How Your Payment History Affects Your Credit Score
Missing one bill payment might not seem like a big deal. That is until that payment blemish causes a lender to rethink your loan’s terms—or even your overall eligibility.
Being a forgetful bill payer is a big deal to lenders and credit bureaus. And if you continually skip payments, you can seriously bruise your financial future.
Your credit score
How you’ve paid your bills in the past accounts for 35% of your FICO credit score. Typically, creditors don’t report a payment as late until you’re 30 or more days past due. However, some lenders report earlier—as soon as one day past the deadline. Even one missed payment can have a negative effect on your credit score.
If you’re late with more than one creditor or your bills are not paid for more than a month, your credit will take a serious hit. Multiple late payments will be reported multiple times, while severely late payments—60 days or more—count more heavily than payments made within 30 days of the due date.
Late payments will remain on your credit history for seven years.
If your accounts go unpaid, they may be sent to a collections department, causing serious damage to your credit score.
Typically, accounts are sent to collections if they’re unpaid for 90 days or longer—though some creditors may turn accounts over sooner or later. When this happens, the original creditor actually sells the debt to a collection agency, which in turn tries to collect from you. When your account is turned over, the original account will be reported as “charged off/unpaid.” You’ll also get a second serious black mark on your credit history when the collection agency files a report about the debt. These reports will stay on your credit history for seven years.
Applying for a mortgage
If you’re applying for a mortgage, having late payments and collection accounts could be harmful. Mortgage lenders look more closely at your credit history than other lenders (a process known as underwriting). With a history of late payments, you likely won’t qualify for a lender’s best rates or terms. Unpaid collection accounts may cause your application to be denied altogether.
Improving your score
If you have only one late payment, talk to your creditor. Many creditors are willing to forgo reporting a single late payment, or remove the report, if you have a history of paying on time.
If you’ve missed more than one payment, time and determination are you best tools for improving your credit score. Making a late payment or having an account sent to collections will have the greatest impact on your credit score as soon as it is reported. As time passes, the impact on your credit score will lessen.
Meanwhile, keep building up positive history by paying every bill on time, which will help counteract past problems and improve your credit score.