Credit reports are financial records that record virtually every loan, credit card and other account. 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.
Definition of Delinquency
A delinquency refers to an account that was not paid on time. Payments become delinquent when they are not received by the due date. Creditors report delinquent credit obligations to the credit reporting agencies, which add it to the consumer's files.
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Delinquencies aren't the same as late payments. They are late payments that have gone uncollected long enough that the credit issuer has reported you to one or more credit bureaus.
For example, all late payments aren't reported to credit agencies. Some credit card companies, for example, might give you a 30-day grace period. If you get your payment in during that time, you still might pay a late fee, but the card issuer won't report the late payment to the credit agencies. If you know you've made a late payment, are going to be late, or might have made a late payment, contact the company and ask if and when they report delinquencies.
The length of a delinquency is recorded in your credit report, and lengthy delinquencies are more harmful to the person's credit rating. Late payments on multiple accounts are also very bad because 35 percent of a consumer's FICO credit score (the main scoring system used by lenders) comes from their payment behavior, according to MyFICO.
Effects of Delinquencies
Every delinquent payment affects a credit score. 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. Depending on how your delinquency affects your score (it might push it lower than a certain benchmark, such as "Very Good" to "Good" or "Good" to "Fair"), you might still get credit, but you might receive less (for example, a credit card with only a $200 limit) or have to pay a higher annual percentage interest rate.
Some delinquencies can result in seizure of property if they happen on a secured loan. For example, most car loan contracts give lenders the power to take vehicle as soon as a late payment occurs.
Results of a Delinquency
Creditors eventually write off delinquent accounts if the debtors never bring them current. This usually happens in six months. 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.
Time Frame for Delinquencies
Delinquencies stay on credit reports for seven years. 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.
Preventing Delinquent Accounts
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. Consider 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.