1003. Is one missed payment going to haunt your mortgage application forever? On this Finance Friday, host Laura answers a listener's question about a recent late payment and the fear that it might ruin their chances of buying a home. If you’ve ever seen your credit score plummet due to a mistake, this episode is for you.
1003. Is one missed payment going to haunt your mortgage application forever?
On this Finance Friday, host Laura answers a listener's question about a recent late payment and the fear that it might ruin their chances of buying a home. If you’ve ever seen your credit score plummet due to a mistake, this episode is for you.
Laura breaks down the "lifespan" of credit damage and reviews seven specific negative items that can appear on your reports, including:
You’ll also learn why your credit score isn’t a "permanent record" and how the diminishing effect of old mistakes allows your score to rebound faster than you think.
Find a transcript here.
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A listener named Martin says, “A few months ago, I forgot to pay a credit card on time and now have a late payment on my credit report, and see that my scores have dropped. I’m really upset about it because I want to qualify for a home mortgage in the next year or two. How long will my mistake affect my credit, and is there anything I can do to improve it?”
Thanks so much for your question, Martin! I know seeing your credit scores drop can really hurt. I’ll answer your question by reviewing seven types of negative information that can affect your credit and how long they remain on your credit reports.
Hi everyone, and welcome to episode 1,003 of Money Girl! This is Finance Friday, where I answer your burning money questions each week. I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, that's my Substack newsletter. I'd love for you to sign up. You can learn more about me and The Money Stack when you visit LauraDAdams.com. And that's also where you can send an email question for Finance Friday.
A credit history or credit report is a file maintained by nationwide credit bureaus. These include companies like Equifax, Experian, and TransUnion. Now they're not the only credit bureaus out there, but they are the big three. Your credit report with these companies contain data reported by some or all of your creditors and certain legal information. And your reports can be a little difference because your creditors may not report data to all three of them. For instance, they may just report to Equifax. So the information in your credit reports is used to generate various credit scores. There are many different types of credit scores out there. And that help creditors and merchants evaluate you. So it's a combination of looking at your credit report and looking at a generated credit score.
For instance, when Martin applies for a home mortgage, the lender typically reviews one or more of his credit reports and credit scores. All that information influences the loan amount and interest rate they will offer him. Note that credit bureaus don’t make any lending decisions themselves; they maintain a history of data reported to them, and sell your report to various financial institutions and merchants who want to buy it to evaluate you as a potential customer.
So it's a good idea to review your credit reports periodically to make sure there isn’t any incorrect information hurting your credit without you knowing it. It’s absolutely free to review your credit reports at the official credit site, Annualcreditreport.com. Reviewing your credit reports never hurts your credit scores, so there’s no downside to checking it as often as you like.
And as Martin mentioned, negative credit information can quickly hurt your credit scores. I’ll review seven items that can appear on credit reports and how long they stay there.
While you can’t have legitimate black marks removed from your credit history, the good news is that positive information stays on your credit history longer, helping your credit scores recover.
1. Late payments.
As Martin described, forgetting to make a loan or credit card payment on time is probably the most common type of negative data on credit reports. It’s typically recorded when you’re 30 days past due, but it does depend on the type of debt. And I'll talk a little bit more about that.
For example, if your credit card payment was due on January 1 but you didn’t pay until the middle of February, your credit reports will show a 30-day late payment. Even if you catch up and pay the past due amount, that black mark typically remains in your credit report for seven years. And I know that can be upsetting if you mistakenly let a payment due date slip through the cracks.
Even if you close a credit account and say "I'm just gonna pay off that credit card and close it, so it will go away and not be on my credit report," it still stays there. So even if you close that credit card or you pay off a loan, it's going to stay on your credit report for seven years from your original delinquency date. The account will show that it has been closed. But again that late payment will stick around.
However, if you get behind on a federal student loan, the rules are different. A past-due federal loan doesn’t get reported to the credit bureaus until you’re more than 90 days past due. If you miss federal loan payments for nine months, you’re considered in default, and the entire unpaid balance of your loan, plus interest, becomes due immediately.
In addition, defaulting on a federal loan means you can lose a lot of benefits like the ability to choose a repayment plan, get a loan deferment, or qualify for additional student aid. The government can even garnish a portion of your wages, federal benefits, and tax refunds, to force you to repay a past-due federal loan. So it's pretty serious.
So always contact your federal loan servicer the moment you know that you can’t make a federal loan payment. They can help you choose the best option for your financial situation.
READ ALSO: Tips to minimize credit damage after a late payment
2. Charge-off.
Another type of negative item that hurts your credit is a charge-off (CO). It’s an accounting term meaning the creditor gave up on collecting a debt and reclassified it from a receivable to a loss. That might happen if you’re more than six months past due on a credit account.
But even if a creditor enters a charge-off on your credit report, you still legally owe them the money. But they’ve stopped expecting you to pay them voluntarily and will likely turn your account over to a collections agency.
Now if you pay a charge-off, the status changes to “paid charge off,” and that will remain in your credit report for seven years from the original delinquency date.
3. Collections.
After a creditor charges off a debt, they typically don’t stop trying to collect it. They may turn over a past-due account to a collections agency that either purchases it at a discount or is paid a cut of what it collects.
When a collector takes over a past-due account, the status changes to “in collections” or shows a transfer to a new creditor in your credit reports. So you might see two entries on your credit reports for the same account: one would be at $0 with the original creditor and one for the amount owed with the new creditor that now owns your debt.
