First-Time Late Payments and FICO 8: A True Tale

Posted on August 25 2011 by Imogen Gwynne

First-Time Late Payments and FICO 8: A True Tale

Want to hear a dumb blonde story? Ask me about late credit card payments.

Every summer, when I look over my accounting for the year, the UDMM category—Unbelievably Dumb Money Mistakes—looms too large for comfort. And, alas, late credit card payments feature prominently.

You know what it’s like: Life gets busy, particularly around vacation time. You pay the bills a few days later than you meant to and wham! There goes another $15 late fee.

Still, if there was such a thing as a dumb blonde contest for credit card mistakes, my most recent late payment misadventure would qualify me as a frontrunner.

I recently pulled a free copy of my credit report at AnnualCreditReport.com and something bewildering caught my eye: A 30-day late payment.

Now, I may be dumb, but I’m not stupid. I do foolish things like pay my credit card bill a day or two late on occasion. But I know far better than to skip a credit card payment or fall 30 days behind on a bill.

Or so I thought. I clicked through on the hyperlink in the report, and lo and behold, there was a $5.50 outstanding charge on a Bank of America credit card, which I had overlooked. I had paid the balance off in full the two previous months, and I hadn’t used the card since. So when I paid my bills before going on vacation, I didn’t even bother to look at the Bank of America credit card statement.

Unfortunately, it turns out there was a $5.50 charge from interest on the previous month’s bill. When I returned from vacation and finally caught the error, it was too late. As I painfully discovered when I pulled that credit report, the payment was marked 30 days late.

I am apparently not the only one running into payment mishaps over the summer. According to Moody’s analyst Jeffrey Hibbs, credit card delinquencies (payments more than 30 day late) historically increase in the summer months, and this year is no exception. People are away on vacation and miss a payment—or they spend more and have greater difficulty keeping up with payments. Whatever the reason, 30-day late payments tend to inch up over the summer, said Hibbs in an interview with PaymentsSource.

But wait a minute, I thought. Why would Bank of America charge interest on an account that was paid in full two months in a row? Surely, the grace period would have been reinstated the first time I paid off the credit card with no interest charged.

No, the friendly neighborhood customer representative from Bank of America informed me. It is Bank of America’s policy that cardholders must pay the account in full for two billing cycles before the grace period is reinstated.

I couldn’t believe it. A 30-day late payment ding to my credit score! For $5.50?! And for interest on a card paid in full the two previous months! Could this be for real?

For help with my plight, I turned to Jeanne Kelly, author of The 90-Day Credit Challenge: Playing the Game of Credit Scoring.

“Sorry, it doesn’t matter what the balance is, when the lender marks you late,” says Kelly. “It doesn’t matter if you had 30 cents, $100 or $10,000, lenders still report it as a late payment.”

Then she delivered the final blow: “Sorry to remind you, but that 30-day late payment will stay on your credit report for seven years.”

But no! This can’t be! Lots of people make silly mistakes all the time. Seven years of misfortune for a late payment of $5.50? Yes, the effect attenuates over time, but still! Surely, the FICO gods must have some sort of exclusion for hapless humans like me, I thought.

FICO 8: A kinder, gentler scoring model Then I recalled that FICO 8, the updated scoring model, which FICO introduced a few years back, was designed specifically for this: To distinguish people who make a dumb slip-up from those who have a habit of late payments.

To find out more, I caught up with Bradley Graham, senior director of Scores product management at FICO.

Graham confirmed that the FICO 8 score contained updates to improve its predictive power. That includes handling certain behaviors differently than prior versions of the FICO score.

“The FICO 8 score provides greater flexibility regarding missed payments,” Graham wrote in an email. “For borrowers who are in arrears on an account, their FICO 8 score will drop less if the borrower also has a number of other credit accounts in good standing.”

The FICO 8 score is also less likely to penalize a single serious delinquency if it occurred two or more years ago and there is no prior or subsequent delinquency, said Graham. (Small collection and public record items originally under $100 are also not evaluated by the FICO 8 score.)

However, it also works the other way, Graham noted. Consumers whose credit reports show multiple delinquent accounts could see their FICO 8 scores drop further. And, he warned, since payment history makes up 35 percent of FICO scores, it is always best to pay bills on time and make at least the minimum payment.

“But how widely used is the FICO 8 score?” I asked. Word has it that lenders have been slow to phase it in.

“The FICO 8 Scores are now in use by more than 3,500 U.S. lenders including Citi and other leading financial institutions,” wrote Graham. “We are pleased with the progress achieved to-date, particularly since it can take a lender more than a year to validate and implement a new score version simply due to the number of steps and magnitude of the work involved.”

So the 30-day late payment will remain a blot on my credit report for years (unless it gets removed in the disputes I plan to file). However, FICO 8 appears to be a kinder, friendlier version designed for, well, dumb blondes like me.

Nonetheless, I’ve learned my lesson. Blonde or not, vacation or not, as far as I’m concerned, this is the last late payment card issuers will receive from me.

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