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True Credit Secrets
By: Rick Miller
Figuring out exactly how credit scores work is problematic. Like nuclear
fission, learning Chinese and setting the clock on your DVD player, credit
scoring is not something that most people can easily master.
In the complicated world of credit scores there is one fact that pretty much
everyone assumes is true: late payments are bad for your credit scores. Not only
are late payments bad, but they are also assumed to be one of the worst things
you could do to your scores. The first sign of a late payment on your credit
reports signals impending credit doom, right? It turns out that this isn’t
exactly the case after all.
There are thousands of slightly different credit scoring models used today, each
with a different purpose and formula. The most common credit scoring systems are
set up to predict only one thing: how likely you are to have a 90 day late
payment or worse in the 24 months after your score is calculated.
Credit scores are used by financial institutions, insurance companies and
utility companies as an efficient way to predict how risky a customer you will
be. If your credit score is low, it indicates that you are more likely to make
late payments or file costly insurance claims. In turn, this means that the
creditor is more likely to lose their investment by lending you money. Once you
understand that credit scores predict this specific behavior, it’s a lot easier
to figure out the best way to manage your credit.
Because scoring systems are so focused on predicting whether or not you’ll go at
least 90 days late, surprisingly, an old 30 or 60 day late payment is actually
not that damaging to your credit scores as long as it is an isolated incident.
Only when your accounts are currently being reported 30 or 60 days past due on
your credit reports, will your credit scores plummet temporarily.
If your 30 or 60 day late payments are an infrequent occurrence, this kind of
low level late payment will damage your credit score only while it is being
reported as currently past due. They shouldn’t cause lasting damage to your
credit score after this period passes unless you make 30 or 60 day late payments
on a regular basis. In this case, the fact that you are habitually late with
your payments will cause long term damage to your credit scores.
It’s a whole new ballgame once you have a 90 day late payment, however. If you
have been over 90 days late (even just once), the credit scoring models consider
you much more likely to do it again. One 90 day late payment will damage your
credit for up to seven years. From a scoring perspective, a single 90 day late
payment is as damaging to your credit scores as a bankruptcy filing, a tax lien,
a collection, a judgment or repossession. Being 90 days late causes you to be
viewed as a possible “repeat offender” and a higher risk to creditors. Here’s a
summary of how late payments impact your credit scores:
30 days late – This record will damage your credit scores only when it is
reported as “currently 30 days late.” The exception is if you are 30 days late
often. Otherwise, a 30-day late payment will not cause lasting damage.
60 days late – This record will also damage your credit scores when it is
reported as “currently 60 days late.” Again, the exception is if you are 60 days
late often. Otherwise, it will not cause long term damage.
90 days late – This record will damage your credit scores significantly for up
to 7 years. It doesn’t make a difference whether or not your account is
currently 90 days late. Remember, the goal of the scoring model is to predict
whether or not you will pay 90 days late or later on any credit obligation. By
showing that you have already done so means that you are more likely to do it
again compared to someone who has never been 90 days late. As such, your credit
scores will drop.
120+ days late – Late payment reporting beyond the initial 90 day missed payment
does not cause additional credit score damage directly. However, there is an
indirect impact to your scores. At this point, your debt is usually “charged
off” or sold to a 3rd party collection agency. Both of these occurrences are
reported on your credit files and will lower your credit scores further.
If you continue to miss your payments beyond 90 or 120 days, the following
records may also harm your credit score:
Collections – Collections are the result of late payments. There are two types
of collections; those that have been sold to a 3rd party collection agency or
those that have been turned over to an internal collection department.
Regardless of which one shows up on your credit reports, your scores will
suffer.
Tax liens – Tax liens are obviously not preceded with late payments on any sort
of account. However, when tax liens are reported on your credit files they have
the same negative impact to your scores as any other seriously delinquent
account. And, just because you pay off the tax lien or have it “released” won’t
increase your scores.
Settlements – Settlements are deals made between you and a creditor who is
trying to collect a past due debt. Normally, you and the creditor would agree on
an amount that is less than what you really owe them. Once you pay them, they
consider the matter closed and paid off. However, they will report that you have
made a settlement for less than your contractual obligation. This will hurt your
scores as much as any other serious delinquency.
Repossessions or foreclosures – Having a home foreclosed upon or a car
repossessed are both considered serious delinquencies and will lower your credit
scores considerably for up to seven years. The assumption normally made by the
consumer is “hey, I gave the home or car back to the lender, why are they going
to show me as delinquent?” The answer you’ll get from lenders is that you signed
a contract with them to buy a home or car and pay it in full over a period of
time. You failed to do so therefore they consider you to be in default of your
agreement with them and will report this on your credit reports.
Remember, the goal of most credit scoring models is to predict whether or not
you will go 90 days past due or worse on any obligation. What’s missing? The
scoring models are not designed to predict whether you will default for any
specific dollar amount. As such, having a 90 day past due of only $100 is as bad
as having a 90 day past due of $10,000. The same goes for low dollar
collections, judgments or liens. The dollar amount doesn’t matter. The fact that
you paid late is what’s most important in the eyes of a credit scoring model.
Now that our late payment secrets have been revealed, let’s look at what it
means to you. You should still avoid making late payments whenever possible. But
we now know that one 30 or 60 day late payment isn’t the end of the world. Since
90 day late payments are the real credit score busters, you should avoid a 90
day late payment at all costs.
If you already have a 90 day late payment record on your credit history then
your scores are already suffering. Be certain that the information is being
accurately reported. If it isn’t then you have the right to dispute it with not
only the credit reporting agencies but also with the lenders who reported it.
Your goal is to have the item corrected or removed, especially if it is in
error. Once removed or corrected your credit scores will immediately recover.
About the Author:
Rick Miller is an ex-credit bureau manager with 10 years experience
http://www.24hrcreditfix.com easycreditfix@aweber.com
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