Myth: A couple of missed payments won’t hurt my credit score
Reality: The worst thing one can do to their credit score is miss making minimum payments. Even one missed minimum payment can reduce a credit score by 50+ points. Making minimum payments on time is so important to lenders & the credit rating system that they designated it as weighing 35% of the credit score. Here is a breakdown of the weight distribution of your credit score. Put in another way, these percentages represent the level of importance these various aspects have on a credit score
35% Making minimum payments on time (as agreed by lender)
30% Credit utilization (how much you owe versus how much credit was extended; the lower the better)
15% Credit history (how long one has had existing credit; the longer the better)
10% Number of inquiries (how often one shops for credit; the more often one shops for credit, the worse the score)
10% Type of Credit (diversity of credit)
With a level of importance worth 35% of credit score, it’s easy to see how having one or two missed payments can affect a credit score. Credit history is tracked on one’s credit report for 6-7 years depending on where they live. This means one missed payment from 3 years ago still has some impact on a credit score. Of course the further away the missed payment is from the present, the less of an impact over time.
Perpetually missing minimum payments on debts can bring a credit score from an outstanding 800+ to a free fall of 500 range over just a few months. Here is how lenders can track and review how someone has been making minimum payments on their debts:
R0 Too new to rate; approved but not yet used (does not affect credit score; i.e.) accumulating student loan debt while in school as a full time student)
R1 Paid as agreed (agreement based on each individual lender)
R2 Late within 30 days of payment due date
R3 Late within 60 days of payment due date
R4 Late within 90 days of payment due date
R5 Account is at least 120 days overdue
R7 Making regular payments through a special arrangement to settle debts (i.e. consolidation order)
R8 Repossession (voluntary or involuntary return of merchandise)
R9 Bad debts, collection or bankruptcy
When a lender pulls a credit report, what they would ideally like to see is 1’s across the board for all debts. A “1” like an R1 means that minimum payments on debt are paid as agreed and on time by the borrower.
If a minimum payment is misses on a debt by even one day, the debt is reclassified as a “2” like R2, even if it was only one day late. The key term to remember is late “within” 30 days. The same is true for 60, 90 and 120 day mark. Keep in mind that this is tracked for each debt that is reported on the credit report and for a revolving 6-7 year period.
Having a 4 & 5 is similar to scoring a “D” grade in a class. Even though it’s technically a pass, the letter grade will affect overall GPA for a time.
Solution: Always try and make the minimum payments on debts each time and on time. If funds are tight, consider asking for a promotional reduced interest rate. If that does not work, try and get a consolidation loan at a lower interest rate to lower your overall minimum monthly payments and close the debts on your existing loans.
The ideal situation would be to a) make minimum payments on all debts on time b) to use no more than 40% of the credit that is extended to you. These two practical applications alone make up for 65% of one’s credit score. If executed correctly, one can ensure a good credit score/ credit report. This would translate to receiving favourable interest rates on future credit and the opportunity to receive additional credit in the future.
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