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Late Payments: How They Really Affect Your Credit Score

late paymentsAccording to the official FICO website, credit history accounts for about 35% of a credit score. What does this mean? Even if the rest of your credit history is great or above average, if you have late payments they could be severely impacting your overall score.

The good news, however, is that most lenders do not report missed payments until the account is over thirty days past due. While you may still get late fees or interest charges, in most cases, the late payment won’t be reported by the creditor to the credit reporting agencies.

The bad news is that once it hits that thirty day mark, the chances of it being reported get significantly higher. In fact, late payments are categorized by how late the payment actually is. For instance they are broken down by:

  • 30-days late
  • 60-days late
  • 90-days late
  • 120-days+ late

Obviously, the later your payments are made, the worse it affects your score. These payments are categorized this way because the real goal of any credit scoring formula is to determine how likely you are to make a payment that’s 90 days late in the next 24 months.

The lower your overall credit score, creditors believe the less likely you are to make on-time payments. So being, thirty to sixty days late here and there may cause a small dip in your score, but if you are otherwise following good credit practices you shouldn’t have too much to worry about.

The problem comes when you are regularly 30+ days overdue. This shows a pattern of late payments and tells creditors that you can’t be trusted to pay your debts on time. Even worse is when your account goes over 120 days and it becomes a charge-off.

A charge-off can occur when after a certain period of delinquency, a lender can longer count your loan or debt as an asset. The lender has to “charge-off” your debt from their books. Charge-offs are reported to credit agencies and remain on your credit record for seven years. Your debt is then typically sent to a collections agency. Once it goes to collections, even if you pay off the debt, it will still remain on your report. It will show as paid, however, you will be considered a risky investment since it took you so long to repay the initial debt.

The overall lesson to be learned here is this: while you may need to be late on payments, do whatever you can to avoid having your debts go to collections.

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