who don’t pay their bills on time don’t deserve the same "cost" for their credit as someone who does. Complaining about this is a waste of time.

3. "Honest Mistake" Late Payments Shouldn’t Hurt Your Scores – Really? And why shouldn't they? Where in your closing documents or promissory note does it allow you to "honestly" not pay your bills on time? I'll save you the research time; it’s not there. Put yourself in the lender’s shoes just for a moment and pretend that the $250,000 home loan came out of your pocket. Would you really care why the payment isn’t being made on time? If you do, then you should not be in lender.

4. There is Such a Thing as a "Co-signer for Credit Only" – There is a very interesting lawsuit working its way through the court system in Georgia where a co-signer is suing a lender because the other co-signer stopped making payments on a car loan. Follow me… two people co-sign an application for a boat loan. The two people break up and one moves to Arkansas, with the boat. He stops making the payments because he lost his job. The other co-signer refuses to make the payments because, well, she can’t use the boat. Lender repossesses the boat, sells it at auction, sues both co-signers for the deficiency balance, and reports it to both of their credit reports and their FICO scores go down. Co-signer, sans boat, sues the lender because she claims that she was a "co-signer for credit only" and shouldn’t be liable for the payments. I love it. Now we’re creating new industry terminology because we don’t read our loan documents. This isn’t a joke; someone is actually making that argument and clogging the Georgia court system with this ridiculous lawsuit.

The silver lining of the credit meltdown, I hope, is that people will actually take time to learn more about the system rather than just complain about it. Complaining about something without offering a reasonable alternative is just that – complaining – and nobody wants to hear it. Complaining about something and having your facts wrong is just that – complaining – and nobody wants to hear it. Complaining about something, having your facts straight, and offering a reasonable alternative isn’t complaining; it’s innovation.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.