In the complicated world of credit scores there is one fact pretty much everyone assumes is true: Late payments are bad for your credit scores. After all, negative information like late payments can stay on your credit reports for up to seven years, so the first sign of a late payment on your credit reports signals years of impending credit doom, right? Actually, that isn’t always the case.
It’s essential that you find out exactly how late payments are affecting your credit. Here are a few ways you can do that:
Financial institutions, insurance companies and utility companies use credit scores as a 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 the creditor is more likely to lose their investment by lending you money.
Most negative items, including late payments, can stay on your credit reports for seven years, but not all negative information is equally damaging. Here’s the first late payment secret you need to know: A payment that is 30 or 60 days late isn’t going to have as serious an effect on your credit score as a payment that’s 90 days past due.
Because scoring systems are focused on predicting whether or not you’ll go at least 90 days late, a 30- or 60-day late payment that occurred long ago is actually not that damaging to your credit scores, as long as it is an isolated incident. It’s when your accounts are recently reported 30 or 60 days past due on your credit reports that your credit scores plummet temporarily.
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If 30- or 60-day late payments are an infrequent occurrence, they shouldn’t cause lasting damage to your credit score unless they are recent (last two years or so) or occur on a regular basis. In this case, the fact that you are habitually late with your payments can cause long-term damage to your credit scores.
It’s a whole new ballgame once you have a 90-day late payment, however. If you have been more than 90 days late (even just once), the credit scoring models consider you much more likely to do it again. One 90-day late payment will damage your credit for up to seven years. From a scoring perspective, a single 90-day late payment is as damaging to your credit scores as a bankruptcy filing, a tax lien, a collection, a judgment or repossession. Being 90 days late causes you to be viewed as a possible “repeat offender” and a higher risk to creditors. Here’s a summary of how late payments impact your credit scores:
If you continue to miss your payments beyond 90 or 120 days, the following records may also harm your credit score:
Now that our late payment secrets have been revealed, let’s look at what it means to you: You should avoid making late payments whenever possible. But we now know that one 30- or 60-day late payment isn’t the end of the world. Since 90-day late payments are the real credit score busters, you should avoid a 90-day late payment at all costs.
If you already have a 90-day late payment record on your credit history, your scores are already suffering. Be certain that the information is accurate on your credit reports. If it isn’t, you have the right to dispute it not only with the credit reporting agencies but also with the lenders who reported it. Your goal is to have the error corrected or removed, and once it is, your credit scores should recover.
You may have heard that you can negotiate a “pay for removal” deal with a debt collector or creditor, but these companies will likely tell you the contracts they have with the credit agencies prohibit them from doing so — otherwise, people’s credit reports wouldn’t accurately reflect their payment histories.
It’s also important to know paying off a collection account does not remove it from your credit report or improve your credit scores much. (In some newer credit score models, paid collection accounts do not have a negative effect on credit scores, but at the moment, those scoring models are the exception, not the rule.)
If your credit reports are accurate, there are still things you can do to to improve your credit scores, despite the late payments dragging them down. First of all, you’ll want to make on-time payments going forward and wait for the negative information to age off your credit reports. Beyond that, you can focus on paying off debts, using as little of your available credit on your credit cards as possible and only applying for new credit when it’s necessary. The information you get when you check your credit scores on Credit.com should help you identify which areas need your attention most as you work to improve your credit.
This article has been updated. It was originally published November 01, 2016.
Source: credit.com