Credit scores of 800 and higher don’t just randomly happen. Reaching the top credit scoring echelon takes participation, diligence, discipline, and budgeting. Over time, managing bills properly and keeping debt under control adds positive history on your credit report, and builds up your credit score so that you enjoy a plethora of loan options, the highest limit offerings, and the lowest, most attractive interest options.
However, it’s easy to “set back” your credit score. Just a few mistakes that don’t seem like that big of a deal at the time can tank your credit score 100 points, or even more!
The easiest way you can derail your credit score is by paying your debt obligations late.
Situations that can decrease your credit score
It sounds simple, and it is. Perhaps you don’t even miss a payment, you just forget to make it for a few weeks. Or you write it out and and don’t send it in. Maybe your cash flow is short that month and you need to wait until your next paycheck clears. Perhaps an illness or costly home repair took they money you were going to use to pay the bill.
All of these scenarios can crush your credit score.
The credit scoring numbers
Within the credit scoring model formulation, payment history has the single biggest impact on the score, at 35%. This means there is no bigger way to make your score go up, or down, than paying your bills on time.
To understand this, you need to understand a credit score’s purpose. Credit scores predict the likelihood that you will make your payments on time. The higher the score, the lower the risk of loaning you money. If you pay every bill on time, over the months and years this raises your credit score into an attractive one. On the opposite end, playing fast and loose with your bill payment plan sets you up to suffer in mediocre-to-bad credit.
The cushion that isn’t really there
Consumers with high credit scores and a long, positive bill payment history with no slow or missed payments think a single late pay won’t damage their scores that much. This is WRONG! In fact, a person with a high credit score suffers from a greater credit score drop with one late payment.
The longer a consumer goes without a late payment,the more points the scoring model gives to his or her credit score. So, a person who has never been late is receiving lots of positive credit scoring points. If that person misses a payment and receives a 30 day late report on his credit, the risk of loaning him money goes up, and his credit score goes down, by as much as 165 points!
If a second consumer who has a few late payments on his credit score gets another late payment, his score probably won’t suffer too much. This is because his score is already lower dues to late payments. He wasn’t getting the positive benefits of a strong payment history anyway, due to his previous late payment. So, as the saying goes, the bigger you are, the harder you fall.
All late payments are not equal
Consumers who don’t meet their bills on time need to know that, even if they have missed a payment, getting current as soon as possible helps their credit score.
- Severity: The severity of the late payment affects your credit score. For example, if a person is only a few days late, say 3-5, this may not even be reported to the credit bureaus, and would have no impact on your credit score. If it’s a month late, a 30 day late will show up on your credit report, and that will negatively affect your score. If you let a payment languish for a long time, the creditor will report it as a 60 or 90 day late, and that will cause your credit score to sink dramatically, even worse than a 30 day late. A 90 day late may shave off well over 100 points! Remember, all of this hinges on where your credit score was in the first place. But, a good rule is, even if you are late on a payment, get it paid as fast as you possibly can in order to minimize the impact on your credit score.
- Frequency: If you have been late on a payment, it’s easy to think, “Well, I’ve already messed up my credit, so I just won’t worry about paying any of my bills on time.” That is a BAD frame of mind. The scoring model looks at the number of late payments on a person’s credit report. If there are multiple late payments, the model adjusts your credit score much lower than before these late payments occurred. Again, your credit score predicts the likelihood you will pay your bills on time. Multiple late payments build a case that you are a high risk of paying your bills late or not at all.
- Recency: Credit scores are driven by your last two years’ worth of actions. If you are late on a payment and then go try to buy a house are car, that late has a huge effect on your score. However, if you are late, and then get caught up and manage your payments well, two years down the road that late is not decreasing your credit score much at all. This is why it’s vital to get current and stay current on debts.
Late payments drop your credit score quickly and tremendously. Losing 165 points because of late payments is frustrating and disappointing when it happens. Practice smart bill paying practices. Schedule your payments in advance, and use a budgeting app to ensure you don’t get into too much debt. If you end up with bills you can’t pay on time, make every effort to get current and stay current as fast as possible, and minimize their negative impact on your credit score health.
Share the tale of your late payment below, so fellow readers can know how to avoid making the same mistakes!