It’s not surprising how many consumers repeatedly make the same credit mistakes and wonder why their credit scores aren’t what they should be. Most consumers do not understand the factors that the credit bureaus use in evaluating your credit and assigning a credit score. In an effort to educate consumers on credit and credit scoring, I’ve compiled a series of posts that cover 5 common credit mistakes, explains how these mistakes affect your score, and how you can avoid these credit pitfalls.
It doesn’t take a credit repair expert to tell you that missing a payment is a bad thing. Your credit payment history is 35% of your credit score – making it the highest impacting factor in your overall credit score. Common sense should tell you that missing a payment is bad. Credit scores are designed to predict how likely you are to miss payments in the future. This means that they look at your credit history to view how you’ve managed all of your credit obligations. Missing payments is the most powerful predictor of future late payments. The FICO score evaluates previous late payments in three different ways:
A). How Severe: How severe is the late payment? It doesn’t take a statistician to tell you that a 30-day late isn’t as bad as a 90-day late. The more severe the late payment, the more damaging it is to your credit scores. Consumers who have missed payments by a few weeks and then bring their accounts current will score much better than consumers that have gone 90+ days past due. In fact, a 90- day past due is the threshold that will wreak havoc on your scores. If you are unable to avoid a late payment, the next best option is to get those accounts current as quickly as possible!
B). How Recent: How long ago did the late payment occur? The last 24 months of your credit history are critical because the FICO score places more emphasis on your recent credit patterns. This means that a late payment 6 months ago is going to carry much more weight than a late payment from 4 years ago. To recover from late payments it’s important that you get current and stay current.
C). How Frequent: How often have the late payments occurred? Consumers that miss payments frequently are penalized much more severely than those that have missed a payment here or there in their past. If you have a tendency to make late payments your credit scores will reflect your bad habits. Make your payments on time and you’ll never have to worry about losing credit score points in this category.
Knowing the factors affect your credit will help you to make better credit decisions to improve and maintain a good credit score. Watch for upcoming posts in the coming weeks covering 4 other credit mistakes and how to avoid them.