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I received the following question over the weekend and it’s a good one so I thought I’d write a little blog around the answer hoping to share the information with others who may have a similar question. The question was…
John – I just lost my job but I do have an emergency fund so I should be ok for a few months. My credit card minimum payments equal about $400 each month. My mortgage is $2,373 each month. So you can see that I can last a lot longer if I’m just paying my credit card bills. But I’m not sure if that’s better or worse for my scores to miss such a huge payment each month. What’s worse? Thanks”There’s good news and bad news for the gentleman who asked me this question. The bad news, obviously, is that this is a no win scenario unless he can find employment soon enough that he doesn’t have to decide between missing payment on one obligation over the other. The good news is that he doesn’t have to make that choice for several months.
When you miss a payment by more than 30 days you allow the lender to report you as being late to the credit bureaus. You must be a full 30 days past the due date, not a day or two late. So, you might be able to use that industry reporting standard to your advantage as you decide your strategy. However, when it comes to the impact of the late payments, when they occur, won’t be that different.
There are two things to think about if you start missing payments. The first is the incident of a late payment. If you’re late on a credit card by 30 days and late on a mortgage by 30 days then the two incidents are the same: 30 days delinquent. And, because the incidents are the same they’re going to have the same impact on your credit scores.
The second thing to think about, and it’s not as important as the first, is the past due balance that will begin to accrue as you miss payments. Clearly the minimum payment due for his mortgage is considerably higher than the minimum due for his credit cards. So, if he were to choose his credit card payments over his mortgage payments his past due amount would be higher. There is a chance this will cause the missed mortgage payments to be more damaging than the missed credit card payments. But, you can lose your home if you default on a mortgage where you can’t lose housing if you default on a credit card.
Clearly this issue has many moving parts and it’s hard to clearly and completely address every single one of them in a short blog but this should at least give him an idea of the impact to his scores if and when he does have to choose to not pay one of his lenders.
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Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.
