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How do late payments impact credit scores?

It’s a question countless consumers ask daily about their credit scores: How do late payments impact credit scores?

We all know that missing payments is bad for credit scores. In fact, payment history is the single most important aspect of a credit report as it pertains to influencing credit scores. In the VantageScore credit score model, payment history is considered “extremely influential.”

But despite wide recognition of this importance, many consumers are surprised to learn that not all late payments are equally damaging to credit scores. Some late payments “count” more than others. To understand why, it is first useful to understand what credit scores have been designed to do.

Credit scoring models are designed to predict the likelihood that a consumer will default, or go at least 90 days past due, on any credit obligation during the subsequent 24 months. Because the model is only designed to predict the likelihood a consumer will pay 90 days late or later, it looks for evidence that is predictive of such potential behavior.

Generally speaking, creditors don’t notify the credit bureaus that a payment is late until it’s 30 days past due. If nothing else on a credit report is negative, the fact that there is currently an account that is 30 days late will have a downward impact on a consumer’s credit score.

It’s important to know that the first instance of negative payment information will cause the most severe drop in the score. That’s the bad news. The good news is that consumers who are only 30 days late haven’t defaulted or, worse, gone terminally delinquent. Paying that overdue account in full immediately, known as “curing the account,” will help begin the journey back to a better score.

If an account continues to be delinquent, then the next step the lender will take in the credit reporting process is to show the account as 60 days past due. At this point, the account is two-thirds of the way to being 90 days past due. And while being 60 days late is certainly more severe than being 30 days late, the score-drop associated with that milestone may not be as steep as the one that occurred at the 30-day mark.

As with any delinquency, the best response to a 60 days overdue account is to pay the outstanding balance to prevent it from getting reported as being 90 days late. This is because remaining delinquent until a lender reports an account 90 days past due means crossing an important threshold—one that puts more and more strain on a personal budget and can make recovery even harder. An account reported 90 days late exhibits the exact default behavior that the credit scoring model is tasked with identifying—and which lenders seek to avoid.

Even after the total outstanding balance on an account is paid, records of late payments remain on a consumer’s credit reports for seven years. Their negative impact subsides as time passes, but their effects don’t go away overnight: Recovering from a default can take more than a year.

The lesson for consumers is to take out only the amount of credit that is appropriate, and pay all accounts on time. And if they should get behind on payments, try to pay off outstanding balances before any account is reported past-due.

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