5 myths about late payments and your FICO scores
You may be surprised to discover that some of the things you 'knew' about missing a payment -- or even being a day late -- just aren't true.
This post comes from Rob Berger at partner site Credit.com.
Recently I had the opportunity to interview Tom Quinn on my weekly podcast. Tom is the credit expert for Fair Isaac Corporation, the creator of the FICO credit score, and he also is a former contributor to Credit.com. There are few people who know more about FICO scores than Tom.
The interview yielded a number of surprises when it comes to that all-important three-digit number. Perhaps most revealing were Tom’s comments about how late payments affect your FICO scores. He crushed several myths surrounding late payments.
Keep in mind that consumers have more than one credit score. In fact, you have many credit scores. Tom’s expertise here speaks specifically to FICO scoring models, though some of the myths apply to other scoring models as well. What’s important are the basics of good credit.
Payment history is a vital part of a consumer’s credit scores, so we debunk five of the most pervasive myths about late payments.
1. The one-late-payment myth
One prevalent misconception is that a single late payment is no big deal. The reality is that on-time payments are the single most important factor in the FICO formula. Research conducted by FICO shows that a single 30-day late payment on a mortgage can shave 75 or more points off of a consumer’s credit score. In addition, late payments remain on a credit report for seven years. As a result, what may at first seem insignificant can have a major affect on a FICO score.
2. The seven-year myth
As significant as even one late payment can be, don’t give up hope. As noted above, a late payment remains on a credit file for seven years. The effect that late payment has on a FICO score, however, changes over time. The FICO formula considers the recency of a late payment. In other words, a late payment in the past six months will be more severe than a late payment five years ago. So like fine wine, it gets better over time.
3. The 30-day myth
A frequent question in credit forums is whether a payment a few days late will get reported to the credit bureaus. Some have mistakenly claimed that payments must be at least 30 days late before they affect a FICO score. In truth, a creditor can report a payment that is even one day late. In practice, however, not all do. As a generalization, late payments on revolving accounts such as credit cards tend not to get reported until they are 30 days late. In contrast, late payments on installment loans like a car loan generally get reported sooner.
Keep in mind that these are generalizations, not rules. Furthermore, creditors can and do level late payment penalties, regardless of whether or when they report the payment as late.
4. The late-is-late myth
Another common myth is that all late payments are created equal, regardless of how late they are. This myth can cause some people to delay making their payment, thinking 30 days late is just as bad as 90 days late. The truth is, FICO scores factor in the severity of the late payment. A 90-day late payment is more severe than a 30-day late payment. Don’t get lulled into inaction by the myth that all late payments are the same. They are not.
5. The number-of-late-payments myth
The fifth and final myth is that the number of late payments is not a significant factor. Late is late, some believe, and whether one is late on one payment or five is not a meaningful factor. The FICO scoring models look at the number of late payments on a credit file. One late payment may reflect a simple oversight, but five late payments potentially reflect a more serious financial problem.
The key is to appreciate just how significant late payments are to the FICO score. Payment history is the single most important factor, making up 35 percent of the FICO formula.
More from Credit.com:
Wouldn't it be nice if consumers could screw over the creditors the way they screw us? I pay my bills on time but I have bad credit all due to mistakes made by my creditors. I used to go thru the rigamarole of getting my credit reports every year and constantly fixing all the wrong info in them. Many of my "creditors" never even bothered to contact me in an attempt to collect or allow me to dispute - they just reported nonexistent charges to the agencies. No, not fishy at all.... Got them all removed too so it can't be just me getting ripped off in this manner.
At one point I actually started getting offers in the mail that used a strange combination of my maiden name and former married name - neither of which I've used in over ten years. Found out one of the credit reporting agencies just willy nilly changed my name! Nightmare trying to get that fixed! Simply because ONE creditor (never found out who) reported it to them makes it true and I have to jump thru hoops to prove my own name. What nonsense!
I don't care anymore and haven't bothered looking at my reports for a few years now. I can't even imagine how crazy it must look. But I'm never going to own a home and I only need credit cards with fairly low limits for traveling purposes (try renting a car, booking a hotel room or buying an airline ticket without one). I would love to be able to collect info on creditors detailing their ridiculous, harmful mistakes and somehow have all that negative info used against them for a change. Wishful thinking...
This is more credit score and credit card insanity- the credit and FICO industries really have the American public firmly around the neck. 75 points of your score for ONE late payment??! Are you kidding me?? Listen, I am not a dead beat, I am not a rich Joe Blow, I'm a regular old hard working American doing my best to make it through- and time after time my worth is measured by my credit score- whyohwhy?? I do not advocate nothing in place to set some sort of standards for lending/credit, but FICO is a huge monster and growing, and business has embraced it as a way to gouge many a citizen out of their hard earned money.
Business does like it's rich and FICO perfect customers, but it loves its middle class and poor FICO score customers even better. You can't charge a perfect FICO score high interest rates, extra fees, higher payments, but you sure can do it to the lesser guy- and that's another avenue for big profits to come in. FICO has become a "legit" way for business to swim with the sharks- they can't help it, FICO demands it.
I have a perfect driving record, and at 50 have never had an accident. Do you think I get the best rates? No, my FICO score determines I am a bad, bad driver and at high risk for ramming my car into a loaded school bus at 110mph.
This country sucks.
we were actually told by someone in financing that you will never win on this whole credit score scam. If you pay off your credit cards & close them your credit score goes down. Too much credit your credit goes down. Too little credit no financing from anyone. On & on & on.
I paid off my cards anyway & closed them. Who cares. I took the hit & beat them at their own game. Haven't had anything but a car payment since. Put $10,000 down on that. It's amazing how the car salesman jump around when you wave that kind of cash! My car payment for a 2012 KIA Sorento: $200 a month.
My advice: Do not skip the 1st month the finance company "graciously gives you" start payments immediately the next month. Pay $10-50 over requested payment every month. Pay at least 10 days before due date. More will be applied toward principal than the interest. THEY HATE THAT! Almost all of our $200 is being applied toward principal NOT INTEREST! Gives me a damn good feeling every month.
Now if I could just save that 20% for a down payment on a house...............................
What a joke. The industry that brought this country to it's knees is telling us how to handle our finances. Nothing but a bunch of rip-off artists. Credit score scam and the government lets them do it. Government for the people, I don't think so.
Meanwhile, they are nothing more than cheap extortionists, paid informers, and blackmailers.
There has to be greater accountability, especially because the buyers of their information count it so heavily.
Making your payments as they become due is a true virtue even if there is very little cash left.
As late fees are avoided, and interest on paid debts is not accrued, a bit more cash will be left
in the wallet or purse.
I use debit, and have any loans, such as car loans etc, directly pulled from set accounts.
Hence, I need no stinking FICO score tips, nor your 'revolving' credit cards. Take your score for a HIKE-O.
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