With late payments, what you’ve done lately matters most

This post originally appeared December 29, 2016 on CreditCards.com as “Late payments’ recency, frequency, severity dictate score damage

By Barry Paperno

Dear Speaking of Credit,
We have huge amounts of credit card debt, but yet to date we have never been late on a single one. It is getting harder and harder to make those payments. What if I quit paying one but continued to pay all the others on time? How does that affect credit scores? – Jim

Dear Jim,
I hope you’re not seeing this scenario – letting one card go unpaid while paying the others – as a true solution to your debt problem. Unless you can soon find a way to begin paying at least the minimum amount required on each card, I’m afraid you’re going to lose this battle.

If you don’t anticipate some relief ahead, for example, a pay raise or payoff of a car or student loan, you may want to start seriously considering some of the more-potent options open to consumers facing debt default, such as a debt management plan or bankruptcy.

Most likely you’re somewhere in the middle. That is, you have apparently gone into the red only recently and may have reason to see some financial light at the end of this tunnel. If so, in addition to answering your question about the scoring effects of paying all cards except one each month, let’s also take a look at a couple of similar tactics that are often proposed in situations like yours.

Paying all cards but one
To get a feel for what this and other such plans are likely to do to your credit score, it will first be helpful to understand how a scoring formula considers past-due accounts. There are essentially three pieces to this puzzle of how delinquent accounts occurring both in the past and present are evaluated:

  • Recency – How recently did a late payment occur?
  • Severity – How many payments are/were past due on an account?
  • Frequency – How many accounts have a history of late payments?

Of these groups of factors, recency carries most of the scoring influence by far, with severity and frequency also considered to a lesser extent. Using these three ways of looking at past-due information, let’s see what your proposed plan is likely to do to your credit score. Warning: It’s not going to be pretty.

Depending on your current score, expect up to a 100-point or more drop as soon as the first late payment appears on your credit report. And it gets worse from there, as the seriousness of the delinquency grows from 30 to 60 to 90 days late until the entire debt is eventually “charged-off” as a loss following about six months without payment.

During those six months of nonpayment, expect to see the following:

  • Recency – By remaining perpetually late, the unpaid card will continue to be seen in the worst possible light within this most-influential aspect of the score.
  • Severity – While not incurring much damage initially as merely a 30-day late, each passing month without payment raises the severity level of the delinquency.
  • Frequency – Considering the harmful impacts in terms of recency and severity, perhaps find some consolation in having only one account, versus many, being reported negatively.

But that’s not all the damage in store when you let even just one account go unpaid. Should the debt be written off as a loss and reported to the credit bureaus as a charge-off, expect one or two more pieces of bad scoring news to follow:

  • Collection – After being charged off, a bad debt is often assigned to a collection agency, creating an additional derogatory item – a collection account – on your credit report that can further depress your score.
  • Judgment – If the collection continues to go unpaid and you are successfully sued for payment, either by the original creditor or collection agency, a court judgment will be added to your county public record files and included in your credit report and credit score.

‘Revolving door’ or ‘shorting’ each account
If what we’ve discussed so far paints a bleak scoring picture, I’m afraid it doesn’t get any better when considering a couple of the other similar “solutions” suggested from time to time:

  • Revolving door – missing a full payment on a different account each month while paying the others.
  • Shorting all cards – paying less than the minimum payment, but something, on each account every month.

As you might imagine, the outcomes of these scenarios are no better than what you’ve suggested, since each includes at least one account currently delinquent at any given time. This alone ensures that the calculations measuring recency will be working overtime against you. As for the other factors, severity and frequency:

  • Rotating the accounts being skipped each month or shorting each card can, at best, delay the deepening severity by a few months, as the negative effect from severity is more slowly spread among multiple cards.
  • Incurring late payments on more than one card means fewer points from the calculations that measure the frequency of delinquent accounts on the credit report.

To summarize, all of these situations have a worst-case scoring scenario in common – a current or very recently occurring delinquency. At best, these kinds of alternatives can offer some trade-offs within some of the lesser factors – severity, frequency and others – but with no substantial scoring benefits. If there’s a moral to this story, it’s that there is simply no way around the need for minimum monthly payments on each account with a balance. No exceptions.

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