Many kinds of entries on a credit report can lower your credit score, but some are much more harmful than others. The entries that do the most damage and that tend to keep your score down for extended periods of time are what lenders call derogatory events—or just plain bad ones. (For a refresher on credit reports and how they are organized, see our Anatomy of a Credit Report series.)
Lenders view derogatory credit-report entries as evidence of mismanaged debt. That is why credit-scoring models typically treat them as grounds for steep, long-lasting score reductions. That is also why you should avoid them at all costs. This four-part series of articles is designed to help you “steer clear” of derogatory events, examining them in detail so you know what to avoid—and what the consequences could be if you don’t. We are covering the three categories of information that can be considered derogatory: The first part examined public records; part two looked at credit-report narratives, this installment and part four will look at the somewhat complicated topic of non-performing trade lines—a fancy term used to describe accounts that aren’t being paid as agreed upon.
Trade, as used in the credit industry, refers to an account on your credit report. So, a Bank of America credit card on your credit report, would be referred to, formally, as a trade line. A trade line can contain a variety of negative entries, including current and historical late payments, past-due balances, and indicators of default or other serious delinquency associated with the account. This month we’re going to tackle historical late payments.
Just for clarity, a late payment on a credit report isn’t the same as a late payment on an account. I know that doesn’t make any sense, so let me clarify. In order for you to be late on one of your credit accounts, you have to not make a payment on or before the due date. In order for a late payment to show up on your credit reports you have to be a full 30 days past the due date. So, if a late payment shows up on your credit reports, then you know you went at least 30 days late, not just a few days late. In other words, there’s a more rigorous standard used in credit reporting.
For the past several decades the three national credit reporting companies (CRCs—Equifax, Experian and TransUnion) have accepted late-payment reporting by creditors. So, if last year you were late on your credit card account by 30-59 days multiple times, it’s likely a record of those previous late payments will appear on your credit reports, associated with each respective account. And yes, those late payments do have the potential to lower your credit scores.
There are a variety of ways historical late payments are represented visually on credit reports. The most common is for the credit reporting companies to display a payment-history grid for each account, which indicates if you’ve made any late payments, how many days you were late, and when you were late. The grids may appear differently depending on which national credit reporting company (Equifax, Experian or TransUnion) supplied the report you’re viewing. This chart shows a common example:
This particular payment history grid indicates that the consumer was 30 days late on a payment in January 2012. It also indicates that the account was paid on time every other month in his or her credit reporting history. That particular 30-day late payment can remain on the consumer’s credit report for seven years, or until no later than January 2019.
Obviously, you’d like your payment history grid to be clear of any record of late payments, like the following example. This grid is void of any late payments and indicates that the account has been paid on time for the time period covering June 2011 to April 2016:
Next month, we’ll take a deeper look at trade-level credit-report entries, and additional types of records to avoid.