How Late Payments Affect Credit Scores

Credit scores impact so many areas of life that it helps to be armed with the facts regarding how they are compiled, rather than falling prey to much of the erroneous information which is little more than myth. The certain way to be sure how late payments affect credit scores is to keep up to date with any changes introduced to the FICO score or the Vantage2 score as occassional updates are made to the way the scores are compiled.

Payment history comprises 35% of the FICO score, but only 28% of the Vantage2 score. Although the FICO score is used by the majority of lenders and is the best known model, Vantage2 is also gaining ground, often used alongside the FICO score. Individuals are unlikely to know which scoring model is being used by the lender.

Late payments have a negative impact on credit scores, but there is no universal fall in scores, as each individual may suffer a different loss of points when a late payment is considered alongside the accounts held. Monthly reporting of payments to credit bureaus includes credit and store cards, instalment loans, retail accounts and mortgages. However, whilst payments towards pay day loans, utilities and fines are not generally recorded, they are reported if late.

The length of time payments fall past due has great relevance to one’s credit score. Late payments under thirty days may well result in a late payment charge from the lender, and even a shift to a penalty interest rate, but they will go unreported if less than thirty days past due. Once a late payment reaches thirty days late it will be reported to the credit agencies and its impact will differ depending on individual accounts.

The longer a payment stays past due the greater the negative impact it will have. Late payments are recorded at thirty day intervals, and if they reach the default stage they will have a significant negative impact on credit scores. Accounts which are passed to collection agencies or which go to judgment have the severest impact.

If an individual has lots of reported accounts which are all paid in a timely fashion, then one late payment on one account will not have a significant effect on credit scores. However, a person who utilizes little credit will see a much more significant fall in their credit score when a payment is reported as late. Those who have lots of late payments will see a greater fall in their credit scores. It is usual for someone with an excellent score to take a bigger negative hit from one missed payment than someone who already has poor credit.

It is important to understand that previous late payments have less impact on current credit scores than a new late payment. However late payments can be rectified by bringing the account up to date. FICO guidelines state that “late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO score.” The FICO score also disregards what it considers nuisance accounts, where the original balance was less than $100, if such accounts are passed out to collection agencies.

All late payments over thirty days past due will have a negative effect on credit scores. Understanding the variables which influence how much effect late payments have is important, as it takes far longer to re-establish good credit than it does to lose it.