Note to self: when time to try for refi, pay bills on time

This post originally appeared September 14, 2017 on as “‘Q&A: Applying for house refinance soon? Don’t miss card payments

By Barry Paperno

Dear Speaking of Credit,
I have two credit cards – Kohl’s and JC Penney. I missed making the payment for two months in a row. Just never saw the bill and spaced out. I know, bad.

They sent the late payment notifications to the credit bureaus, which brought my credit score down. I paid the accounts off. How long will it take before my credit score will go back up?

I am also trying to refinance my house. Do you think this will cause them to deny the loan? I was working on getting it up. I had it up to 670; now it’s like 659. – Maryann

Dear Maryann,
At least you’re not offering any tired excuses when admitting to having simply “spaced out” on those two card payments for a couple of months. Who hasn’t done something similar and let a payment or two slip through the cracks at one time or another? Now it’s time to clean up the mess and get back on track toward a higher credit score.

Sill, there’s no sugarcoating the fact that the months prior to refinancing your home is not the best time to forget to pay your bills. If there is any instance where a recently missed payment can hurt your chances for credit approval, it’s when a mortgage – whether for new home purchase or refinance – is on the line.

The good news, if you can call it that, is that your score “only” dropped 11 points in spite of those recent 60-day late payments – for somebody with a credit score similar to yours, a 30-day late payment could cause a score drop of 60 to 80 points. Had your score been much higher than 670, those delinquencies would have taken a much higher toll.

Typically, when the dent to a below-average score is so minimal, that mild impact is usually due to the presence of other previous late payments or high card balances – or, as is often the case, both – on your credit report.

Fortunately, the answer to your question of when your score will go back up is that it already has.

Lower credit utilization = higher credit score
Once you paid those cards in full you not only caught up on the past-due payments, but you may have also helped your score by lowering the credit utilization percentages measuring your total card usage. Credit utilization – the amount you have borrowed compared to your credit limit – is the second most important credit scoring factor, after – you guessed it – making on-time payments.

Yet any attempt at addressing how this recent misstep might affect your chances of refinance approval is likely to fall short without also knowing more about your finances and some of the other non-credit-score lending requirements, such as employment and debt-to-income ratio.

Around six months to recoup score points
Focusing strictly on your credit report and score, however, you can ensure your chances will be as good as can be if you wait at least six months since your last late payment before applying for the refinance.

Not only will this pause in action put some distance between your application and your last late payment, but your score will most likely take about six months simply to recoup those lost points. Of course, the longer you can wait the better, as your score will continue to climb with more monthly on-time payments and, if too high, lower card balances.

Ways to help your score recover
During this proposed six-month waiting period, your strict attention to the following will be essential to raising your score:

  • Schedule monthly automatic payments. You can do this either via your bank account’s “bill pay” feature or by pulling from your bank account from your card company’s website.
  • Pay for charges immediately after making them, without waiting for a statement. Not only will you not have to remember to pay the bill in the weeks ahead, but also managing your card in this manner can lead to lower statement balances that can help your score further.
  • Refrain from opening any new accounts, no matter how attractive the offer. A hard inquiry and new account on your credit report could further delay your score’s recovery. Additionally, mortgage lenders tend to see trouble ahead with any evidence of seeking new credit within the six months leading up to a mortgage.

Old habits can die hard. This is why it will be important to seriously change your bill-paying habits to demonstrate that impeccable record of credit management a mortgage lender wants to see – even if only for the next six months. Chances are good that the higher score achieved over that time will help you qualify for that refinance.

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