Credit reports are financial records that record virtually every loan, credit card and other account. The Federal Reserve Bank of San Francisco explains that the information is gathered, stored and regularly updated by credit reporting agencies such as Equifax, TransUnion and Experian. They sell it to banks and companies evaluating credit and insurance applications. Certain items, such as delinquencies, affect the ability of borrowers to qualify for new accounts.
A delinquency refers to an account that is not being paid on time. Payments become delinquent when they are not received by the due date. Creditors report this information to the credit reporting agencies, which add it to the consumer's files. The length of the delinquency is noted, as lengthy delinquencies are more harmful to the person's credit rating. Late payments on multiple accounts are also very bad because the FICO credit score company states that 35 percent of a consumer's score comes from their payment behavior.
Every delinquent payment affects a credit score, according to MyFico. Creditors also pay attention to late pays on credit reports because that often indicates a person is having trouble meeting financial obligations. Delinquent bills raise the possibility of defaulting on additional accounts or even filing bankruptcy. Lenders are reluctant to extend more credit to people who cannot pay their current bills. Some delinquencies can result in seizure of property if they happen on a secured loan. For example, the Federal Trade Commission (FTC) warns that most car loan contracts give lenders the power to take vehicle as soon as a late payment occurs.
Creditors eventually write off delinquent accounts if the debtors never bring them current. This usually happens in six months, according to MSN Money columnist Liz Pulliam Weston. Charging them off does not mean that collection efforts cease or that a person is no longer responsible for the bill. The debt is often sold to collection agencies who pursue payment through various aggressive methods like frequent phone calls and letters or even legal action.
Delinquencies stay on credit reports for seven years, the FTC advises. Lenders see them for that entire time frame and may consider them in making credit decisions. Recent late payments or long stretches of slow bill payments are more serious than one or two delinquencies several years ago.
Late payments are preventable through a strict budget and prompt payment of every bill. Mail delays can cause late payments, so set up electronic funds transfers instead. Holden Lewis of the Bankrate financial information site recommends asking credit card companies to change due dates if many bills fall due at the same time. Spreading payments throughout the month may reduce or eliminate delinquencies.
- My FICO: What's in Your FICO Score
- MSN Money: When Paying Bills Can Hurt Your Credit
- Federal Trade Commission: How to Dispute Credit Report Errors
- Bankrate: Changing the Due Date on Your Credit Card
- Federal Reserve Bank of San Francisco: Your Credit Report, What it Says About You
- Federal Trade Commission: Vehicle Repossession, Understanding the Rules of the Road