Before a consumer can contemplate effects on their credit score, they have to understand what goes into calculating a credit score and what weight is given the data being used to formulate a credit score. Although all three consumer credit rating bureaus use different formulas to calculate a credit score, in general terms they use a formula incorporating the following data at the weight values given:
- 35% Payment history
- 30% Outstanding debt
- 15% Length of time with credit accounts
- 10% New credit information
- 10% Type of credit
Main Cause of Change
As outlined above, the payment history on an account has a great deal to do with the ultimate credit score. Over a third of the value of a credit score is based on payment history. But this is not reflective of only one account; it reflects the history on all the accounts listed with the credit bureaus. If a consumer has 10 credit reporting accounts and only one of those accounts reports a payment being made late, the overall effect will be pretty small. However, if five of the ten accounts report late payments, the effect will be substantial.
When creditors are categorizing the receipt of payments against the due dates for those payments, they use different terms to designate and identify where the payment sits in the full payment cycle of an account. A payment cycle is normally 30 days and if a payment is due on the 1st of the month, the period of 10 days after the due date is considered the “Due” period. Simply put, from day 1 to day 10 is the “Due” period.
Past Due Payments
After the first ten-day period elapses, there is a period of time when the payment that was originally due on the 1st is considered “Past Due”. Generally, this is the remaining period between the 11th day and the 29th day that the payment has not been paid. The payment may be considered “Reportable Past Due” for some companies and “Past Due” for others.
In many cases, until the 30-day period elapses, the payment that was due on the 1st of the month is not considered a reportable late payment until it has passed the 30-day window. At this point, the creditor will probably report the payment as late to the credit bureau. There are a few companies that wait until after this time period as oftentimes the payment has been missed by mistake. Rather than damage a good customer’s credit rating, these companies will exhibit patience and not actually report anything until the second payment is in the “Past Due” category or late also.
For credit card companies, the date a payment is posted to the account can be no later than 24-hours after receipt. In other words, if you mail or electronically pay a payment to a creditor, they have 24 hours after receiving it to show it has been paid on your account. Commercial accounts, installment agreements, and other types of credit-based accounts may take up to 72 hours to show a payment against an account as the payment made be received on a Friday, but not actually processed and posted to the account until the following Monday. Consumers should try to be diligent when making payments close to the 30-day mark to insure it is posted prior to the 30th day elapsing. This is especially true for payments made by check.
In certain, rare cases, a creditor will not credit a payment to an account until the check which pays the account actually clears the customer’s account. The reason for this delay is the possibility the bank will not honor the check and will return it to the creditor for processing. In some cases, the bank’s processing can take up to two weeks or more, before a creditor receives notice of an insufficient funds (NSF) check being returned. If the creditor applied the payment to the account and then, later, received notice that the payment was not valid, the creditor has to go through a series of actions to reverse the payment, re-age the account, and then proceed to collect the funds again and report the late payment.
If a consumer acquires more debt, by virtue of charges against a new credit card or credit account, then the consumer’s debt to asset ratio changes. In general terms, a consumer’s net worth, or the ratio of a consumer’s debts to their assets, determines the consumer’s availability of credit. While consumer credit rating bureaus don’t actually know about a consumer’s assets, they can estimate the amount of total debt a consumer can handle based on their payments with their current debts. If the outstanding lines of credit are maxed out, the result has a negative impact on their credit rating.
The Last Three Categories
The final three categories of concern for credit rating bureaus – length of time with credit accounts, new credit, and type of credit – total up to about 1/3 of a consumer’s credit rating. Keeping accounts open (even though the balance is paid off) is the best way to keep these categories positive. Retaining accounts even though there’s little or no activity shows an extended relationship with a creditor. Applying for new credit cards or credit accounts will affect the score and consumers should not “over-apply” for accounts if possible. Also, making sure there are a variety of account types (credit cards, open accounts, revolving accounts, installment agreements, etc.) insures a better score in the long run.
Music to Your … Credit
Maintaining good scores with the three consumer credit bureaus (Equifax, Experian, and TransUnion) is like conducting an orchestra; knowing which factors can produce what results helps a consumer stay in control and on top of their all-important credit score.