An account in collections gets reported on your credit reports for seven years from your first delinquency date with the original creditor. And even paying it off in full doesn’t make it go away. Just like other black marks on a credit report, it typically remains for seven years. However, having a paid collection account can be viewed more favorably than one that hasn’t been paid.
Note that there are special rules for medical debt. First, any unpaid medical bill under $500 should not appear on credit reports. This was recently changed. Also, you get a longer grace period, up to one full year, before a past-due medical debt or one assigned to collections can appear on credit reports.
In addition, unlike a typical debt in collections, which stays on credit reports for seven years even if you pay it in full, there’s a different rule for medical debt. The moment you pay or settle a medical debt, it must be completely removed from your credit reports.
Plus, some states give consumers even more credit protection, such as prohibiting any medical debt from appearing on credit reports.
Note that some credit scoring models may even exclude paid collections and any past due medical debt from score calculations, even if they appear on your credit reports. That can help you get approved for a large loan, like a home or car loan, even with old medical bills or paid-off collections on your record.
4. Settlement.
A settlement is an account that you agree to pay for less than the full amount owed. It’s not as negative for your credit as an unpaid account or one in collections, but it isn’t as good as paying as you originally agreed.
A settlement stays on your credit report for seven years from the reported date or seven years from the date the account first became delinquent. However, you can try to get the creditor or collections agency to agree to a “pay for delete.” This is where the account is entirely removed from your credit history once you pay it. Now there's no guarantee that this strategy is going to work, but it's certainly something you can try to negotiate. Also, keep in mind that a collection agency can’t remove black marks in your credit reports put there from other institutions, like an original “charge-off” from a bank.
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5. Voluntary surrender.
If you take out a loan that’s secured by property, like real estate or a vehicle, you agree that if you don’t pay the loan, the lender can take the asset to help repay your debt. But let's say you have a financial hardship, and you decide to return the property to the lender, that’s called a voluntary surrender.
For example, some people would rather give back their car or boat than force the lender to pursue repossession. The problem is, you typically still owe the debt, even if you return the property to your creditor.
If a lender can sell the property, their profit is typically less than what you owe. In that case, you’re still responsible for the difference, which is known as a deficiency balance. The lender may send the deficiency account to a collections agency. And as I previously mentioned, a collection account remains on your credit reports for seven years from the date you became past due with the original creditor.
6. Foreclosure.
If you’ve had many months of late payments on a home mortgage, your lender can use foreclosure to take ownership of your property to help repay your debt. Once proceedings begin, the account is updated to show a foreclosure status on your credit reports.
Like most negative items on your credit report, a foreclosure is listed for seven years from the original date you first became past due. And it has a significant negative effect on your credit scores during that time, even if you get caught up on loan payments.
If you can’t pay a mortgage as agreed, doing a “short sale” may be slightly less harmful for your credit. A short sale of real estate is when you sell it for less than you owe, with the lender’s approval. However, a lender may still hold you responsible for a deficiency balance.
If you negotiate a short settlement, where a mortgage lender agrees to accept less than the original amount owed, it’s shown on your credit report as “settled” for seven years.
7. Bankruptcy.
Filing for bankruptcy is one of the worst items for your credit report. It’s a federal legal process where you declare yourself unable to pay your debts. A bankruptcy is entered into the public records, and then gets picked up by the credit bureaus. The two most common types for individuals are Chapter 7 and Chapter 13.
With a Chapter 7 bankruptcy, you agree, in exchange for your debt being completely erased, that your property (except types exempt under state law) can be sold to raise cash. This is terrible for creditors because they may receive little or none of the amount you owe. Chapter 7 stays on your credit report for ten years after the filing date.
With a Chapter 13 bankruptcy, you keep all your property, but agree to pay creditors a set portion of your balances according to a three- to five-year repayment plan. This is less harmful to creditors than a Chapter 7, and it does stay on your report for seven years from the filing date.
Filing either type of bankruptcy doesn’t make any past-due accounts disappear from your credit reports. The affected accounts are simply updated to show they’re included in a bankruptcy and remain on your credit reports for seven years.
READ ALSO: Know your score and improve your credit
Martin asked if there is a way to have a late payment removed from your credit history. The answer is typically “no.” As I mentioned, it doesn’t hurt to ask to have negative amount deleted as part of a debt settlement, but it typically doesn’t happen unless there are extenuating circumstances, like a billing error.
Once the reporting period for a credit account or a public record item has expired, the credit bureau automatically deletes it from your file. You don’t need to submit a request to have it removed, but it’s a good idea to double-check by pulling copies of your credit reports.
To sum up, just about every negative item on a credit report remains there for seven years, and this is according to the Fair Credit Reporting Act (FCRA). The primary exceptions are a Chapter 7 bankruptcy, which I mentioned, remains for ten years, and an unpaid tax lien, that's another negative item which can remain ten years or longer in your credit reports, depending on the laws in the state where you live. Some states don't allow unpaid tax liens to show up; others do.
However, it’s important to understand that negative items on your credit reports have a diminishing effect on your credit scores. For example, a five-year-old late payment hurts your scores much less than one from last month.
So Martin, as negative items age, they’re weighted less in credit scoring models. So, making on-time payments going forward will offset your late payment and help your credit scores rebound. And once that happens, you’ll be in the best position to apply for a large loan, like a home mortgage. I hope that's been helpful.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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