Late payments and revolving balances are the two things that can do the most damage to a credit score. Having a late payment show up on your credit report probably makes sense but can revolving balances really have as much of a negative impact as a late payment? Absolutely.
Let’s look at late payments first. A creditor can only report an account as late if the payment is over 30 days late. If a late payment shows up on your credit report and you feel it was not over 30 days late, the creditor needs to be contacted immediately. If you have proof that it was paid within the right time frame, all the better. All too often creditors will report an account as 30 days late when in fact it may have only been 20 or 25 days late. At that point they can charge a late fee but they legally cannot report the account as 30 days late.
How much will a late payment affect a score and for how long? A late payment can stay on a credit report for seven years. The entire time it is there it will have some negative effect, with the first 24 months being the worst. Once a late payment is 24 months out it will start to have less and less of an impact. If a late payment is incurred it is always a good idea to call the creditor and see if they will do a “one time courtesy removal” of the late payment. There are quite a few creditors, especially credit card companies that will agree to do that if the account only has one late payment and otherwise has a good payment history. A late payment can affect a score up to 100 points or more depending on what the rest of the credit report looks like. The type of account the late payment is on has no relevance. A recent late payment on a small store credit card will do just as much damage as a recent late on a mortgage or auto loan.
Further damage can be done by late payment once they get to be 90 or 120 days past due. At this point they are usually charged off and sometimes turned over to a third party collection agency. It can then affect a score negatively twice as the original creditor will show up as a charge off and a new collection account will show up from the collection agency.
Revolving balances can also have a negative affect on a credit score, even if they have never incurred a late payment. This would be balances that are over 10% of the credit limit. The closer the balances get to the credit limit the more the scores are going to be negatively impacted. Even just one revolving balance that is close to the credit limit can hurt a score by up to 100 points, again depending on what the rest of the credit report looks like. If there are three or four credit cards with high balances it can be even more detrimental. There have been scores in the lower 600s on reports with no late payments or collections at all. It is strictly because of high credit card balances.
Optimally a consumer will have no more than three revolving balances and those balances will be below 10% of the high credit. If it’s not possible to pay balances down to what they should be, an option would be to request a credit line increase from the creditor. If the credit limit is increased it could put the ratio of balance to limit back to the right proportions.
Avoiding late payments and having high revolving balances may not be possible 100% of the time. But the more a consumer can stay on top of paying on time and keeping their revolving balances as low as possible, the better off the scores will be.