It Pays To Be On Time: How Late Payments Ruin Your Credit Score, Finances

By Michelle Black

WWR Article Summary (tl;dr) Once your payment passes the 30-day late mark all bets are off and damage to your credit becomes a very real possibility.

Discovering that you accidentally missed a payment due date on a credit card or loan can be an unsettling feeling.

Your lender might charge you a late fee for the oversight and even worse, it may negatively affect your credit scores.

Here’s the good news: Your payment has to be a full 30 days late before a lender can report it to the credit bureaus. This means if your payment is made a few days or even a few weeks past the due date, it isn’t going to harm your credit scores (though you might still face consequences from your lender).

Once your payment passes the 30-day late mark, however, all bets are off and damage to your credit becomes a very real possibility.

There’s no question that the payment history on your credit reports is important. In FICO brand scoring models, payment history is worth 35 percent of your credit score.

Yet a late payment, or any other negative blemish on your credit reports, isn’t worth a specific number of points.

You won’t, for example, automatically lose 15 points from your score when a 30-day late payment is added to your report. (FICO scores range from 300 to 850.) The credit scoring process is a lot more complicated than that.

Different credit scoring models, different impacts
When it comes to credit scores, you don’t have just one. Rather, there are hundreds of different credit scores available for lenders to choose from.

Score providers include industry leader FICO as well as VantageScore, which was created by the three major credit-reporting agencies, and smaller boutique shops.

It’s up to each lender to decide which brand and version of a scoring model it will purchase and use to evaluate the credit reports of new credit applicants.

Which credit score version a lender uses can make a big difference in how much a 30-day late payment will affect your score. In older FICO scoring models, such as the ones still used by the mortgage industry, even an isolated 30-day late payment could potentially have a very negative impact on your credit scores.

The newer FICO 8 scoring model, however, has some forgiveness built into it as it pertains to isolated late payments. With FICO 8, if a 30-day late payment is the only one appearing on your credit reports, the impact on your scores will not be as severe. On the other hand, if you have a lot of late payments on your reports, your scores could suffer more under FICO 8 when compared with other models.

Here’s the catch: You won’t know which model or version of a credit score a lender is going to use before you apply for financing. So, if a late payment appears on your credit reports, there’s always a risk that it could hurt your credit scores significantly when you apply for new financing.

Other factors
The number of points you may see shaved off your score when a late payment is added to your credit reports can depend upon other factors as well. FICO scoring models will consider all of the following information when determining the impact a late payment has on your score:

-How severe is the late payment? The longer your payment is past due, the bigger the impact will be on your credit scores.
-How recently did the late payment occur? Late payments typically do the most harm to your credit scores when they first happen. Over time, the negative impact lessens.
-How many times have you paid late? If your credit report is already full of other late payments, your credit scores are likely already on the low end. The addition of one more negative entry might not damage your scores a lot more if significant damage has already been done.

How long do late payments remain on your credit reports?
The Fair Credit Reporting Act (FCRA) sets time limits that control how long negative information is allowed to remain on your credit reports. This includes late payments.

Per the FCRA, any late payments on your credit reports are limited to a seven year maximum shelf life. After that, they must be deleted from your credit reports.

Of course, even seven years can feel like a long time when you’re trying to improve your credit. Just remember, even though late payments may remain on your reports for seven years, the damage they cause to your credit scores will lessen over time. In other words, a late payment that happened six years ago isn’t going to hurt your credit scores nearly as much as a late payment added to your credit reports last month.

Tips to master your payment history
While payment history isn’t the only thing that matters when your credit scores are calculated, it does matter more than anything else.

As a result, if you want to earn great credit scores and enjoy all of the financial perks they afford, you should avoid dings on your credit report caused by late payments. This means future payments on your credit obligations must be made on time, all the time.

If you’ve struggled with late payments in the past, you might need to review your budget to see if you’re overextended financially. Finding ways to cut back on spending may reduce your financial stress, as spending cuts can make it easier to pay your credit obligations on time.

Setting up an emergency fund to help you handle unexpected expenses can also be a smart move.

Finally, automatic payment plans can be a great backup method if you’ve made late payments in the past due to busyness or forgetfulness. Once you break the late payment habit, your credit scores should begin to improve over time.

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