Whether you pay bills on time is the single most important factor that makes up your personal credit scores. It is also a major factor when it comes to your business credit, but there are some differences in the way it is evaluated. Here’s what you need to know.
If you miss a payment on your personal credit card, car loan or mortgage by a few days, chances are it won’t hurt your credit scores. With personal credit reports, payment activity falls into 30 day buckets; payments are categorized as 30, 60, 90, or 120 days late. This means most lenders will not report a late payment on an account unless it is a full thirty days late.
For example, if your credit card bill is due on the 2nd of January, you probably won’t be reported late as long as your payment is received and credited to your account by the 1st of February. (Caveat: if you’re a few days late on one of these bills, you may be charged a late fee and it is possible your missed payment could be reported to the credit bureaus immediately. Your best bet is to pay on time. Better safe than sorry!)
If a late payment is reported to the credit reporting agencies, it will remain on your credit reports for seven years. Credit scores look at late payments in several ways:
How late were you?
Scoring models take into account the severity of late payments; 90 days late is worse than 30 days late, for example.
How many times were you late?
Here the frequency of your missteps are evaluated. The greater the number of occurrences, the more your scores will suffer.
How recently were you late?
Recent information carries more weight. Late payments in the last two years will have the greatest impact on your scores.
Ironically, the better your score to begin with, the more it’s likely to drop due to a reported delinquency. In fact, a single late payment can drop a high score by 50–100 points or more!
What can you do about your payment history?
If your credit report lists delinquencies that are accurate, paying on time from here on out can help. Remember, with most credit scores, recent information has the greatest impact on your scores. As your late payments “age,” they won’t hurt your scores as severely, especially if your payment history has been stellar ever since.
You can also try disputing late payments if you believe the information is incorrect. (Nav’s CreditSweeper tool can help you with the dispute process.) If the company reporting the account does not confirm it, it will be removed.
Business Credit Scores and Payment History
When it comes to business credit reports and scores, payment history is treated differently. Rather than just reporting payment activity in 30-day increments, they often use Days Beyond Terms (DBT). Let’s say your payment terms with a vendor are Net 20. That means the balance is due 20 days after the invoice date. If you pay 22 days after the invoice date you are two days beyond terms and that late payment may be reported as 2DBT. Your D&B Paydex score, for example, will take into account your current DBT, average DBT and highest DBT.
Additionally, payment history can make up 50 – 100% of your business credit score, depending on which scoring model is being used, so overall it tends to be a more significant factor with business credit than with personal. And yet because the information about late payments is so granular, a single late payment out of many is not as likely to drop your scores as much as it would on personal credit. (Don’t get us wrong, though; if you want strong business credit, don’t pay bills late!) Experian notes that the average DBT is seven days.
Here’s another twist unique to commercial credit: While late payments can definitely hurt your business credit, early payments can also help. In fact, to earn a perfect D&B Paydex Score, you’ll want to pay 30 days before the due date! Paying perfectly on time will only land you a score of 80 out of 100.
Finally, the Experian Intelliscore Plus will take into account information from your personal and business credit history. Therefore, you will want to make sure both are strong. Nav is the only place where you can monitor your personal and business credit scores. Get started for free now.