Credit scores measure late payments in multiple ways

This post originally appeared May 31, 2018 on CreditCards.com as “Late payment? 4 ways it impacts your credit score

By Barry Paperno

Dear Speaking of Credit,
My credit score was in good shape till one or two weeks ago – 705 points on Equifax and 740 on TransUnion. However, I had one late car payment and my score dropped 40 points!

I am hoping to close on a home with a FICO score goal of 720 points in six or seven months.

Assuming I keep all other payments the same and keep my credit utilization below 10 percent, can I recover my credit score back to 720 in seven months? – Nader

Dear Nader,
Though we don’t know for sure if this was your first late payment, considering that your scores have remained above the average FICO score (over 700 points) despite this recent mishap, we’ll assume that any prior minor delinquencies will have occurred at least a couple of years ago or so.

You are about to learn why knowing the entire history of all past and present late payments can be essential when trying to determine the major negative influences on your current and future scores before setting out on your score rebuilding journey.

When attempting to understand what it will take for your score to recover, it always helps to not only know what has hurt your score, but also knowing how it got there can often provide a roadmap that will eventually help you undo much of the damage and enable you to better prioritize those rebuilding efforts.

Four important credit scoring questions related to late payments
Let’s then consider how the following four credit scoring questions are used by the credit scoring formula when the payment history associated with any card or loan includes past or currently late payments:

  1. How recently did the most recent late payment occur?
  2. How much is owed on accounts with currently late payments?
  3. How late was the worst late payment?
  4. How many accounts show a history of late payments?

1. How recently did the most recent late payment occur?
It might be surprising to note that, despite all other indicators, the length of time since the last late payment has been known to carry more scoring weight than any other single score factor.

This means that any current or recently late payment is likely to hurt your score more than any older one, no matter the amount of the debt, how serious the delinquency, or how many of your credit accounts carry a history of late payments.

2. How much is owed on accounts with late payments?
These four questions are applied with equal importance to any type of account on your credit report: mortgage, auto loan, student loan, credit card or store card.

However, the amount owed on a currently late account can cause additional harm to a score already critically impacted by such a “recently late” payment.

  • For example, a currently late car payment of $300 can hurt your score more than a currently late credit card payment of $100.
  • At the same time, a currently late $300 credit card payment can do more damage than a $100 late car payment that is also currently late.

3. How late was the worst late payment?
While far from the most critical factor in the credit scoring scheme, a late payment that has been allowed to go a long time – say, 90 days – before being brought current can take more points from your score than when resolution occurs within the first 30 to 60 days of becoming late.

Such impacts based on “severity” can apply to credit histories containing both past and current delinquencies.

4. How many accounts show a history of late payments?
In addition to the aforementioned factors, a score can be further affected, for better or worse, by the number of accounts on your credit report that include a history of past or present delinquencies.

Therefore, you may see some benefit to your score by limiting the number of accounts with late payments to as few as possible.

Anticipated credit score recovery time following a late payment
As might be expected, there is no foolproof way to gauge the length of time it will take for your scores to reach that all-important 720 score  for a mortgage.

In fact, not only is there no foolproof way, but given the multiple score factors at work when late payments come into play, there really is no reliable answer to your question.

My only suggestion is to follow these tried-and-true steps to raise your score as quickly as possible:

  • Increase the number of months since your last late payment by making all payments on time going forward.
  • Keep your overall and individual card utilization on all revolving accounts – credit and store cards – below 10 percent. Credit utilization – the amount you have borrowed compared to your credit limits – is the second most important factor in credit scoring.
  • Don’t open any new cards or loans until after you close on that mortgage, regardless of how long that may take.

Best of luck on your road to score recovery!

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