How fast does your credit score recover from your goofs?Time heals credit wounds, but how soon and how well remain a mystery
Dear Credit Score Report,
I know if I have even one 30-day late payment, my credit
score drops. Question: How long is the penalty? When can I expect to see my
score increase again? -- Mike
Hey Mike,
Experts say you can expect a late payment to hurt your
credit score for seven years, with your score gradually recovering over that
time frame as you make smart borrowing decisions -- though exactly how much and how fast your score recovers isn't entirely
clear.
The federal Fair Credit Reporting Act says that negative items can only appear on your credit report
for seven years,
but it doesn't say how the credit industry should treat the impact of those
items after they happen. That vagueness, combined with the secrecy and complexity
involved in credit scoring, mean that it's tough to say exactly how a
borrower's credit score
will recover from a late payment. Still, provided the
borrower makes smart decisions following a slip-up, time will heal those credit
wounds.
"Every consumer's situation is different, but
generally speaking, the impact from a negative item, such as a late payment,
will lessen as that item ages" says Steve Katz, spokesman for credit bureau TransUnion.
While FICO, creator of the most-widely used scoring
model, largely keeps the details of its scoring model a secret, we do know the
approximate damage a late payment will cause. FICO pulled the curtain back a bit
on its scoring model recently when it acknowledged just how much certain credit
mistakes can hurt a borrower's credit score. For example, in the case of two
hypothetical consumers, FICO said that a 30-day late payment would reduce a
FICO score of 680 by 60 to 80 points, while an identical late payment would
reduce a FICO score of 780 by 90 to 110 points. (For more on this topic, see
our story on FICO's damage points.) You can run FICO's
credit score simulator to get an idea of how much damage
various mistakes, including a late payment, may cause to your own credit
score.
But when it comes to the recovery process, it's still largely
a mystery. FICO spokesman Craig Watts says your score will recover over time because
the scoring model factors in when you made your errors, how bad they were --
for example, was your payment late by 30 days or by 90 days? -- and how often
you made them. However, FICO's mathematical formula can't predict exactly how
fast your score will improve. Watts says there are simply too many changes that
can happen over time in a consumer's credit report, both due to the
cardholder's own actions and changes that are beyond the consumer's control. For
example, you wouldn't have any control over the continual aging of your
existing accounts.
Still, FICO's website gives some clues as to how a
credit recovery might play out. FICO says that for negative
items on a credit report, "a collection that is 5 years
old will hurt much less than a collection that is 5 months old." Please
note the use of the phrase "much less" to signal that five years out
from your late payment, its impact will be seriously lessened.
In discussing a foreclosure's
impact, FICO says "it's a common misconception that it will ruin your
score for a very long time. In fact, if you keep all of your other credit
obligations in good standing, your FICO score can begin to rebound in as little
as two years." Based on the fact that a foreclosure is much more damaging
to a credit score than a late payment, it would make sense that in your case, your FICO score would also begin to recover within two years of your late
payment.
Although FICO leaves it somewhat unclear what a
recovery from score damage looks like, the steps you need to take to recover
from that mistake are clear: "The best way to minimize the impact is to
catch up on the payment and then continue to make all of your payments on
time," says Rod Griffin, director of public education with credit bureau
Experian.
By always making on-time payments from now on, as well
as keeping debt levels low and only taking on additional lines of credit when
necessary, that late payment will become just a minor slip-up on the road to an
improved credit score.
Good luck!
-- Jeremy
See related: FICO reveals how common credit mistakes affect scores
Jeremy M. Simon is a former CreditCards.com reporter who wrote about credit scoring, economic data, credit card crime and other issues. He is based in Austin, Texas. He is a graduate of Vassar College and has previously worked for Thomson Financial in New York City, where he wrote about the stock markets, and Texas Monthly, as well as several publications in Austin.
Send your question to The Credit Score Report.
Published: December 22, 2009
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