5 Myths About Late Payments and Your FICO Scores

This post comes from Rob Berger at partner site Credit.com

Recently I had the opportunity to interview Tom Quinn on my weekly podcast. Tom is the credit expert for Fair Isaac Corp., the creator of the FICO credit score, and he also is a former contributor to Credit.com. There are few people who know more about FICO scores than Tom.

The interview yielded a number of surprises when it comes to that all-important three-digit number. Perhaps most revealing were Quinn’s comments about how late payments affect your FICO scores. He crushed several myths surrounding late payments.

Keep in mind that consumers have more than one credit score. In fact, you have many credit scores. Quinn’s expertise here speaks specifically to FICO scoring models, though some of the myths apply to other scoring models as well. What’s important are the basics of good credit. (If you want to see how you’re doing on the credit basics, the Credit Report Card is a free tool that grades you on important credit factors and shows you your credit scores with Experian and VantageScore.)

Payment history is a vital part of a consumer’s credit scores, so we debunk five of the most pervasive myths about late payments.

1. The one late payment myth

One prevalent misconception is that a single late payment is no big deal. The reality is that on-time payments are the single most important factor in the FICO formula. Research conducted by FICO shows that a single 30-day late payment on a mortgage can shave 75 or more points off of a consumer’s credit score. In addition, late payments remain on a credit report for seven years. As a result, what may at first seem insignificant can have a major effect on a FICO score.

2. The seven-year myth

As significant as even one late payment can be, don’t give up hope. As noted above, a late payment remains on a credit file for seven years. The effect that late payment has on a FICO score, however, changes over time. The FICO formula considers the recency of a late payment. In other words, a late payment in the past six months will be more severe than a late payment five years ago. So like fine wine, it gets better over time.

3. The 30-day myth

A frequent question in credit forums is whether a payment a few days late will get reported to the credit bureaus. Some have mistakenly claimed that payments must be at least 30 days late before they affect a FICO score. In truth, a creditor can report a payment that is even one day late. In practice, however, not all do. As a generalization, late payments on revolving accounts such as credit cards tend not to get reported until they are 30 days late. In contrast, late payments on installment loans like a car loan generally get reported sooner.

Keep in mind that these are generalizations, not rules. Furthermore, creditors can and do level late-payment penalties, regardless of whether or when they report the payment as late.

4. The late Is late myth

Another common myth is that all late payments are created equal, regardless of how late they are. This myth can cause some people to delay making their payment, thinking 30 days late is just as bad as 90 days late. The truth is, FICO scores factor in the severity of the late payment. A 90-day late payment is more severe than a 30-day late payment. Don’t get lulled into inaction by the myth that all late payments are the same. They are not.

5. The number of late payments myth

The fifth and final myth is that the number of late payments is not a significant factor. Late is late, some believe, and whether one is late on one payment or five is not a meaningful factor. The FICO scoring models look at the number of late payments on a credit file. One late payment may reflect a simple oversight, but five late payments potentially reflect a more serious financial problem.

The key is to appreciate just how significant late payments are to the FICO score. Payment history is the single most important factor, making up 35 percent of the FICO formula.

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