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. In this article, our experts reveal secret information about late payments and how they impact your credit scores:
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 you’re 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.
Here’s a summary of how late payments impact your credit scores:
30 days late – This record will damage your credit scores only when it is reported as “currently 30 days late.” The exception is if you are 30 days late often. Otherwise, a 30-day late payment will not cause lasting damage.
60 days late – This record will also damage your credit scores when it is reported as “currently 60 days late.” Again, the exception is if you are 60 days late often.
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
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. Settlements – Settlements are deals made between you and a creditor who is trying to collect a past due debt. Normally, you and the creditor would agree on an amount that is less than what you really owe them. Once you pay them, they consider the matter closed and paid off. However, they will report that you have made a debt settlement for less than your contractual obligation.
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.
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.