How a late payment affects your credit score

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We have talked before about how payment history impacts your credit score, but let’s talk specifically this week about what a late payment does to your score.

How long does a late payment stay on your credit report?

Late payments that were reported to the credit bureau will stay on your credit report for seven years. But it is important to understand that not all late payments are reported. Much depends on how soon you correct the problem. If you are late by even a day, you are likely to incur a late charge, but you won’t be reported. It is not until you pass the 30-day mark that you need to be concerned about a late payment notation to your credit report.

There is a notable exception to the 30-day-and-you’re-late rule: medical bills. Medical bills don’t get reported as late until they are six months old. This allows time for wrestling with your insurance company and provider or hospital over your bill.

How much does a late payment damage your credit score?

Here again, it depends. What else is in your credit file is important in understanding how this works. If we are talking about one late payment against an otherwise clean report, you might lose a lot of credit score points, but it may take less time to recover. And since a clean credit report generally implies a high credit score, even a big drop could leave you in reasonably good shape. (According to FICO, a 30-day late payment can cause someone with a score in the high 700s to lose 60-80 points.)

However, multiple late payments will hurt you more and for longer. It’s also important to note that any adverse actions, whether we are talking about late payments or other actions like collections, are far more damaging to someone with a thin credit file than someone with a fat file and an excellent credit score. These two categories are the easiest to damage and to repair.

If you are in the middle of the pack in terms of your score, you may not see much difference (especially if this is a one or maybe two-time occurrence). A middle-of-the-pack score indicates that there is already some level of uncertainty built into your score, hence the smaller drop in points versus someone who is either new to credit or rated as a very low risk.

While that may not seem fair, if you look at it from the creditor’s perspective it is easy to see why there are differences. A credit score tries to predict the likelihood of the consumer defaulting in the near future. On-time payments indicate all is well. Late payments create uncertainty and may (or may not) be an indication of trouble to come.

In the case of someone with a thin file—meaning there is not a lot of history and information to base a score on—late payments send a strong warning sign. For those with excellent scores, late payments may signal a change in the consumer’s financial circumstances. Remember, an excellent score indicates that your risk of default is considered low. A late payment creates doubt and thereby results in a lowering of your score to reflect a now uncertain future.

In both cases, until enough time has passed to alleviate these concerns (because you have corrected your course) your score may be stuck at a lower place than you want.

Can you remove late payments from your credit report?

Accurate and timely notations to a credit report generally cannot be removed. However, if the cause of the late payment was a genuine mistake on your part and it is a one-time-only thing, you can certainly ask your creditor not to report it in the first place.

Assuming you have been a good customer thus far, chances are you will be successful. Everyone makes a blunder now and then and mainstream creditors recognize that and can make allowances. But the key will be to get to the creditor before they report. It’s easier to stop the credit reporting train before it leaves the station than after it has left.

If you are not successful in getting your creditor to not report, there are actions you can take to minimize the damage—and you should. These include being very careful not to be late with a payment to this creditor again. In fact, you must be vigilant in paying all of your bills on time, every time. Also, watch your credit card usage and be sure to stay below 25 percent or so of your total credit limit.

These two categories—payment history and credit utilization—account for a whopping 65 percent of your total FICO credit score. In addition, do not apply for new credit unless you need to and only when you are fairly sure you will be approved.

Doing these things will mitigate the damage you did to your score with your missed payment in time. Within a few months of doing everything right, you should see your score back to where it was before, or close at least, even though the late payment notation will remain on your credit reports. Doing all the right things go a long way in alleviating any score damage.

How can you avoid a late payment?

I am a big fan of automatic payments when it comes to paying bills on time. By setting up recurring payments on your accounts, you can ensure that you are never late.

I have made it a habit to set up a future payment for a bill on the day it arrives. If I get my credit card bill on the first and it isn’t due until the 20th, I go online to my checking account and schedule a payment to arrive at the creditors by the 19th. Otherwise, I know it is too easy for me to misplace the bill or the payment.

Of course, I must keep track so that I am sure to have the funds available when those payments become due, so it’s a little more than just set it and forget it. If keeping track of all your accounts is too time-consuming or just not in your DNA, there are lots of tools available to help you, from a simple spreadsheet to programs that track it all for you. The essential thing is to find what works for you and start using it before you have that first late payment.

Good luck!