I'm Confused About Scoring of Negative Items! Please Help!

[CharBAM]

I  have read that negative items  have less impact on your FICO score as they age..."for example, a collection that is 5 years old will hurt much less than a collection that is 5 months old".  So how does that work?  I presume that your score will take a hit the first time a collection is reported, but what happens to your score each subsequent month that it remains unpaid?  Is there a continued hit to your credit monthly but just in smaller point increments as it ages?  Same question with late payments, as I read that the same rule applies. You get an immediate score impact after the late payment is first recorded, but how is your score impacted thereafter..... such that the same late payment has less impact overtime ( the late payment that has aged by 1 year, and then 3 years, until it no longer shows after 7 years?)  Ultimately, I am asking how does this rule about negative items and aging ... actually manifest numerically in one's credit score?

[CreditCurious]

When a negative item is reported, you will lose points based upon the FICO algorithm.  The exact number of points depends on many factors, so nobody can give you a definitive number.    

So theoretically you lose 30 points, and drop from 750 down to 720.  Your score remains depressed by 30 points for some number of years.  Your score may go up and down for other reasons, such as utilization, age of accounts, good or bad payment records, but overall, your score will be lower by 30 points than if you had not nad the original bad mark.

It will not lose any more points related to that bad mark, unless something else related to that mark happens. This might be a 30 day late turning into a 60 day late, then 90 day late, etc.  It might be a delinquent account sent to collections.  If one of these things happens, it will trigger another reduction in your score.

Over time, you will recover some of those points. How many I cannot say, as the FICO algorithm is proprietary, depends on your overall credit profile, and you do not include any specifics even if we did know all the details of FICO.  However, you will likely notice a small bump a few years after any given delinquency.  

In my case, I had a 180 day late, and in years 4,5,6, when I started paying attention to my credit score, I would notice a bump of 5-10 points each year as my derogatory aged.  It is possible that these increases were simply coincidential, but my score did go up.  However, a serious delinquency like I had hurt my score much more than those minor point increases. When it finally dropped off my record, my score jumped 80-100 points, depending on which agency you look at.  This tells me I may have lost 120+ points for such a severe late payment.

So, yes.  As time passes, your score will likely increase as the negative item ages.  Depending on many factors, it may still hurt your score significantly for 7 years, until it drops off completely, or it may hurt some amount less.

[JoeRockhead]

Suppressed scores from negative items will fade over time. Much of that has to do with the severity of the adverse information, but also the recency of that information and one's profile and history are also factors. 

A 30 day late, and a collection could both very well cost someone 100 points. With no more adverse instances going forward, the 30 day late score penalty will recover faster than more severe adverse information, but not fully until it comes off reports. Another factor is that any serious derogatory (60 days late or worse) also moves them down to a lower scorecard. Being on a lower scorecard, and with lower scores, things like higher utilization, inquiries, or further missteps are generally scored more harshly.

The issue with collections is they are generally associated with a charge off as well, so they are two separate serious delinquencies (more points loss). If the charge off was a revolving account, the CL is no longer factored, resulting in the utilization of that account being reported at 100% (more points loss) until it's been paid to zero.

Another issue is as mentioned, recency of the event. Many people get surprised by what they view as additional points losses because they maybe had the reporting of a charge off, or collection account go dormant for a period of several months. Maybe because they were following some kind of dispute everything hack on valid derogatory items they saw on YouTube, the reporting of those items then gets updated, their score gets dinged because the derogatory looks more recent and they're left making a sad face. 

[Thomas_Thumb]

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@CharBAM wrote:

I  have read that negative items  have less impact on your FICO score as they age..."for example, a collection that is 5 years old will hurt much less than a collection that is 5 months old".  So how does that work?  I presume that your score will take a hit the first time a collection is reported, but what happens to your score each subsequent month that it remains unpaid?  Is there a continued hit to your credit monthly but just in smaller point increments as it ages?  Same question with late payments, as I read that the same rule applies. You get an immediate score impact after the late payment is first recorded, but how is your score impacted thereafter..... such that the same late payment has less impact overtime ( the late payment that has aged by 1 year, and then 3 years, until it no longer shows after 7 years?)  Ultimately, I am asking how does this rule about negative items and aging ... actually manifest numerically in one's credit score?

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The penalty associates with lates lessens over time regardless of severity. Impact of 30 and 60 day lates drop substantially at the 2 year mark. More severe 90/120 and 150 day lates maintain a majority of their penalty for 7 years but, impact will lessen noticeable particularly over the 4-7 year timeframe.

Frequency of lates is a minor factor but, greatest severity sets the penalty level which is moderated based on age. So, losing a few 30 day lates won't really help score if a 90 or 120 day late remains.

Collections are penalized like severe lates. They retain a majority of their impact for 7 years. Based on data shared by others, a slight tapering of impact may be realized starting at 24 months. As an example, a collection may cost 80-100 points initially but drop to 60-70 points prior to falling off at 7 years.

[CharBAM]

This is a follow up note to Thomas_Thumb, Joe Rockhead and Credit Curious.  First, thank you for taking the time to reply to me;  I am grateful for your expertise.

May I summarize what I took away from your collective responses - to ensure my correct understanding?  

It seems that you are saying that a negative item - lets say a 30-day late payment - will cause a loss of points initially; no one can be sure how many, but for the sake of this discussion, lets say 40 points.  As long as this late payment does not regress to something more serious, aka 60-day late, 90-day late, or collection...then the initial loss of points is all that will occur.  Then, at some point as this ages...maybe around 4 or 5 years (I use this as an example, not a hard rule) you may start to get a few of those points back per year - i.e. 3 points, 5 points (also just an example) so that by the time it falls off your credit report at 7 years...one may have recovered some of the initial 40 point loss. Then once it falls off at 7 years - you recoup the remaining points.     

So in summary - still using ficticious points and years - but to illustrate the general pattern of the algotithm:

30-day late payment - lose 40 points

After 4th year - gain +3 points

After 5th year - gain +4 points

After 6th year - gain +5 points

After 7th year - gain remaining +28 points  (-40 + 3 + 4+5 = -28 +28 = 0 point loss to credit score)

I was an English Major - so please forgive me if my equation is amateur.

Thanks again for your time and help!

[AndySoCal]

@CharBAM  You are correct that a derogatory item has less impact as it ages. There also several variables in this as well. The first variable is the consumer's credit profile. Does the consumer have one derogatory account or more than one with derogatory information. The simple one is the consumer with derogatory item, a collection account.  The amount points will decrease as the collection account as time passes yes.  The account when it is removed the consumer will see increase.Will the score return to what it was before the degatory account was added  not really the credit profile has changed over the 7 years or however long the account was on the profile.  The score will reflect the current credit profile.

The consumer with multiple derogatory items is more complex. For example a consumer  has 5 derogatory accounts. The consumer is able to have 2 of them removed. The two that were removed are not the most recent derogatory item. The comsumer may or may not see a score increase after those two items are removed.  The consumer has two of the five derogatory itmes removed and one them was the most recent derogatory item.  Yes that should help the score because the late is older in time. How much if any points gained depends on the consumer's  profile.  As I stated earlier there are many variables both on the positive and megative side of the credit scoring equation that affect the score.

All a consumer can do is this make sure the contents of the credit report is accurate. There also things a consumer can do to help maintain a good credit score. I hope this helps. 

[CharBAM]

Thanks AndySoCal - I appreciate your final take; this has been very helpful information!