How late payments ding your credit score
How much will a late payment affect your credit scores? Here are the factors to keep in mind.
This post comes from Rob Berger at partner blog The Dough Roller.
Late payments may be the bane of your credit score perfection, or they may just be part of your overall credit mediocrity. How late your payments are, how perfect your scores would be otherwise, and a host of other factors all play into how much a late payment (or multiple late payments) will affect your credit scores.
I've broken the issue into several specific, commonly asked questions. Here's what you need to know about how late payments affect your scores:
What does a late payment do to my credit score?
Obviously, a late payment isn't a good thing -- with your creditors or for your credit scores. But I can't say something like, "One late payment will drop your credit score by 100 points."
The truth is that it depends. But know this: Your payment history makes up a significant portion of your overall credit score calculation. According to the official FICO website, credit history accounts for about 35% of a credit score.
This means that even if the rest of your credit history is great, late payments could have a hugely negative impact on your credit scores.
How late does a payment need to be to affect my credit scores?
Here's the good news: Most creditors won't report a payment that's just a few days late. If your payment is less than 30 days late, according to Credit.com, it probably hasn't been reported to the credit bureaus yet.
But once you hit that 30-day mark, expect your late payment to show up on your credit reports. In fact, late payments will be categorized based on how late those payments are: 30 days, 60 days, 90 days, 120 days, 150 days, or charge-off. The more delinquent your payment is, the worse its effect on your credit scores.
According to The Motley Fool, the occasional payment that's 30 to 60 days late will have a small, temporary effect on your credit score. A payment that's more delinquent can have long-term credit score ramifications. And the story gets worse if your account is charged off or moved to collections.
What happens to my credit scores when an account goes to collections?
A charge-off, a CreditCards.com article notes, is an accounting term. After a certain period of delinquency, your lender can no longer count your loan, credit card, mortgage or whatever else as an asset. The lender has to charge it off its books.
A charge-off is reported to credit bureaus and will remain on your credit report for seven years. Its effect is significant and can hurt your credit scores for that entire seven-year period. Once your account is charged off, the lender will try to collect on your debt through its own collections department or by hiring a collection agency, or the lender will sell the debt to a collection agency.
When your account goes to collections, you can never bring it current again, even if you pay it in full. Yes, your credit reports will show that you paid the debt, but you'll still look much riskier to lenders because it took so long for you to pay the debt.
The lesson: Do everything in your power to keep accounts from being charged off, even if they're already very late.
Are all late payments the same, or are some worse than others?
According to Credit.com, the real goal of any credit scoring formula is to determine how likely you are to make a payment that's 90 days late in the next 24 months. The lower your score, the more likely you are to make a very late payment in the next two years.
That means the impact of a 30- to 60-days-late payment doesn't last as long on your credit scores. But it also means that no matter what type of account you're talking about, a very late payment is a very late payment.
So, a very late credit card payment could have about the same impact on your credit scores as a very late mortgage payment.
But this isn't the only thing to consider when deciding, if you must, which payments to put on hold. Obviously, in the long run, secured debts -- like your mortgage or a car loan -- can have more dire financial and personal consequences. A credit card company might charge off your debt and send debt collectors after you, but it can't do much more than that. Your mortgage or auto lender, on the other hand, can reclaim your property through foreclosure or repossession to get part of what's owed to them.
As far as your credit scores go, it doesn't matter which payments are late. But practically speaking, it's much better to keep up with the mortgage and car payments, even if you have to pay unsecured debts very late to do it.
What about late payments on non-debt accounts?
When we think of a credit score, we normally think of actual credit -- auto loans, mortgages, credit cards and the like. And, most of the time, those are the things that affect your credit scores.
However, non-debt accounts can affect your credit scores as well.
On a normal basis, your utilities company, phone company and Internet provider probably don't do much reporting to the main credit bureaus. If you make a late payment, you'll have to pay a late fee perhaps. And if you make lots of late payments, your services will be cut off.
But if your account goes late enough to enter into collections, it will be reported to credit bureaus. So make sure you're staying current on utilities and other payments, as well as credit accounts, to avoid a negative impact on your credit scores.
Will late payments hurt my score the same as they would someone else's, or is it all relative?
How late payments will affect your credit score is somewhat unpredictable. Because the FICO formula and similar credit scoring models are proprietary, we can only guess how any one event will affect a person's credit score.
The main differentiator, according to the National Foundation for Credit Counseling, is how high your score is. Because individuals with midrange credit scores are slightly risky to lenders, a late payment will probably not have a huge effect on their credit scores. Those with very good credit scores, on the other hand, will take a bigger hit from an out-of-character late payment.
According to the NFCC, people with a credit score of about 670 could see a 140-point drop if an account is 30 days late. Individuals with a credit score of 780, on the other hand, might experience a 160-point drop from a 30-days-late payment.
This means that if your credit is great, you'll need to be more cautious to protect it from late payments. If your credit isn't fabulous, though, you're not off the hook. That 140-point drop could be the difference between getting a loan and not getting one. So either way, it's important to keep all your accounts current.
How can I avoid having a late payment hurt my credit scores?
Maybe you're struggling with the bills, or maybe you just keep forgetting to pay one small bill on time. Either way, here are some steps to take to avoid having a late payment harm your credit scores:
- Set up bill pay reminders. A variety of apps are available to remind you when you have a bill coming due. For many, better cash flow planning is the key to ensuring that bills are paid on time.
- Talk to your lender. If you've just lost a job or run into other serious financial issues, talk to your creditors. The truth is that creditors would rather hear from you now, well before your account goes into collections, which costs them a lot of money. Try to reach a payment agreement that will work for you both -- either an extended grace period or a smaller payment. That way, you'll never be late in the first place.
- Prioritize your payments. Let's say you have $500 worth of payments to make, but only $300 in the bank. In this situation, you'll need to prioritize which bills you pay. Essential bills -- rent, mortgage, utilities, etc. -- should take priority. After that, pay bills that have a hefty late fee. Then pay the bills that are closest to going into collections.
- Ask a lender to erase a late payment. Bringing an account current after 30 to 60 days of delinquency should fix your credit score pretty quickly. But if your late payment was a one-time thing, you could also ask your creditor to erase that late payment from your credit history. Many lenders will make these "goodwill adjustments" for borrowers who are otherwise in good standing. It never hurts to ask.
- Start making on-time payments. If you've missed payments in the past, several months' worth of on-time payments can make up for it. This is especially the case with payments caught up before 90 days of delinquency. Late payments still hurt, but if you catch up quickly, you can erase the effects before long.
- Check your credit report. Once you've caught up on your late payments, get a copy of your credit report. Sometimes your creditor or the credit bureau will make a mistake and your account will still show as unpaid. If this is the case, file a written dispute to get the information corrected as quickly as possible.
Sometimes, late payments are a fact of life. When you're struggling to pay bills on time, it's good to know how your decisions will impact your credit score -- for now and over the long term.
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