A Deeper Look at Late Payments and FICO Scores by Barry Paperno
While anyone can tell you that late payments will hurt a credit score, what most people don’t know is that there are subtleties in just how the FICO scoring formula treats one late payment from another. For example, some typical questions about late payments are…
Why would someone with a 90 day late have a better score than someone who’s never paid later than 30 days?
Does it matter if a payment goes 60 days late rather than 30 days – assuming it was from a year ago?
Does the score care how many late accounts I have or just that I was late at all?
How could someone with ten collections have a better score than someone with no late accounts at all?
While most credit advice (rightfully) recommends paying on time, it takes a deeper look in to the workings of the FICO formula to be able to answer some of the less obvious questions about the effect of late payments on FICO scores.
The FICO score is a predictor, not a report card. First, it’s always important to remember when analyzing the FICO scoring formula that the score is a “predictor” of future credit performance. It’s not there to reward or punish, but rather to predict the likelihood that someone will pay their bills as agreed over the next few years – based solely on the information in a credit report.
That is, just because you have a lot of accounts with late payments you’re not necessarily going to score lower than someone who has fewer late accounts. Or, having only missed one payment isn’t necessarily going to result in a higher score than if you had missed a number of payments. Remember, the score isn’t always intuitive – but it’s always predictive.
When looking at late payments, the FICO scoring formula looks at the information on a credit report in 3 ways (according to importance):
Recency – How recent was the most recent late payment?
Severity – How severe was the worst late payment?
Frequency – How many accounts with late payments have there been?
Recency
Recency is by far the most important thing to remember and it makes a lot of sense when you think about predicting future payment performance. A recent late payment – even one as minor as a 30 day late – not only indicates there might be a financial problem, but that the problem may not yet be over. It could be too early to tell – even if the account is now current — that the recent payment difficulty is far enough into the past that there is no further need for concern.
The question that comes up right about now in this discussion is usually: How recent is recent? Well, as with many aspects of FICO scoring, it varies. That is, while there is no specific number of months or years defining “recent” — the best way to think of recency is that the less time since the late payment occurred, the worse it is for your score. Or, to put it more positively, the older the better when it comes to late payments.
The idea here is that, all other things considered, someone with a late payment last month is a higher risk than someone whose last late payment was five years ago. Or, that someone with a late payment from a year ago is less risky than someone who’s most recent late payment was from two years ago. Or, that someone with a late payment from a year ago is less risky than someone who’s most recent late payment was from two years ago.
Severity
While recency is most important to the formula when looking at late payments, next is severity. This means that while a 30 day late can occur simply due to a monthly payment being overlooked, a 90 day late — or worse – is more likely to indicate a serious financial problem, and is predictive of a higher level of risk, than say a 30 or 60 day late.
Recency still carries more weight than severity, however, as a 30 day late from last month could hurt your score more than the 90 day late (or worse) from a couple of years ago.
Frequency
Now that it’s clear that recency is the most important risk predictor when looking at late payments and that severity is right behind it, we now need to bring frequency into the picture. By frequency I mean the number of accounts that have fallen behind in payments.
The reasoning here is that the more accounts that have been paid late, the greater the scope of the problem and the greater the overall future risk.
Recap
The FICO score is a predictor that looks far beneath the surface in assessing creditworthiness. You’re always advised to make timely payments, but if you have some lates on your report, you’ll get a better understanding of how they’re affecting your FICO score by asking yourself these questions:
1. How recent was the most recent late payment? (Recency)
2. How severe was the worst late payment? (Severity)
3. How many accounts with late payments have there been? (Frequency)
And, as for how you can have a low score without ever having been late, remember, there’s more to FICO scoring than late payments!
Barry Paperno serves as Product Support Manager for Fair Isaac Corporation, where he has helped lenders and consumers gain a better understanding of FICO credit scoring since 1995. Currently, he administers the FICO Forums online community at myFICO.com and regularly contributes to Fair Isaac’s consumer education and advocacy initiatives.Prior to joining Fair Isaac, Barry served as Operations Manager for Experian, where he headed their San Francisco Bay Area Consumer Assistance office. Barry holds a bachelor’s degree in Business Administration from California State University, East Bay.
All photos by Hank! 
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