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“Pay your bills on time” is a financial mantra that sounds easy enough to follow. But sometimes personal finances get put on the back burner, especially when life doesn’t go as planned.
One or two slip-ups may not irreparably damage your credit score. But you might want to understand how late payments factor into your overall creditworthiness.
Your payment history is a record of on-time, late and missed payments on past and current credit accounts. These accounts can include credit cards, lines of credit, personal loans and mortgages.
Your payment history indicates to a potential lender the likelihood of you successfully repaying your debt — or going into default.
It also factors into a significant percentage of your credit score. Though exactly how much it contributes isn’t clear — scoring models like to keep their algorithms close to the vest.
FICO, however, claims that 35% of your FICO Score comes from the behaviors revealed by your payment history.
Recurring payments — such as monthly office or apartment rentals — aren’t a typical part of your payment history. Neither are payments to electric and water utilities or services like home and office maintenance.
If you fail to pay these bills and your unpaid debts end up in collections or legal suits against you, they could end up on your payment history, ultimately hurting your credit score.
Most potential creditors or lenders look at your payment history to see if you’ve ever missed a payment. Many late payments in your financial history can pull down your credit score.
Payments made far after their due dates ultimately weight more heavily on your score. This is because negative scores tend to increase the longer it takes you to repay your obligations.
A payment history that’s free of late payments doesn’t guarantee a high score, however. Neither will a handful of late payments dramatically decrease your score if the rest of your financial history is stellar.
Credit bureaus consider several factors in computing your credit score, often using a proprietary algorithm.
When focusing on late payments, banks and lenders also consider:
Also considered in your payment history are publicly available bankruptcies, foreclosures, some liens and lawsuits.
Most of your creditors report the information related to your open accounts — including your payment history — to the three major credit bureaus: Equifax, Experian and TransUnion.
Each bureau weighs that information slightly differently, running in through a complex algorithm to ultimately compute your credit score.
Not all lenders report to all three credit bureaus, however, resulting in credit score variations that depend on the bureau.
Generally, creditors and lenders have the right to report late payments of 30 days or more to the bureaus. If you have a good relationship with your creditors, however, most give you more time to pay your obligations before reporting you.
For late payments of 90 or more days, a lender can charge off your account and send it to collections. Collections can stay on your payment history, pulling down your credit score for years.
Your credit report can include late payments and other black marks for as long as seven years. Bankruptcies remain on your report for as long as 10 years.
An imperfect credit report or payment history doesn’t mean that you can’t get a loan or credit card before these seven years are up, however. Depending on the creditor, you could be considered a low credit risk regardless.
You have four ways to request late payments removed from your report:
Because most lenders wait to report late payments until at least 30 days after your due date, you’re likely fine if you pay before then.
But if you’ve hit a financial hurdle and know you can’t pay, immediately contact your creditor and explain your situation and how you expect to resolve it. Be ready to provide a timeframe in which you’ll pay. Paying even a partial amount is a measure of good faith.
Creditors don’t like late payments, but in the end, they simply want you a straightforward plan for when they can see payment. By contacting them, you’re taking responsibility for your obligation, despite your difficulty in meeting it at that moment.
You’ve likely heard at least a few of these tips, but they’re worth repeating among others you might not have considered:
Your payment history is a record of successful, late and missed payments that potential creditors and lenders rely on to determine their risk in taking you on as a borrower.
The information within it also contributes to a significant percentage of your overall credit score. Paying outstanding obligations on time goes a long way toward improving or maintaining your credit score. And a strong credit score often results in more competitive interest rates and terms when you apply for a loan or credit card.
To know more about credit scores and the factors that go into their computation, check out our guide to credit scores.
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