How fast does your credit score recover from your goofs?

Dear Credit Score Report,I know if I have even one 30-day late payment, my creditscore drops. Question: How long is the penalty? When can I expect to see myscore increase again? -- Mike

Hey Mike,Experts say you can expect a late payment to hurt yourcredit score for seven years, with your score gradually recovering over thattime frame as you make smart borrowing decisions -- though exactly how much and how fast your score recovers isn't entirelyclear.

The federal Fair Credit Reporting Act says that negative items can only appear on your credit reportfor seven years,but it doesn't say how the credit industry should treat the impact of thoseitems after they happen. That vagueness, combined with the secrecy and complexityinvolved in credit scoring, mean that it's tough to say exactly how aborrower's credit scorewill recover from a late payment. Still, provided theborrower makes smart decisions following a slip-up, time will heal those creditwounds.

"Every consumer's situation is different, butgenerally speaking, the impact from a negative item, such as a late payment,will lessen as that item ages" says Steve Katz, spokesman for credit bureau TransUnion.

While FICO, creator of the most-widely used scoringmodel, largely keeps the details of its scoring model a secret, we do know theapproximate damage a late payment will cause. FICO pulled the curtain back a biton its scoring model recently when it acknowledged just how much certain creditmistakes can hurt a borrower's credit score. For example, in the case of twohypothetical consumers, FICO said that a 30-day late payment would reduce aFICO score of 680 by 60 to 80 points, while an identical late payment wouldreduce a FICO score of 780 by 90 to 110 points. (For more on this topic, seeour story on FICO's damage points.) You can run FICO'scredit score simulator to get an idea of how much damagevarious mistakes, including a late payment, may cause to your own creditscore. 

But when it comes to the recovery process, it's still largelya mystery. FICO spokesman Craig Watts says your score will recover over time becausethe scoring model factors in when you made your errors, how bad they were --for example, was your payment late by 30 days or by 90 days? -- and how oftenyou made them. However, FICO's mathematical formula can't predict exactly howfast your score will improve. Watts says there are simply too many changes thatcan happen over time in a consumer's credit report, both due to thecardholder's own actions and changes that are beyond the consumer's control. Forexample, you wouldn't have any control over the continual aging of yourexisting accounts.

Still, FICO's Web site gives some clues as to how acredit recovery might play out. FICO says that for negativeitems on a credit report, "a collection that is 5 yearsold will hurt much less than a collection that is 5 months old." Pleasenote the use of the phrase "much less" to signal that five years outfrom your late payment, its impact will be seriously lessened.

In discussing a foreclosure'simpact, FICO says "it's a common misconception that it will ruin yourscore for a very long time. In fact, if you keep all of your other creditobligations in good standing, your FICO score can begin to rebound in as littleas two years." Based on the fact that a foreclosure is much more damagingto a credit score than a late payment, it would make sense that in your case, your FICO score would also begin to recover within two years of your latepayment.

Although FICO leaves it somewhat unclear what arecovery from score damage looks like, the steps you need to take to recoverfrom that mistake are clear: "The best way to minimize the impact is tocatch up on the payment and then continue to make all of your payments ontime," says Rod Griffin, director of public education with credit bureauExperian.

By always making on-time payments from now on, as wellas keeping debt levels low and only taking on additional lines of credit whennecessary, that late payment will become just a minor slip-up on the road to animproved credit score.

Good luck!

-- Jeremy 

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