Figuring out exactly how credit scores work is problematic. Like nuclear fission, learning Chinese and setting the clock on your DVD player, credit scoring is not something that most people can easily master. Luckily, Credit.com is partnered with credit industry experts willing to share their secrets! In this article, our experts John and Emily reveal secret information about late payments and how they impact your credit scores:
In the complicated world of credit scores there is one fact that pretty much everyone assumes is true: late payments are bad for your credit scores. Not only are late payments bad, but they are also assumed to be one of the worst things you could do to your scores. The first sign of a late payment on your credit reports signals impending credit doom, right? It turns out that this isn't exactly the case after all.
There are thousands of slightly different credit scoring models used today, each with a different purpose and formula. The most common credit scoring systems are setup to predict only one thing: how likely you are to have a 90 day late payment or worse in the 24 months after your score is calculated.
Credit scores are used by financial institutions, insurance companies and utility companies as an efficient way to predict how risky a customer you will be. If your credit score is low, it indicates that you are more likely to make late payments or file costly insurance claims. In turn, this means that the creditor is more likely to lose their investment by lending you money. Once you understand that credit scores predict this specific behavior, it's a lot easier to figure out the best way to manage your credit.
Because scoring systems are so focused on predicting whether or not you'll go at least 90 days late, surprisingly, an old 30 or 60 day late payment is actually not that damaging to your credit scores as long as it is an isolated incident. Only when your accounts are currently being reported 30 or 60 days past due on your credit reports, will your credit scores plummet temporarily.
If 30 or 60 day late payments are an infrequent occurrence, this kind of low level late payment will damage your credit score only while it is being reported as currently past due. They shouldn't cause lasting damage to your credit score after this period passes unless you make 30 or 60 day late payments on a regular basis. In this case, the fact that you are habitually late with your payments will cause long term damage to your credit scores.
It's a whole new ballgame once you have a 90 day late payment, however. If you have been over 90 days late (even just once), the credit scoring models consider you much more likely to do it again. One 90 day late payment will damage your credit for up to seven years. From a scoring perspective, a single 90 day late payment is as damaging to your credit scores as a bankruptcy filing, a tax lien, a collection, a judgment or repossession. Being 90 days late causes you to be viewed as a possible "repeat offender" and a higher risk to creditors. Here's a summary of how late payments impact your credit scores:
If you continue to miss your payments beyond 90 or 120 days, the following records may also harm your credit score:
Remember, the goal of most credit scoring models is to predict whether or not you will go 90 days past due or worse on any obligation. What's missing? The scoring models are not designed to predict whether you will default for any specific dollar amount. As such, having a 90 day past due of only $100 is as bad as having a 90 day past due of $10,000. The same goes for low dollar collections, judgments or liens. The dollar amount doesn't matter. The fact that you paid late is what's most important in the eyes of a credit scoring model.
Now that our late payment secrets have been revealed, let's look at what it means to you. You should still avoid making late payments whenever possible. But we now know that one 30 or 60 day late payment isn't the end of the world. Since 90 day late payments are the real credit score busters, you should avoid a 90 day late payment at all costs.
If you already have a 90 day late payment record on your credit history then your scores are already suffering. Be certain that the information is being accurately reported. If it isn't then you have the right to dispute it with not only the credit reporting agencies but also with the lenders who reported it. Your goal is to have the item corrected or removed, especially if it is in error. Once removed or corrected your credit scores will immediately recover.
Credit scores are complicated. Fortunately, you don't need to be a credit scoring genius to improve your own credit score. Using this late payment secret and other credit score information from Credit.com, you can manage your score like a credit industry expert.
You can check your credit score each month using Credit.com's free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You'll see, for example, how your payment history, debt and other factors affect your score, and you'll get recommendations for steps you may want to consider to address problems. In addition, you'll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.