Generally speaking, negative marks remain on your credit report for seven years, though Chapter 7 bankruptcy stays on for 10 years. The important thing to remember is that the impact lessens dramatically over time.
A few missed payments in the last year causes a big hit on your score. If you get back on track and start making consistent on-time payments, those same bad marks might cost you only a few points after five years.
“We do know that consumers miss payments. That’s a reality,” says Can Arkali, principal scientist for analytics and scores at FICO, the most trusted authority in the credit business.
How to Limit the Damage of Missed Payments
It’s what happens immediately after a missed payment that determines how much long-term damage is done, Arkali explains.
“The first thing to repair the damage is to get current and stay current with your payments,” he said. “The longer you manage to pay your bills on time, even on missed obligations, the better off you are. The negative payment information is not going to disappear quickly, but the impact on your score is less and less every year.”
The three major credit bureaus in the U.S. – Experian, Equifax and TransUnion – compile your information into credit reports, which are divided into three categories: trade lines; credit inquiries; and public record and collections.
Trade lines are credit accounts that the bureaus use to track your payment history. They include credit cards, retail accounts (department store credit cards or any line of credit from places you shop), installment loans (auto loans or any loan that you make regular payments on), finance company accounts and mortgage loans.
How reliably you pay on those accounts is the most important factor in your credit score. Credit payment history determines 35% of a FICO score. It’s worth more than any other component of the score.
Delinquencies are missed payments on trade lines and stay on your credit report for seven years. One missed payment can drop your score anywhere from 60 to 130 points depending on your original score. The higher your score is the more your score will drop due to a late or missed payment.
The longer you allow a payment to remain delinquent the more points you will lose on your credit score. A 60-day late payment is worse than a 30-day late payment so it’s a good idea to catch up as quickly as possible.
That said, the effects of a late payment to your score will deteriorate over time.
“The more recent that information, the more impact it will have on your credit score,” Arkali said. “If you have a missed payment that is one year old, it will have a slightly more pronounced negative impact than one that has aged four years.”
When Are Late Payments Reported to Credit Bureaus?
Don’t confuse late payments with missed payments. Just because your creditor hit you with a late fee, doesn’t mean you missed the payment. It is against federal law for a creditor to report a missed payment until it is 30 days past due.
Missed payments can happen for a number of reasons, but regardless of whether you lacked the funds or were simply careless the effects are the same.
Let’s say you’re going through a divorce and forgot about an account you shared with a spouse so the payment deadline passes. When the mistake is discovered, it is vital to pay the debt as soon as possible. Rebuilding your credit after divorce can be challenging, especially if you are taking on your ex-spouse’s payment obligations, but if you can keep your payments current, you’re score will improve.
If the payment remains delinquent for long enough, a creditor can choose to charge it off and sell it to a debt collection agency. A charge off is more serious than a missed payment and will remain on your credit report for seven years, even if you eventually pay it in full.
Hard Inquiries vs Soft Inquiries
Credit inquiries can also affect your credit score depending on the type. There are two kinds of inquiries, soft inquiries (which do not affect credit scores) and hard inquiries (which do affect credit scores).
Hard inquiries occur when you apply for a new line of credit such as a credit card or auto loan. This will drop your score by a few points and stays on your credit report for two years.
Soft inquiries occur when you request a credit report or score, or when a credit card company does an account review to see if you qualify for their card. Soft inquiries have no effect on your credit score but will show up on a credit report for two years.
Credit reports also look into your public records including bankruptcies, foreclosures, suits, wage attachments, liens and judgments. A short sale will remain on your credit report for seven years, but it may only prevent you from getting a new mortgage for 2-3 years.
The amount of time bankruptcy remains on your credit report depends on which type you file. Chapter 13 bankruptcy allows your to keep most of your assets and will stay on your credit report for seven years. Chapter 7 bankruptcy is a little more serious. You will have to liquidate your assets to pay off debts, and this stays on your credit report for 10 years.
A foreclosure—when a bank seizes your home for failure to make payments— will be on your credit report for seven years. A tax lien will also remain on your credit report for seven years. If you don’t pay taxes the government could put a lien on your property, and if you don’t take care of the lien, it will could stay on your report for up to 10 years.
If you fix your mistakes and manage your finances responsibly, your credit score will rebound over time.
How to Get Help When You Have Bad Credit
If you need debt relief with bad credit, consider working with a nonprofit credit counseling agency and enrolling in a debt management program, where you can get interest rate relief and help with paying your bills on time, regardless of your credit score.
FICO (2017) What’s in my credit report? Retrieved from http://www.myfico.com/CreditEducation/In-Your-Credit-Report.aspx
Gaskin (2011, March 24) Impact To FICO Score. Retrieved from http://www.fico.com/en/blogs/risk-compliance/research-looks-at-how-mortgage-delinquencies-affect-scores/