A late payment is a payment you haven’t made to the lender before the due date, which can happen to the best of us. We all can make the mistake of not paying our bills on time due to cash shortage or negligence.
Payment history is the key element used to calculate credit scores, which is why late payments can cause our credit scores to drop dramatically.
This blog can help you learn how late payments affect your credit score, other possible penalties, and smart moves to keep your future credit health safe.
What are the effects of late payments on your credit score?
It’s evident that late payments negatively affect your credit score, but you may not be aware of how much your credit scores can fall or how long it can take for your credit repair efforts to work. It is crucial to know about these factors because credit scores can either boost or drain your finances.
As per Experian, a single 30-day late payment leads to the ding of 90-100 points if you have a good credit score of 780 and above, and a drop of 60-80 points if you have a score of say 680 and below. Nonetheless, the number of points on your credit score that will drop when a late payment is added to your score will depend on several factors.
The FICO scoring model will consider all the points mentioned below to determine the effects of late payments on your credit score.
- It all depends on how long you wait to pay your bills. Your payment is reported after 30 days past the due date, after 60 days, 90 days, and then again after 150 days. The longer you take to pay your bills, the more impact your credit score will suffer. And after that, your account will be written off as a loss of charge, which is terrible news for your credit score.
- Late payments that have occurred in the past year can cause more damage to your credit score than the ones from several years ago. In other words, your recent credit history can cause severe harm to your credit score, but the negative effect will lessen over time.
- How many points your credit score can take a ding also depends on the number of late payments on your credit report. If you already have many late payments on your credit report, the addition of one more late payment may not cause more alarming damage to your score since most of the damage has already occurred.
- The amount of your late payment is also significant in determining the damage it can cause to your credit score. There’s a difference between $200 and $2000 in late payments, so the more you owe, the more your credit score drops.
Other potential penalties for late payments
- A lender will generally charge you a late fee, and if you continue to miss the due date, you’ll have to pay additional late fees.
- The interest rates on your future loans will increase.
- Your interest rate could be reset to a penalty annual percentage rate (APR) or default, depending on your creditor’s policy. Sometimes, credit cards penalty APR can go up to 29.99%.
- You can also forfeit your 0% promotional rate on your balance transfer card, and it can be reset to the default interest rates. Although, you’ll have to pay much more interest on your overdue given this is done.
- It’ll reflect on your credit report for seven years, so you may not qualify for a mortgage at the best interest rates, receive the best credit cards and reward programs, or get personal and auto loans.
Here’s how to master your late payments
Whether you are forgetting or struggling to pay your bills on time, regardless, there are ways to master your late payments.
- Select a payment due date that coincides with when you pay all your bills together or your paydays. Several credit card issuers allow you to select a due date.
- Set up text alerts or payment email reminders about the bills due in a few days. Set up multiple electronic prompts if you need more than one reminder.
- Consider setting up automatic payments, especially if you stay too busy or you’ve made late payments in the past because of forgetfulness. But make sure you have sufficient funds in your account so that you need not pay an overdraft fee. Your credit score will improve over time once you start paying bills on time.
- Review your budget even though money is tight. You may find ways of cutting back on your spending, which can help you pay your bills on time.
- Prioritize your bill payments if you don’t have sufficient funds to pay all of them at once. You should pay all your essential bills like rent, mortgage, and utilities first. Next, pay those bills with hefty fines for late payments, and then those bills that are about to go into collections.
- Last but not least, setting up an emergency fund is a smart move to manage unexpected expenses.
It’s wise to pay your bills on time, which can improve and help maintain a good credit score.