One negative mark or past due bill payment on your credit report can take years to repair.
If you’re juggling bills come the end of the month (or the beginning), it can be tempting to let one of them slip on by. Sure, you’ll pay a late fee. But that’s a price you may be happy and willing to pay! Unfortunately, skipping a bill payment or making a late payment can result in a much heftier price tag than initially meets the eye..
Here’s the truth: While there are a number of actions that can tank your credit score, one late payment on your credit report could end up impacting your credit score for years to come. Unfortunately, when it comes to credit scores, the effects of negative behavior far outweigh the effects of good behavior — and that damage can take quite a long time to fix.
How do credit scores work?
Credit scores are like a letter grade for your trustworthiness as a borrower. They are based on the information contained in your credit reports, which track your history as a credit user during a seven-year-time period. You have three different credit reports, one each from the three major credit bureaus: Experian, TransUnion, and Equifax.
The original credit score — the FICO score — was created by Fair, Isaac and Company and debuted in 1989. FICO scores are based on a scale from 300 to 850. The higher your FICO score, the better your credit. While there are other competitors — notably VantageScore — FICO scores are still the most commonly used type of credit score out there.
While the exact formula for creating FICO scores is a closely-guarded secret — and evolves over time — the general scoring system goes like this:
Payment history (35%): Paying your bills on time is important. In fact, your payment history is the single most important factor in your score.
Amounts owed (30%): The more debt you owe — especially unsecured consumer debt — the more likely that you will have trouble making all your payments.
Length of credit history (15%): The longer you’ve been responsibly using credit, the better.
Credit mix (10%): The more diverse your mix — personal loans versus credit cards versus auto loans versus student loans, etc. — the better.
Recent credit inquiries (10%): Requests for additional credit resulting in hard credit pulls, can be a sign that’s something amiss — especially if there are many requests in a shorter period of time.
Your credit reports contain a ton of different information drawn from lenders, landlords, some utility companies, and even from the public record. Some of that information can help your score, while other information can hurt it. But even if you have a ton of “good” marks on your credit, a few “bad” marks can hurt your credit for years to come.
Negative credit info > positive credit info
“Your credit score is affected by a variety of factors both positive and negative,” explained CPA Logan Allec, owner of personal finance site Money Done Right. “A positive factor would be an open credit card that is actively used and always paid off on time. A negative factor would be a credit card that has a missed payment.”
Unfortunately, a negative factor can have a longer lasting impact that a positive factor, he says.If that doesn’t seem fair, well, it helps to examine things from the opposite perspective.
One way to think about the impact of a negative factor is to recognize the purpose of a credit score. “At its core,” Allec said, “a credit score is designed to show banks and lending institutions whether or not you are likely to pay your debts.”
Your credit history is sort of like your driving record. A single mistake can easily outweigh years of impeccable behavior. e. Paying your bills on time, making all of your monthly payments, and monitoring your debt loads can take some diligence — true — but that diligence is exactly the kind of behavior that traditional lenders are looking for in potential customers.
How long before your credit score recovers?
“Unfortunately, even though a credit score can be hit by a simple missed payment, it can take significant time to raise your credit score as you demonstrate your creditworthiness,” Allec said.
And “significant time” doesn’t mean a matter of months. It means years. Smaller negative marks like a new credit inquiry or two will stop affecting your score within a year (at most), but more serious bad marks like bankruptcies could affect your score for well more than half a decade. In fact, bankruptcies stay on your report longer than most information: 10 years!
Still, there are no easy fixes to improve a bad credit score, although there are some programs and services out there that may be able to help. However, consistently paying your bills on time is the best way.
“The key tip for increasing your credit score is to never miss a payment,” Allec said. “Some practical tips to make sure you never miss a payment are to set calendar alerts on your phone to remind yourself to pay off your card every month or set up automatic card payments if your bank allows it.”
As you continue to make your payments on time and reduce your debt loads — ideally to zero, but below 30% of your open credit limits will do just fine — the effects of negative marks will start to fade and the amount of positive information on your account will increase.
But before you decide to miss your due date or skip out on one of your bills altogether this month, take a second to think through the long term consequences. By opting to not pay that bill now, you could end up paying way more in higher interest rates and fees in the years to come.
Logan Allec is a CPA and owner of the personal finance website Money Done Right. After spending his twenties grinding it out in the corporate world and paying off more than $35,000 in student loans, he dropped everything, and in 2017, launched Money Done Right. His mission is to help everybody — from college students to retirees — make, save, and invest more money. He resides in the Los Angeles area with his wife Caroline. Follow him on Twitter @moneydoneright.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.