Time heals credit wounds, but how soon and how well remain a mystery
By Jeremy M. Simon
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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 Web site 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
