By now you’ve probably begun, or perhaps even finished, your Christmas shopping.
And while December is a month filled with countless distractions one thing remains crystal clear, which is that you cannot forsake your obligations to lenders just because you’re distracted.
I just returned from a trial in Pennsylvania where one of the parties made countless excuses for why he couldn’t pay one of his loans on time and was constantly 30 to 60 days late.
The excuses ranged from falling down and hurting his knees to his dog being exposed to chemicals in his home.
And while everyone is sympathetic to the external pressures of life, due dates are never to be forsaken and lenders don’t care about your excuses.
Great Myths of Credit Scoring
One of the great myths of credit scoring is that minor late payments can’t hurt your scores if you quickly catch the account back up.
This is true BUT only if your late payment is isolated AND historical, meaning the account isn’t CURRENTLY delinquent.
In the world of credit scoring there are two categories of derogatory information; minor and major. The dividing line between the two categories is very clean.
Historical delinquencies that have not gone 90 days past due or worse are considered minor derogatory items. Everything else is considered a major derogatory item.
So, to be clear, minor would include only historical 30 and 60-day delinquencies.
Major would include defaults, any record of being 90 days late or worse, repossessions, tax liens, judgments, collections, foreclosures, bankruptcy, settlements, and accounts that are currently delinquent.
The influence on your credit scores is drastically different between a minor and major derogatory item.
Delinquency Vs. Major Derogatory Item
Using the only FICO credit score estimation tool in existence, I simulated the difference in scores between people who have never been delinquent on anything versus those who are currently delinquent, but not in default.
For those who are currently 30 days delinquent their scores were considerably lower, normally around 35-50 points in my simulations.
For those who were currently 60 days delinquent (but not in default) their scores were always over 100 points lower that those who have never missed a payment.
This is where the confusion begins because neither a 30 day or 60 day delinquency is considered a “major” derogatory item yet their influence on a consumer’s score is significant, which seems counterintuitive until you get a better explanation.
Scoring systems, like FICO and VantageScore, are designed to predict the likelihood that you’ll go 90 days delinquent soon after you apply for credit.
By being currently delinquent, even just 30 or 60 days, you’re making the credit score’s job easy because you’re currently proving that you’re willing to be past due on credit obligations, thus the drastic score drop.
There’s something else to keep in mind, and this isn’t a secret in my world although it’s not well known by consumers.
When you’ve got a “30 day late” on your credit report that means you’re actually at least 30 days late on the obligation.
Lenders are not permitted to report late payments to the credit bureaus until the borrower has gone a full 30 days past the due date.
So, if you’re a week or two behind on your loan payments those won’t ever be reflected on your credit reports, although you’ll likely have to pay late fees.
In fact, a 30 day late on a credit report actually means you’re 30-59 days late on the obligation. A 60 day late on a credit report actually means you’re 60-89 days late on the obligation, and so forth and so on.
Point being, even if an account is showing on the credit report as just being 30 days late it’s possible that it’s actually 40, 50 or almost 60 days late.
This is another reason credit scoring systems are so harsh on consumer’s who have currently delinquent accounts on their credit reports.
What’s the possible harm?
You may be thinking, “well, if I just catch up on the payment and I avoided going 90 days past due (major derogatory) then my score will recover.”
You’re exactly right, although you’re not going to fully recover your score but it will bounce back quite nicely.
However, this still doesn’t prevent significant downside to being currently past due.
Lenders only update your credit reports once a month. That means if you have an account that is showing up as being currently past due it will be that way for a full month.
And, that means your credit scores will likely be lower, and maybe considerably lower, for 30 days straight.
Many credit card and line of credit creditors pull your credit scores every month to determine if they still want to do business with you.
That practice is called “Account Management” or “Account Maintenance.”
Just look at your own credit reports and you’ll likely see a long list of inquiries that fall into those two categories.
If one of your creditors pulls your credit score during their account management process and sees that it has dropped due to the currently late account, they’ll likely react by closing your account, lowering your limits, or raising your interest rates.
John Ulzheimer is the Credit Expert at CreditSesame.com, and a credit blogger at SmartCredit.com, Mint.com, and the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. You can follow John on Twitter here.