Few things cut through the intricacy of personal finance and have a greater impact on your financial health as quickly as late payments. Whether it’s a forgotten utility bill or a missed credit card payment, the possible repercussions of falling behind on your financial obligations are complex.
They can have repercussions over an extended period of time. This is most definitely the case when it comes to your credit score all-important number that can impact everything from whether or not you’ll be able to secure a loan to the interest rates you’ll be offered.
But what happens if you make a late payment? How bad is it for your credit score, and how long does that ding last? Are all late payments alike, or are some worse than others? And most importantly, what can you do to mitigate the damage if you’ve fallen behind?
In this comprehensive guide, we will explore late payments and how many can affect your credit. We will discuss exactly how a late payment affects your credit score, the varying degrees of lateness, their respective consequences, and strategies for recovering from a late payment. Whether you want to understand the potential consequences of a missed payment or try to rebuild your credit after a series of financial missteps, this article will equip you with the knowledge and tools needed.
Let’s start with an in-depth look at what it really costs to make a late payment and how you can safeguard and enhance your credit health.
Credit Scores and Payment History Explained
Before discussing late payments, it’s crucial to understand where credit scores begin and the role of payment history.
What is a Credit Score?
A credit score is usually a three-digit number ranging from 300 to 850. It indicates your creditworthiness. Lenders consider it a pointer of the risk one poses when lending them money or even extending credit. The higher the score, the more likely one is to secure loans and credit cards at great terms.
The Importance of Payment History
However, payment history is considered the most influential determinant in calculating your credit score. Indeed, according to FICO, the most commonly used credit scoring model, paying bills on time or not accounts for a full 35% of your credit score. This means that your track record in paying bills on or off greatly impacts your general creditworthiness.
How Credit Bureaus Track Payments
Major credit bureaus, Equifax, Experian, and TransUnion, receive information about your paying habits from creditors. The data will generally be updated every month and can include but is not limited to:
- Whether a payment was made on time
- Number of days the payment was late
- Amount of payment that was late
- Date the account was brought current
The Mechanics of Late Payments and Credit Scores
Now that we understand the importance of the payment history factor, we shall examine the impact that late payments alone have on credit scores.
When is a Payment Considered Late?
Regarding credit reporting, a late payment may happen 30 days or more past due. Nevertheless, most creditors have their policies:
Grace periods: Most creditors offer a grace period of 10-15 days before they levy a late fee.
Reporting times: Some creditors may not report a late payment to the bureaus until it becomes 60 days delinquent.
The Severity of Late Payments
Late payment is affecting credit scores, depending on several variables such as follows:
- The gravity of lateness in payment:
-30 days late: Least severe but will still affect your score
-60 days late: More serious
-90 days late: Severe
-120+ days late: Very serious, and most likely to be charged off or sent to collections - The recency of the late payment:
- The newer the late payment, the more this reduces your score.
- The impact decreases over time if you restart making on-time payments
- The number of late payments you have made:
- One will probably do less damage compared to several late payments
- Several late payments on more than one account are even more damaging
- Your current credit score:
- Ironically, the higher the credit score, the more it’s likely to be impacted by a late payment
This is because high scores indicate a history of responsible credit use, so deviations from this pattern are treated more severely.
The Point Impact of Late Payments
While the exact impact can vary, here’s a general idea of how late payments might affect your credit score:
A single 30-day late payment can lower a good credit score to 700 or above by 60-80 points.
A 90-day late payment can drop your score by 100-120 points
Multiple late payments have a cumulative effect, which may lower your score by 200 points or more
Long-term Effects of Late Payments
The influence of late payments is not confined to the immediate drop in your credit score. Now, we shall consider the long-term consequences.
How Long Do Late Payments Stay on Your Credit Report?
Late payments typically remain on your credit report for a period of seven years from the date of the original delinquency. If you have later brought the account current and even if you have closed it, it is still on record.
“Aging” of Late Payments
Though late payments remain on your report for seven years, their influence lessens throughout time: the first two years, which are said to have the greatest impact on your credit rating, are the ones in which late payments can badly affect your score.
-Years 3-7: This effect reduces over time, assuming that you have otherwise had good payment behavior
Consequences for Future Credit Applications
Late payments are likely to affect your application for credit or terms in various ways:
- Lenders may reject your application or charge a higher interest than standard when seeking a loan.
- When applying for a credit card, the underwriter may reject premium cards or give you a card with less favorable terms.
Housing: Most landlords insist on checking the credit report and may not be willing to rent a house to somebody who has made late payments in the past.
Implications for Jobs
Some employees might order credit reports for certain jobs when the person is handling money. A history of late payments might affect your job prospects.
Different Types of Late Payments and Their Consequences
Not all late payments are created equal. Let’s talk a little bit about how different types of late payments can affect your credit.
Credit Card Late Payments
Credit card late payments will probably have the most potential to do damage because:
- They’re usually reported faster than other types of accounts
- Credit card companies tend to be more strict regarding the reporting of late payments
Mortgage Late Payments
Mortgage late payments can have severe repercussions because:
- They are huge amounts of money
Mortgage lenders are less forgiving when dealing with late payments.
Mortgage late payments make for tough choices when future home loans arise.
Auto Loan Late Payments
Auto loan late payments can be worse in some ways because:
Their continued late repayment might lead to the repossession of the vehicle.
They may affect your future auto loan or lease.
Federal student loan payments will generally only be reported as late after 90 days in arrears, but private student loans can often be reported sooner. Late student loan payments can:
- Affect your chances of getting future student loans
- Affect your eligibility for loan forgiveness programs
Utility and Medical Bill Late Payments
Unless they go to collections, these generally don’t appear on your credit report. However, some newer credit scoring models have begun incorporating utility payment history.
How to Handle Late Payments
If you’ve made a late payment or think you’ll make one, you can take steps to limit the damage.
Move Fast
The sooner you move on a late payment, the less hurt it will cause:
If you are a few days late, Pay as soon as possible. Most creditors do not report late payments until they are more than 30 days overdue.
- If you are close to 30 days late: Make the payment before it reaches 30 days late to stop it from being reported to the credit bureaus.
Communicate with Your Creditors
If you think you may not be able to make a payment:
- Call your creditor before the due date
- Explain your situation and ask if they have any hardship programs available. Some
