In this article, I’ll explain what happens when you make a late payment, how your credit is affected, and give tips to minimize the potential damage. Plus, I’ll answer a question from a long-time Money Girl Podcast listener named Jackie who’s wondering what to do about an account that accidentally became delinquent.
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How Late Payments Affect Your Credit
You probably know that not paying a credit account on time is a major offense in the financial world. But what you may not realize is that how you pay bills is the single most important factor that credit scoring models, such as FICO and Vantage Score, use to calculate your scores.
I call payment history “the king of credit” because it typically makes up 35% of your scores. Other factors are important too, such as your total amount of debt, your credit utilization ratio, how many new accounts you have, and the number of credit inquiries in your recent history. But none carries as much weight as your payment history.
When you have a record of paying accounts on time, it shows that you’ve been responsible with money. It suggests that your good behavior will continue and you won’t default on debt in the future.
In contrast, having late payments or accounts in collections are serious red flags that you haven’t been dependable and that you may not repay debts with regularity or at all. The consequences are stiff. Even making just one late payment can drastically reduce your scores, especially if you have good or excellent credit.
Even making just one late payment can drastically reduce your scores, especially if you have good or excellent credit.
It makes sense that creditors and other merchants like insurers, landlords, and utility companies want to do business with customers who appear to be financially responsible. Businesses shudder at the thought of having to hiring expensive collectors and attorneys to go after past due money.
That’s why the better your credit, the lower your interest rates, insurance premiums (in most states), and upfront security deposits will be. Dependable borrowers and customers are rewarded handsomely because companies compete for your business.
Other Ways Late Payments Cost You
Once you make a late payment, merchants become wary because it could be a sign that you’re in financial trouble and will miss more due dates. So, in addition to having a bad mark added to your credit file, lenders penalize you directly in several different ways.
One is charging a late fee. How much a creditor can tack on to your next statement depends on the agreement or application you signed and the state where you live. Credit card late fees generally range up to $35 and apply the first day you’re late.
Car loans and mortgages usually come with a grace period of 10 or 15 days after which you get charged a fee that could be 4% or 5% of the overdue payment. If you continue to miss due dates, you’ll pile hundreds of dollars on top of the amount you already owe.
With credit cards, another penalty you typically face after paying late for two consecutive months is an increase in your annual percentage rate (APR) up to 29.99%. And by the way, that crazy-high rate will be applied to your entire outstanding balance, not just to future charges. Additionally, you might lose accrued credit card rewards or a 0% interest promotional offer.
See also: How to Build Credit With a Secured Credit Card
What Does Having an Account in Collections Mean for Your Credit?
If your payment is more than 180 days past due, your creditor may sell your debt to a collector. Then the collection company will attempt to get the overdue balance and fees from you.
Having a debt in collections is much more serious than having a 30- or 60-day late notice on your credit report and causes a bigger dip in your scores. Just like with a late payment, an account in collections stays on your report for seven years from the date you first became delinquent, even after you pay it off.
While you can’t make a valid, bad debt disappear from your record, paying it shows creditors that you honored your financial obligation. How much a bad debt hurts your credit depends on factors such as what your scores were before the bad mark and the amount of debt you didn’t pay.
Just like with a late payment, an account in collections stays on your report for seven years from the date you first became delinquent, even after you pay it off.
However, as you make on-time payments and add positive data to your credit reports, the impact of late payments or an account in collections lessens with time.
See also: 5 Lesser-Known Reasons Why Your Credit Score Drops
4 Tips to Minimize Damage from a Late Payment
I received a question about a past due account from a long-time Money Girl Podcast listener named Jackie. She said:
“I had a credit card that I used for years until I got a new one. Several months later I found out that I was delinquent on the first card for a $20 balance. I’m terrified that this will destroy my credit and erase the good history I built up. What should I do?”
Here are 4 tips to minimize the damage from a late payment:
1. Act quickly to settle your account.
The sooner you pay the bill, the better your chance of squeaking by without any fees or rate penalties. The good news is a delinquency can’t be reported to the nationwide credit bureaus until 30 days after the due date.
If you get caught up before 30 days, your mistake won’t show up on your credit file; however, the creditor can still charge the fees I just covered if you miss a due date.
If you don’t get caught up quickly and a late payment is reported on your credit file, it can stay there for up to seven years. On the flip side, your on-time payments and all good marks stay on your credit record for ten years.
So it’s likely that Jackie’s late payment will show up on her credit report. If you’re not sure what’s on your credit history, stop guessing and pull your free report using a site like annualcreditreport.com or CreditKarma.
Assuming Jackie pays the small debt, it will show as late, put paid in full. She doesn’t need to worry that a late payment erases or negates her long history of on-time payments. No matter what, all the good information stays there for 10 years after you pay off a loan or close a credit card account. And as I mentioned, any negative entries fall off your credit file after seven years.
If a creditor pegs you as late, but it’s in error, dispute it with the credit bureaus right away. Inaccurate or unverifiable information must be removed by law.
However, if you were at fault for a late payment, the creditor is under no obligation to retract it, even if you eventually paid up. The purpose of your credit file is to reflect an accurate history of your account activity.
If a creditor pegs you as late, but it’s in error, dispute it with the credit bureaus right away. Inaccurate or unverifiable information must be removed by law.
2. Contact the creditor.
If you get your past due account settled, but are disappointed to get charged a late fee, contact the creditor to discuss it. If your payment was late by accident, such as getting lost in the mail, explain the situation and ask to have the fee credited.
Lenders and card companies typically want to keep good customers happy, so they may do you a favor—especially if you’re polite on the phone. Remember that customer service representatives have a lot of leeway but won’t be keen to help you if you’re in a panic or are rude.
3. Pay all your credit accounts on time.
If your credit scores went down or you got hit with a high penalty APR after a late payment, be extra cautious about never being late again. If you make six months of on-time credit card payments, your issuer is required to reset your interest rate back to the pre-penalty rate.
Plus, your credit scores will slowly improve as you build a history of positive information and the late payment ages. Credit models tend to favor new data more than old entries, so be vigilant about staying on track.
4. Set up automatic reminders
If you made a late payment because you don’t have a good system for paying bills, now’s the time to get organized. You could use a spreadsheet, calendar reminders, or smartphone app like Mint, Bills Monitor, or Evernote.
Many financial institutions allow you to create email or text notifications to remind you about an upcoming payment due date. This is a great way to make sure a deadline never slips past you.
My favorite way to keep tabs on what I owe each month is a simple spreadsheet. I list each obligation on a row and use columns for the merchant or creditor name, due date, payment amount, and month. As I pay each bill, I enter an “x” in the corresponding row under the current month.
I use my bank’s online bill pay to cut checks or transfer funds for each payment. Some are set up to pay automatically and some I manually approve before funds are sent electronically.
One strategy to make sure that you never miss a minimum credit card payment is to set it up to pay automatically. Even making the minimum payment helps you build credit. You don’t get “extra credit” for paying more, but it’s wise to pay your balance in full each month so you don’t have to pay any interest next month.
See also: The Statute of Limitations and 4 Options for Old Debt
Chalk It Up to a Learning Lesson
Few people (including me) can say they have never missed a payment due date. It’s not fun to slip up and get penalized for it, but it’s not the end of the world either. Don’t beat yourself up about it. Follow my four tips to minimize the damage and consider it a learning lesson.
If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Dollars! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.
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