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Note from Kalen: I’m on vacation this week, so I have an awesome article from the team over at Credit Sesame. Credit Sesame is a free service you can use to monitor your credit. See my review here.
In the lending industry, free credit scores and credit scoring systems have become universal. As technology advances and becomes more commercial, such as the public debut of the 1989 FICO credit scoring model, scoring tools have started to overtake traditional underwriting process in the world of lending. Companies like Credit Sesame have been founded to help the public gain a deeper understanding of their financial standings by offering free credit scores, reports, and tracking. While there are definite benefits to this new takeover, there remains to be widespread misunderstanding of what actually affects your credit scores. One of the top suspects: late payments.
Reporting of Late Payments
Lenders have various alternatives for late payments that can be reported to credit bureaus. These options range from a simple 30 day late payment to a harrowing 180 day late payment. However, contrary to constant misreporting on the topic, not all options have a major impact on your overall credit score. In fact, there are just two categories that late payments fall into on your credit report: minor derogatory and major derogatory.
Minor Derogatory: 30-60 Days Late
If your late payment is between 30-60 days late, it is formally considered a minor derogatory credit entry. It is minor as it does not reach or surpass 90 days, which makes it a considerably less problematic historical delinquency. In other words, a minor derogatory late payment is less indicative of elevated risk and will therefore have less of an impact on your credit score. Yet there is one caveat: if a 30-60 day late payment on a credit report proves the borrower is currently past due rather than historically, what would be a minor derogatory late payment is instead considered a major derogatory late payment.
Please note, it is important to know that lenders are not allowed to report you as late until a full 30 days have passed since the original due date. That means that if you do find a 30 day late payment on your credit report you are one full cycle past the due date, not just a couple of days as there is no way of accurately reporting 1-29 days past due. You will still be regarded as ‘current’ on your account even though you are actually past due.
Major Derogatory: 90+ Days Late
A major derogatory credit entry includes any account that is 90 days or more past the initial due date. At this stage, if you are more than 90 days late you have crossed over from a minor delinquency to someone that is defaulting on their financial obligations. This is more serious than a minor derogatory credit entry as credit scoring models work to predict the probability of you going severely delinquent – you have proven you are prepared to take your account into default and are therefore more likely to repeat this offense in the future.
Recovering Your Credit Score
It is possible to bring your credit score back up to a good level after minor and/or major derogatory credit entries, but it will take both time and diligent effort. The amount of time you will need depends on 2 things: why your credit score is low to begin with and the number you wish to increase it to. For example, a person who had a previous credit score of 680 will have to wait less time for their scores to rebound as opposed to a person who had a previous score of 800. In general, the amount of time it takes for a credit score to fully recover from minor and major delinquencies ranges from 3-7 years.
About the Author:
This article was researched and written by the Credit Sesame Financial Research team. Credit Sesame is a personal finance website that helps users do more with their credit score and manage their loans. They offer tools and tips to manage personal finance and loans in one place. No credit card is required to access the free membership.