Contemplating skipping a credit card (or any other) payment? Think again.
"Really think about the consequences," urges Anthony A. Sprauve, FICO senior consumer credit specialist. "Thirty-five percent of your FICO score is your payment history, so it's the single most important thing your score looks at. You want to avoid missing or skipping payments unless you're under dire circumstances."
Of course, he's right. Your credit score helps to determine whether or not you get approved for a loan, and the interest you're likely to have to pay for it. If your score means you're excluded from the best credit card, auto loan and mortgage rates, the cost of your borrowing could skyrocket. And that means less money in your budget for the good things in life.
This makes knowing and actively managing your score vital, something that can only be done if you check it regularly. Luckily, there are now free credit score services that allow you to do so easily.
When you have to miss
But, as Sprauve readily acknowledges, sometimes you may have no choice but to skip a payment.
"If you see you're in a predicament where you're going to miss a payment, call your creditor in advance," he suggests. "See if there's something you can do to avoid being marked as missing a payment."
Your best bet is to inquire about making a reduced payment or agreeing to a payment plan. While you're on that call, ask the agent how any agreement you reach is going to be reported to credit bureaus. Lenders assign codes to the information that appears on your credit report, and it's that information -- a whole mass of it across all your accounts going back at least seven years -- that's used to calculate your credit score. If you can use charm (and charm's likely to be your only weapon at this point) to persuade the lender to assign a less damaging code than the one for a skipped payment, you could reduce the harm to your score.
The single most important thing you can now do is minimize the period over which you skip payments.
"The smaller the hole you dig, the quicker you can recover," Sprauve says.
Fewer than 30 days late
Chances are, your lender's not going to report your payment as missed until it's at least 30 days past due. It could, however, still be reported as late.
Call your credit card company and make excuses and apologies for your tardiness. Use all your charm to try to persuade the agent to code the payment as on time.
30-59 days late
There's now a missed payment on your report. It's inevitable that your score's going to take a hit, because, as VantageScore says in a 2012 credit-scoring white paper, this is a tipping point, which often signals to prospective lenders that you bring "potential for significant exposure."
That's serious, but it's not the end of the world. Just how damaging one or more missed payments are going to be depends largely on what your score was before. The higher it was, the bigger the drop it's likely to experience.
"If you've been an A-plus student, and suddenly you get an F, your grade point's going to drop further than if you're someone who's been a D student and then gets an F," Sprauve explains.
True, that skipped payment's going to remain on your credit report for the next seven years (yes, even if you subsequently close the account), but its impact on your score is going to fade over time. That VantageScore document says its systems could see scores recover within 18 months or so, providing all other current accounts are perfectly maintained. Your FICO score may bounce back more quickly in the same circumstances. Sprauve suggests perhaps a year for someone with a previously high score, and less for someone who started out with a middling one.
60-150+ days late
You can't realistically expect your credit card issuer to keep coding your reduced or skipped payments in a friendly way, and eventually your issues are likely to be reflected in your score. Multiple missed payments are going to hurt it badly.
Your goal now is to stop your creditor from "charging off" your balance. From your point of view, that accounting term means you're in default, and your debt's going to be passed to a collection agency or the lender's own in-house collection department.
If you ignore your card company, it's likely to charge off your account earlier than it might if you engage with it. It's not unusual for accounts to be sent for collection when they're 90 days past due.
Default means a world of hurt. Most obviously, you're likely to suffer endless harassing calls and scary (not always legal) threats from collectors. But, as bad, the effect on your credit score is certain to be catastrophic. VantageScore brackets a charge-off/default with a foreclosure, and warns of a "major score drop." The only thing worse would be a bankruptcy.
Sprauve points to another issue. Lenders (and some employers) look in detail at your credit report, and that's going to show this incident for at least seven long years after it occurs.
A brighter future
So you certainly want to avoid default if it's at all possible. But suppose the worst happens? Well, the great thing about credit scores is, once you're back on your financial feet, you can do a lot to recover. The prospect of a super-prime score is never an impossible dream. The last word on a default -- and this applies to all scoring issues -- goes to Sprauve.
"Even if you've stumbled, if you pick yourself up, dust yourself down, and start doing the things you need to do, you'll begin to recover almost immediately," he advises. "It'll take time to get back to where you started, but you'll definitely start moving in a positive direction."