Looking at the 5 most common credit mistakes just about everyone makes at some point, here we’ll talk about the effect missing or late payments have on your credit report.
The Hired Goon Clause
Most people know to pay their bills on time if they want to remain in good standing with their creditors and keep their score on the up and up. What most people may not realize is how severely missing payments can affect your rating in the long run. While most creditors won’t actually resort to sending two large gentlemen to your door to try and collect late payments, the affect on your score can still leave it pretty bruised.
One Strike & You’re Out (of Luck)
Just one payment slip up can ruin your credit score for years. A forum poster who regularly watches their credit score saw her credit score drop from 702 to 624 after just one missed payment. For those of you keeping track at home, that’s the difference between being approved with respectable interest rates to outright denial of loans or lines of credit.
Late last year FICO, the company that created the leading credit score model released some specifics about just how much a late payment can hurt your credit score.
|
Effect on a score of: |
680 | 780 |
| 30-Day Late Payment | Between a 60 to 80 point drop | Between a 90 to 110 point drop |
| Source: FICO |
Obviously credit profiles vary, so there’s no guarantee that just one missed payment will hurt your score that much. But when you consider the higher monthly payments you’re likely to pay as a result, the affects can be devastating not only to your credit score, but your monthly finances as well.
What happens when you’re late?
Everyone knows about late fees the creditors tack onto your next bill, but the penalties for late payments don’t stop there. Many creditors will start hiking your interest rates up, which can increase your finance charges, making it more expensive to carry a balance.
Here’s how it’s broken down:
• 30 days late. This will only affect your credit report and score if you are consistently 30 days late on your payments, i.e. you pay the bill, but you’re usually about a month late in getting to them. Otherwise, these aren’t too much of a lasting problem.
• 60 days late. The same as 30 days – these are only really a lasting problem if you always pay your bills 60 days past their due date.
• 90 days late. Here’s where the real damage starts. Not only are you up to 3 months late on your payments – which looks bad enough as it is – but now the bureaus are no longer willing to cut you any slack because you’ve demonstrated you’re willing to let your bills go for up to 3 months, possibly even longer. In light of that, your credit scores will start to drop.
• 120+ days late. Those don’t bring your score down any further, but if you get to this point, you’ll be toeing the very dangerous line between an account that’s simply late, and one that could be charged-off and sold to a collection agency. And those look even worse on your report.
So how exactly do all these late payments affect your score? According to myFICO.com your payment history accounts for 35% of your overall score. As you can see, that’s the largest slice of your credit pie. Yeah, now you see why you should pay on time.
How can I avoid this?
Pay your bills on time. Simple. If you’re having trouble keeping track of all your bills though, you may want to consider setting up automatic withdrawals for some of your accounts online so you won’t worry about any of these accounts falling through the cracks. Luckily, after 6 months of on-time payments, creditors are required to give you your pre-penalty rates back.
If you’re on a fixed income, you might consider creating a budget for yourself – if you haven’t already – to better map out what needs to be paid and when.
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