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True Credit Secrets
By Rick Miller, Thu Dec 8th

Figuring out exactly how credit scores work is problematic. Likenuclear fission, learning Chinese and setting the clock on yourDVD player, credit scoring is not something that most people caneasily master.

In the complicated world of credit scores there is one fact thatpretty much everyone assumes is true: late payments are bad foryour credit scores. Not only are late payments bad, but they arealso assumed to be one of the worst things you could do to yourscores. The first sign of a late payment on your credit reportssignals impending credit doom, right? It turns out that thisisn't exactly the case after all.

There are thousands of slightly different credit scoring modelsused today, each with a different purpose and formula. The mostcommon credit scoring systems are set up to predict only onething: how likely you are to have a 90 day late payment or worsein the 24 months after your score is calculated.

Credit scores are used by financial institutions, insurancecompanies and utility companies as an efficient way to predicthow risky a customer you will be. If your credit score is low,it indicates that you are more likely to make late payments orfile costly insurance claims. In turn, this means that thecreditor is more likely to lose their investment by lending youmoney. Once you understand that credit scores predict thisspecific behavior, it's a lot easier to figure out the best wayto manage your credit.

Because scoring systems are so focused on predicting whether ornot you'll go at least 90 days late, surprisingly, an old 30 or60 day late payment is actually not that damaging to your creditscores as long as it is an isolated incident. Only when youraccounts are currently being reported 30 or 60 days past due onyour credit reports, will your credit scores plummettemporarily.

If your 30 or 60 day late payments are an infrequent occurrence,this kind of low level late payment will damage your creditscore only while it is being reported as currently past due.They shouldn't cause lasting damage to your credit score afterthis period passes unless you make 30 or 60 day late payments ona regular basis. In this case, the fact that you are habituallylate with your payments will cause long term damage to yourcredit scores.

It's a whole new ballgame once you have a 90 day late payment,however. If you have been over 90 days late (even just once),the credit scoring models consider you much more likely to do itagain. One 90 day late payment will damage your credit for up toseven years. From a scoring perspective, a single 90 day latepayment is as damaging to your credit scores as a bankruptcyfiling, a tax lien, a collection, a judgment or repossession.Being 90 days late causes you to be viewed as a possible "repeatoffender" and a higher risk to creditors. Here's a summary ofhow late payments impact your credit scores:

30 days late - This record will damage your credit scores onlywhen it is reported as "currently 30 days late." The exceptionis if you are 30 days late often. Otherwise, a 30-day latepayment will not cause lasting damage.

60 days late - This record will also damage your credit scoreswhen it is reported as "currently 60 days late." Again, theexception is if you are 60 days late often. Otherwise, it willnot cause long term damage.

90 days late - This record will damage your credit scoressignificantly for up to 7 years. It doesn't make a differencewhether or not your account is currently 90 days late. Remember,the goal of the scoring model is to predict whether or not youwill pay 90 days late or later on any credit obligation. Byshowing that you have already done so means that you are morelikely to do it again compared to someone who has never been 90days

late. As such, your credit scores will drop.

120+ days late - Late payment reporting beyond the initial 90day missed payment does not cause additional credit score damagedirectly. However, there is an indirect impact to your scores.At this point, your debt is usually "charged off" or sold to a3rd party collection agency. Both of these occurrences arereported on your credit files and will lower your credit scoresfurther.

If you continue to miss your payments beyond 90 or 120 days, thefollowing records may also harm your credit score:

Collections - Collections are the result of late payments. Thereare two types of collections; those that have been sold to a 3rdparty collection agency or those that have been turned over toan internal collection department. Regardless of which one showsup on your credit reports, your scores will suffer.

Tax liens - Tax liens are obviously not preceded with latepayments on any sort of account. However, when tax liens arereported on your credit files they have the same negative impactto your scores as any other seriously delinquent account. And,just because you pay off the tax lien or have it "released"won't increase your scores.

Settlements - Settlements are deals made between you and acreditor who is trying to collect a past due debt. Normally, youand the creditor would agree on an amount that is less than whatyou really owe them. Once you pay them, they consider the matterclosed and paid off. However, they will report that you havemade a settlement for less than your contractual obligation.This will hurt your scores as much as any other seriousdelinquency.

Repossessions or foreclosures - Having a home foreclosed upon ora car repossessed are both considered serious delinquencies andwill lower your credit scores considerably for up to sevenyears. The assumption normally made by the consumer is "hey, Igave the home or car back to the lender, why are they going toshow me as delinquent?" The answer you'll get from lenders isthat you signed a contract with them to buy a home or car andpay it in full over a period of time. You failed to do sotherefore they consider you to be in default of your agreementwith them and will report this on your credit reports.

Remember, the goal of most credit scoring models is to predictwhether or not you will go 90 days past due or worse on anyobligation. What's missing? The scoring models are not designedto predict whether you will default for any specific dollaramount. As such, having a 90 day past due of only $100 is as badas having a 90 day past due of $10,000. The same goes for lowdollar collections, judgments or liens. The dollar amountdoesn't matter. The fact that you paid late is what's mostimportant in the eyes of a credit scoring model.

Now that our late payment secrets have been revealed, let's lookat what it means to you. You should still avoid making latepayments whenever possible. But we now know that one 30 or 60day late payment isn't the end of the world. Since 90 day latepayments are the real credit score busters, you should avoid a90 day late payment at all costs.

If you already have a 90 day late payment record on your credithistory then your scores are already suffering. Be certain thatthe information is being accurately reported. If it isn't thenyou have the right to dispute it with not only the creditreporting agencies but also with the lenders who reported it.Your goal is to have the item corrected or removed, especiallyif it is in error. Once removed or corrected your credit scoreswill immediately recover.

About the author:Rick Miller is an ex-credit bureau manager with 10 yearsexperience http://www.24hrcreditfix.com easycreditfix@aweber.com

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