Late payments and credit rating
There are so many misconceptions with late payments and how they affect your credit rating, we have decided to put together this post to confuse you even more. So to start with, any late payment, be it a 30 day late, 60 day late or 90 day late, makes your credit suffer and badly. Of course 90 day late hurts more than 60 day late, which in turn hurts more than 30 day late. You don't have to be a Ph.D in anything to understand this simple fact of life, but surprisingly many real life Ph.Ds do not.
Now, we are not going beyond 90 day late payments, because by the time you cross this sad threshold and become 120 days late or more, your lender has already charged that debt off, sent it to a collection agency or initiated foreclosure - depending on what type of debt you are in default. At this point, you would likely wish you never had credit rating to begin with.
Important fact is that when it comes to late payments, FICO scoring algorithm basically looks at 3 things - Frequency, Severity and Recency. Frequency means how many accounts are in default, Severity means how late are lates, and Recency means how recently a late payment was reported by a lender.
90-day late payments vs. 30- and 60-day lates
Many credit gurus say that because FICO scoring algorithm is almost single handedly focused on predicting whether or not you will go 90 days late, an old and isolated 30 or 60 day late payment is actually not that damaging to your credit rating. Only when your credit report has a currently reported 30 or 60 days late, will your credit rating go down but only temporarily.
This is like saying that an occasional simple cold is way better than a serious chronic disease. Hello, we all know that. Of course, a 60 day late payment hurts the worst for 2 years, and then it is scored as a puny 30 day late. But a 90 day plus late stays on the credit report for 7 years because it is a serious delinquency, while isolated 30 day lates basically don't count after 2 years. With this said, you must understand that -
having just one 60 day late payment that is less than 2 years old on credit reports, places you squarely into FICO negative score bucket. Such a bucket would hold a collection of other borrowers with similar problems for scoring purposes, see details on FICO bucketing. Once 2 years are left behind, you come out of that negative score bucket and your credit rating improves, unless you still have other 60 day lates less than 2 years old, or 90 day lates, collections, charge-offs, and other serious derogatory and public records sitting on your reports.
Multiple late payments kill credit rating
You might get away with an occasional late payment on a single account, but if you have a few even 30 day lates on multiple accounts, FICO treats it more severely because you mishandled several credit accounts. Also understand that once you are late, from the credit rating side of the equation, it does not matter anymore if you still owe the money or not. Paying off lates and bringing credit records current, doesn't help your rating and score. What it does help however, and this is very important, your lates stop growing from 30- to 60- to 90- to 120-day lates. So in a fact, by paying your debts you keep your credit scores from plummeting deeper.
90 day late payment is very bad for your credit rating
Once you have a 90 day late payment, the FICO can't help but consider you as an armed and dangerous credit delinquent. A 90 day late affects your credit rating for 7 years. Understand again, from where FICO stands, being 90 days late is a very short distance from filing for bankruptcy, getting a tax lien, judgement or repossession, or being foreclosed very soon.
To summit up,
- 30 days late payment hurts the most while it is current unless you have multiple occurrence on one or few accounts. Otherwise no long term damage to your credit rating, but don't try it.
- 60 days late hurts the most for the first 2 years, then does the same damage as a 30 day would. Unlike a 30 day late, it puts you into a negative score bucket as explained above.
- 90 days late stays on your credit for 7 years and hunts you badly for at least 5 of those. You will also be placed into FICO score bucket with borrowers with rather bad credit profiles so your rating and scores will suffer tremendously for at least 2 years with only incremental improvement in the following 2 years.
- Does not matter how little or how much was that late payment for. FICO does not care if you miss $5, $50 or $50,000. Once you miss, you miss, as long as a creditor reports it, the effect is one and the same.
Mon Oct 18, 2010 09:10AM | Copyright: www.bad-credit-advisor.com | More in Credit Score Help | Comments (0)
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