Careful, Now: This One Mistake Can Wipe Out a Year of Credit Score Progress
Your credit score consists of several factors, including your payment history. In fact, payment history is the single largest contributor to your score, which is why missing even a single payment is a big deal.
Here’s how payment history works with your credit score, and why missed or late payments can wipe out an entire year’s worth of progress.
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Payment History and Your Credit
Your FICO score consists of five major factors:
Payment history (35%)
Amounts owed (30%)
Credit history length (15%)
New credit (10%)
Credit mix (10%)
As you can see, payment history has the biggest impact on your overall score. On-time payments can build your score up. Late or missed payments can cause it to plummet.
The reason why payment history matters so much is because it shows lenders how risky lending money to you might be. If you have a history of missed payments, they’re unlikely to offer you a loan since there’s a lower chance of you paying it back. This goes for credit cards, too.
Your payment history isn’t only about missed or late payments. According to FICO it also includes things like:
Amount of money owed in collections or on delinquent accounts
Number of past-due items on your credit report
Payment info on loans and credit cards
Number of accounts with on-time payments
Bankruptcy (public record)
Impact of Missed Payments
Missing one payment won’t automatically destroy your credit score, but it can cause it to drop. Multiple missed payments, however, can have a much more serious impact.
The exact impact depends on a few factors, including how late your payment is. Per FICO, creditors typically report payments as late after 30 days, and then every 30 days after that. The longer you go without paying, the greater the impact to your score.
If you don't pay for 120-180 days, your debt may be "charged off." This means your creditor has closed your account and potentially sold it to a collection agency. According to Equifax, the charged-off account will remain on your report for up to seven years, and can bring down your score even more. You're still obligated to pay what you owe.
Your current credit score and overall credit history also factor into the impact of a missed payment. According to The Credit People, a charge-off could cause your score to drop by:
50-80 points if you already had poor credit or a history of late payments (600 starting score)
100-plus points if you had good credit (700 score or higher)
Essentially, a single missed payment could cause a significant point drop for those with good or excellent credit. The impact may not be as high for those with less-than-stellar credit. Having multiple late payments or charge-offs can lead to a larger drop.
Getting Your Score Back on Track
If your credit has suffered from missed payments, try not to stress. You can get it back on track in a few ways, like:
1. Paying Within 30 Days
If you catch up on a payment within a month, your creditor may not report it as late. This means it won’t impact your score. You may still be charged a late fee, though.
2. Catching up as Soon as Possible
Bringing your accounts current sooner as opposed to later can help minimize the impact to your score.
3. Waiting It Out
Sometimes, the best thing you can do (after bringing your accounts current) is to let time do its thing. The impact of a missed payment or a charge-off lessens over time.
4. Consolidating Debts
If you’ve got accounts in collections or if you’re struggling with multiple debts, consolidation could simplify your payments. It might even get you a lower monthly payment amount.
5. Contacting Your Creditors
Yours might be willing to work with you, especially if you have a valid financial hardship causing you to miss payments. Ask what kinds of assistance they can provide or see if they can refer you to a credit counseling service.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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