Blog posted On December 16, 2020
If you’re preparing to apply for a mortgage loan, you’ve likely already looked at ways you can improve your credit score. Your credit score is calculated by the three national credit bureaus – Experian, TransUnion and Equifax – and will fall within a range between 300 and 850. Scores between 740 and 799 are considered very good and will often qualify for better rates than applicants with lower scores. Though the specific scoring algorithms are not public knowledge, several scoring factors are widely well known. The most important factor, according to Experian and other credit experts, is your loan payment and credit card payment history.
The most common type of loan payments are mortgage payments, car loans, and student debt. While late payments on other bills such as utilities and medical expenses won’t directly affect your credit score, making late loan payments can be costly.
Your first late mortgage payment can cause your credit score to drop 60 to 80 points. If you continue to miss several mortgage payments in a row, you could be in risk of foreclosure – which can lower your credit score by up to 150 points.
Under the recent CARES Act, late mortgage payments will not show up on your credit report if you’ve received an official forbearance agreement from your lender. If you are having difficulty making your mortgage payment, it’s important to contact your loan servicer right away.
Though not quite as costly as late mortgage payments, late car loan payments can cause your credit score to drop anywhere from 25 to 85 points. Car loan payments typically have a grace period of about ten days; however, like mortgage payments, consecutively missed car payments can lead to a repossession by the bank.
The loan payment that can have the greatest effect on your credit score is your student loan. Missing your student loan payment can cause your credit score to drop up to 110 points, if it’s paid after 30 days.
According to Colleen McCreary, a consumer financial advocate at Credit Karma, missing a student loan payment can result in a number of consequences beyond a credit score ding – such as delinquencies and defaulting. Similar to mortgage loans, missed payments on student loans will not affect a consumer’s credit scores through the end of 2020.
Credit card payments
Most people’s credit scores won’t be affected if you pay your credit card bill a few days late. Once your credit card bill is a month overdue then your credit score will start dropping dramatically. Your credit score can drop anywhere from 25-to-85 points from late credit card payments. Furthermore, a late payment on your credit card bill can result in additional fines or interest costs.
Late payments on your water and electricity bills are not directly reported to credit agencies. Therefore, they will only affect your credit score if they are sold to a third-party collections agency. The same goes for late payments on rent and internet service. Third-party agencies are companies used by lenders to gather information on funds or accounts that are in default.
Like utility bills, late payments on internet service are not reported to credit bureaus and therefore will not affect your credit score, as long as you pay them within 180 days of when they are due. However, it is important to pay your late bills as soon as possible since you can still be fined late fees.
Medical bills can be expensive and unexpected. Fortunately, they will only dent your credit score if you delay payment for six months or longer. Though you should always try to pay your bills on time, if you need to delay payments for financial reasons, delaying your medical bills would be a good first option due to the long repayment period.
When life gets busy (and expensive), you might miss a few bill payments. If you have to pause or delay certain payments due to financial stress, make sure that you prioritize the bills that can affect your credit score first. You’ve likely worked hard to reach your current score, and “the higher you are, the harder you're going to fall in terms of score,” says Eric Espinoza, director of research and advocacy at Neighborhood Trust Financial Partners.
To see what mortgage rates you could qualify for with your current credit score, talk with us today.