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5 Myths About Late Payments & Your FICO Scores

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Recently I had the opportunity to interview Tom Quinn on my weekly podcast.  Tom is the credit expert for Fair Isaac Corporation, the creator of the FICO credit score, and he also is a former contributor to Credit.com. There are few people who know more about FICO scores than Tom.

The interview yielded a number of surprises when it comes to that all-important three-digit number. Perhaps most revealing were Tom’s comments about how late payments affect your FICO scores. He crushed several myths surrounding late payments.

Keep in mind that consumers have more than one credit score. In fact, you have many credit scores. Tom’s expertise here speaks specifically to FICO scoring models, though some of the myths apply to other scoring models as well. What’s important are the basics of good credit. (If you want to see how you’re doing on the credit basics, the Credit Report Card is a free tool that grades you on important credit factors and shows you your credit scores with Experian and VantageScore.)

Payment history is a vital part of a consumer’s credit scores, so we debunk five of the most pervasive myths about late payments.

1. The One Late Payment Myth

One prevalent misconception is that a single late payment is no big deal.  The reality is that on-time payments are the single most important factor in the FICO formula. Research conducted by FICO shows that a single 30-day late payment on a mortgage can shave 75 or more points off of a consumer’s credit score. In addition, late payments remain on a credit report for seven years. As a result, what may at first seem insignificant can have a major affect on a FICO score.

2. The Seven-Year Myth

As significant as even one late payment can be, don’t give up hope. As noted above, a late payment remains on a credit file for seven years. The effect that late payment has on a FICO score, however, changes over time. The FICO formula considers the recency of a late payment. In other words, a late payment in the past six months will be more severe than a late payment five years ago. So like fine wine, it gets better over time.

3. The 30-Day Myth

A frequent question in credit forums is whether a payment a few days late will get reported to the credit bureaus. Some have mistakenly claimed that payments must be at least 30 days late before they affect a FICO score. In truth, a creditor can report a payment that is even one day late. In practice, however, not all do. As a generalization, late payments on revolving accounts such as credit cards tend not to get reported until they are 30 days late. In contrast, late payments on installment loans like a car loan generally get reported sooner.

Keep in mind that these are generalizations, not rules. Furthermore, creditors can and do level late payment penalties, regardless of whether or when they report the payment as late.

4. The Late Is Late Myth

Another common myth is that all late payments are created equal, regardless of how late they are. This myth can cause some people to delay making their payment, thinking 30 days late is just as bad as 90 days late. The truth is, FICO scores factor in the severity of the late payment. A 90-day late payment is more severe than a 30-day late payment. Don’t get lulled into inaction by the myth that all late payments are the same. They are not.

5. The Number of Late Payments Myth

The fifth and final myth is that the number of late payments is not a significant factor. Late is late, some believe, and whether one is late on one payment or five is not a meaningful factor. The FICO scoring models look at the number of late payments on a credit file. One late payment may reflect a simple oversight, but five late payments potentially reflect a more serious financial problem.

The key is to appreciate just how significant late payments are to the FICO score.  Payment history is the single most important factor, making up 35% of the FICO formula.

Have a question about a late payment and how it will affect your credit scores? Tell us in the comments!

More on Credit Reports and Credit Scores:

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  • Fixin Highways

    Seven years….7 years! Something is truly wrong with a system that allows one’s financial success to be impacted for such a long time for such a minor event…such as one late payment. It is dis-concerning to me that a credit score now influences many institutions who are not related to borrowing money. People without money end up suffering more financial distress because they pay higher insurance rates without just cause, There are probably more examples where a bad credit score can unfairly impact ones cost of living. This system of scoring one;s credit worthiness and how credit score impact everyday needs really needs non-impartial oversight by a governing agency.

    • PKVol

      Fixin Highways. A reason that a poor credit score will affect other, SEEMINGLY, non-financial relationships is that a person who is in financial distress may be more likely to commit fraud or steal when given the opportunity. An insurance company may think you’re more likely to ‘stage an accident’ or pocket the insurance proceeds from an accident. An employer will want to know the financial background of an employee who regularly handles money or has access to payroll records.
      Also, ‘a governing agency’ is rarely a good option. It creates a layer of expense that hardly ever justifies the expense versus the benefit.
      I also think you meant to say ‘non-partial’, which would usually be stated as simply ‘impartial’. I think you were trying to say that the oversight should have no bias, but the way you wrote it, you’re saying the agency should be biased.

    • Bob

      “…really needs non-impartial oversight by a governing agency.” -Fixin Highways
      You mean “impartial” not “non-impartial.”

  • Reighn9

    #2 the 7 year myth-a late payment is counted just as heavily for the entire 7 years. The impact does not lessen with age. The #1 negative reason given for my credit score was late payments or derogatory remarks for all 7 years. The wording changed around here and there but it was always the #1 negative reason. The month after the 7 years ended my credit score was raised by 50 points. Tell me it wasn’t affected during that time, and it’s contined to go up.

  • http://www.credit.com/ Credit.com Credit Experts

    The exact formula (and how, exactly, components are calculated and weighted) is secret, but the components of the various scoring models are widely known. You may learn more here: FICO vs. Vantage Score: 5 Differences You Should Know.

  • Jeanine Skowronski

    There are many different versions of your credit reports and many different credit scores. It may help to look at the one the lender was looking at – they are required to send it to you along with an explanation of why you were denied credit or the best terms. Generally, late payments appear on credit reports, so if they are legitimate, you may have a hard time disputing them. You can call the issuer and ask if they will not stop reporting them delinquencies. Here are some other tips for handling late payments on your credit report:




    • Kurt E

      Am pursuing all options. Thanks for the link. Every article I find though only talks about 30 days later or more as having an impact. Clearly that isn’t what is the problem here. Any idea how long 1-10 late charges will continue to drag on and impact a score?

    • Kurt E

      Thank you for that feedback Jeanine. We’re exploring all options.
      Also, thank you for the link, although, it, like everything else I’ve read only discusses payments considered 30 days late or more. I can’t find anything about addressing payments 1-10 days late that don’t show up as a problem on a credit report, but have tanked a persons credit. In trying to go to the creditor to request they remove at least some of the damaging information due to child birth, death in a family, etc, I need to figure out what I’m asking them to do, since when I called the creditor they told me they don’t see any late payments and don’t report less than 30 day late payments. Will figure out what the bank pulled to make their decision and probably buy the report package from myFICO that contains that report and go for there. I think if we can get her score back into good territory with a greatly reduced utilization, then the little bit late payments won’t have the same impact in creditors decision making.

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