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 necessarily the case after all.
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Before we get into the specifics of how late payments affect your credit, it’s essential that you find out exactly how they are affecting your credit. To do that you need to do two things:
- Get your free credit score from Credit.com which will explain in detail the factors that are having the greatest impact on your scores, including delinquencies, and what you can do about them.
- Get your free annual credit reports from each of the three major credit reporting agencies, Equifax, Experian, and TransUnion so you can see whether your reports contain late payments.
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, 30 or 60 day late payments that occurred long ago are actually not that damaging to your credit scores as long as it is an isolated incident. It’s when your accounts are recently reported 30 or 60 days past due on your credit reports that your credit scores plummet temporarily.
If 30 or 60 day late payments are an infrequent occurrence, they shouldn’t cause lasting damage to your credit score unless they are recent (last two years or so) or 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:
- 30 days late – This record will damage your credit scores most when it is recent. The exception is if you are 30 days late often. Otherwise, a single 30-day late payment should not cause lasting damage.
- 60 days late – Similarly, recent 60 day late payments cause the most damage. Again, the exception is if you are 60 days late often which will certainly hurt your scores. Otherwise, one late payment should not cause long term damage.
- 90 days late – This record will damage your credit scores significantly for up to 7 years. It doesn’t make a difference whether or not your account is currently 90 days late. Remember, the goal of the scoring model is to predict whether or not you will pay 90 days late or later on any credit obligation. By showing that you have already done so means that you are more likely to do it again compared to someone who has never been 90 days late. As such, your credit scores will drop.
- 120+ days late – Late payment reporting beyond the initial 90 day missed payment does not cause additional credit score damage directly. However, there is an indirect impact to your scores. At this point, your debt is usually “charged off” or sold to a 3rd party collection agency. Both of these occurrences are reported on your credit files and will lower your credit scores further.
If you continue to miss your payments beyond 90 or 120 days, the following records may also harm your credit score:
- Collections – Collections are the result of late payments. There are two types of collections; those that have been sold to a 3rd party collection agency or those that have been turned over to an internal collection department. Regardless of which one shows up on your credit reports, your scores will suffer.
- Tax liens – Tax liens are obviously not preceded with late payments on any sort of account. However, when tax liens are reported on your credit reports they have the same negative impact to your credit scores as any other seriously delinquent account.
- Repossessions or foreclosures – Having a home foreclosed upon or a car repossessed are both considered serious delinquencies and will lower your credit scores considerably for up to seven years. The assumption normally made by the consumer is “hey, I gave the home or car back to the lender, why are they going to show me as delinquent?” The answer you’ll get from lenders is that you signed a contract with them to buy a home or car and pay it in full over a period of time. You failed to do so therefore they consider you to be in default of your agreement with them and will report this on your credit reports.
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.
Find Out Where You Stand
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.