High unemployment, a stagnant housing market and tight lending restrictions combined in a perfect economic storm beginning in 2007, and many Americans found themselves defaulting on loans. If you, too, have a late "paid-in-full" account, it hurts your credit because timeliness of payment history comprises 35 percent of your credit score. However, the good news is that a late "paid-in-full" account is better for your credit than an account that's gone to collection.
FICO Scores
Your FICO score is a three-digit number used to predict the level of risk you pose a lender. Late mortgage and auto payments have a stronger negative effect than late credit card payments, but they all count. Other factors that contribute to your FICO score are the amounts of your balances, the length of your credit history, the types of credit you have and the amount of new credit you've borrowed. Because these factors vary among borrowers, there can't be a one-size-fits-all approach to scoring.
Late Payments
It doesn't matter if you have excellent or poor credit: Late payments harm your score and appear on your credit history for seven years. However, if a late account is made current and paid in full, your history will suffer less long-term damage than if it is never paid.
Loans as late as 150 days may still be made current and paid in full. The key is not to allow the account to go to collection or have it marked as a judgment. You can recover much more easily from a late paid-in-full account because lenders will see that you eventually satisfied the obligation.
The Good News
The best medicine for your credit history is time. As long as you ensure that the account in question was paid in full and make sure to order your free credit report and review it carefully, you can recover in several months' time. During this recovery period, make your payments on time. Also carefully monitor how much credit you're using on a monthly basis: Always keep revolving balances (like credit cards) to less than 50 percent of your available credit because the "amounts owed" portion of your credit report counts for 30 percent of your FICO score.
Credit Tips
Note that simply paying your bills on time and keeping your revolving debt load to less than 50 percent ensures that 65 percent of the factors that affect your FICO score are in excellent shape. Also, let time pass before applying for a new loan, because recent late payments affect your score more than late payments from several months or years ago. FICO scores are merely a snapshot in time of your creditworthiness. Loans that are late in being paid in full will eventually fade.
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