WHEN You Pay the Mortgage Matters

[Alison] I was crunched financially on paying my two Syracuse mortgages in September so I paid one mortgage and called up the bank to ask if they could refrain from reporting a 30-day late if I got the second mortgage in within a week. Some of my tenants have not been paying on time and so I've been having trouble getting it done. No sympathy!

"Sorry! It's the law. We have to report it." the bank official on the phone told me. I said that policy did not give me much incentive to race to get this payment made faster.

Now this month, October, I will have paid my two mortgages ON TIME for a year. I was unwilling to give that record up so I raced around and took money I had wanted to use for other purposes (health care, phone/internet/cable, water bill etc.) to cover that second mortgage. I'm trying to sell one of my houses for greater liquidity but the market is so bad, it has not been easy. Once I have made on-time mortgage payments for two years, I will be considered a seasoned investor with added credibility.

Anyway, the bank official told me that the bank has a 5-point system for the payment of mortgages that I did not know about. If the mortgage is paid by the 1st of the month, that's 1 point. Between the 1st and 15th is 2 and 3 points. After the 15th until the last day of the month is 4 points and a late penalty. I was aware of the penalty. After the last day of the month, the next month is also due so that is a 5-point internal bank rating, both months plus one month's penalty are owed, and the bank reports the 30-day late to the three credit bureaus (Experian, TransUnion & Equifax) which causes the individual's FICO score to drop. This ding on the credit score record lasts seven years and affects applying for favorable mortgage rates, buying a car, getting a job and a host of other unpleasant consequences. I don't know how this 1, 2, 3, 4, 5 internal bank track affects future financing with this bank or any another lender, although I'm certain it does somehow. The following month, this 1 to 5 rating system begins again, each and every month.

Wild, right? Do you know what your bank's policies are? What do these numbers mean in real life (higher or lower interest rate offers, internal coding as a bad, fair, good, great client, who knows what else)? What are the penalties exactly? Are there rewards at 1 and 2, and what are those? Do banks and other lenders share this information with each other? You may want to find out for yourself on your own mortgages. I feel like this policy is a stacked deck for the bank against the property owner since it isn't transparent. However, if the deck is stacked against me, it's even more vital to know the rules we are playing by. Knowledge gives us greater power to make informed choices as individuals, families and investors, and to be aware of future consequences. Let the good times roll!