Vail Daily column: One late payment can make a difference
Now that we are in the offseason (though it’s a shadow of its former self many years ago, when literally the valley did shut down for a couple of months), many locals are finding themselves a bit short on cash, and for many the easy answer is to just skip a few credit card payments. The thinking is that, “Hey, I pay on time the rest of the year, so the credit card companies can just get over it.”
While it is true years ago this might not have made much difference, it’s a very different story now, as a few potential clients have found out lately. The reason is a tool used by creditors called FICO scoring, and everybody has a FICO score or several of them depending on who is checking.
A FICO score is a computer generated number assigned to your credit report between 350 and 900. It is the result of a very complex series of calculations that evaluate your credit history and activity and predict the likelihood of a future default. The formula has been derived at by studying thousands of credit reports and noting patterns that led to defaults.
Amongst the things FICO looks at are the lengths of time your accounts have been open, how many accounts you have, what percentage of your available credit you are using, how many inquiries you have had and what your payment history is in terms of late payments. Your FICO score actually changes every time a creditor reports an update to the bureaus.
So what happens if you decide to blow off a payment? Well, for starters your credit score may well drop 40-50 points, and that’s if you miss just one payment and make all the others that month. Miss a couple and you could easily slip a hundred or more points. Now, if you had an 850 score to start with, then you might not be hurt that much and for good reason. To get an 850 score you likely have had over 15 years of perfect payments, don’t use your cards very often and have always paid them off promptly. You also likely may have cards with say $25,000 credit limits that you rarely use. So in that case, a missed payment would still knock you down but not out because likely it was a legitimate mistake.
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However, if you had a 700 score and went to 600, you’ve got some serious problems. First, it is likely your other creditors (whom hopefully you have been paying every month) are checking your score every month or so to keep an eye out for potential problems. Their computers will then flag your accounts for review, and I don’t mean to consider you for the triple platinum, zero interest balance transfer offers.
What can happen is you may suddenly find your interest rates increased on the cards you have been paying on time. Also, if the defaults are becoming serious, then you may suddenly have your credit limit lowered or your account closed, even though you never were late on the account in question.
It is also quite likely you may see an increase in your car, homeowners or health insurance. While I find it hard to believe, it seems that the insurance bean counters have determined that people in financial straits may be more prone to health problems and car accidents. Possibly they assume you’re financial stress is causing health issues.
Many times employers and landlords check your FICO score to determine if you meet their requirements, and they may deny you housing or a job if your credit is poor.
Now if you were thinking about using the time you have in offseason to go look for a home to buy, then you really are going to pay. If your score is below 640, then you will pay a premium of up to a full percent on a mortgage rate, even though it may be just one or two late pays on a credit card.
How long does it take for a few late pays to stop bringing down your scores? It varies, there is no simple chart for such a thing, but in general it will probably take 12 months at least.
If you want to mitigate the impact of a late pay you can also focus on paying down your cards to at least 50 percent of your credit limits, and 30 percent is better. Also, it is vital that everyone check all three credit bureau reports at least once or twice a year for mistakes.
You may not like playing the FICO scoring game, but it’s a part of life that you will benefit more by mastering than trying to pretend it’s not there.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.