Be Careful! Late Payments Affect Your Credit Score
Sometimes there is a financial emergency, maybe you lost your job, your car broke down or it was a simple oversight and your payments are late. It might not seem important because you always pay on time. However, if you miss one payment on your credit accounts, be it a mortgage, a loan, or a credit card, your credit score will be affected and if your score drops, lenders won’t see you as favorably as before.
When is a Payment Marked as Late on a Credit Report?
By federal law, a late payment cannot be reported until past the 30-day mark. Therefore, you have 30 days to catch up with your bills before your credit gets affected.
How Much Can a Late Payment Affect Your Credit Score?
Your credit score is calculated based on information found on your credit report. The most important factor that contributes to this number is your payment history and paying all your bills on time is one of the easiest ways to improve your credit score.
Late payment will be recorded depending on how late it is, and of course, the later it is, the more it will affect your score: 30 days, 90 days, 120 days, 150 days late or charged off. All things being equal a payment that is 120 days late will be more damaging than a payment that is 30 days late.
How it truly affects your score depends on many factors, such as how recent it is, how severe it is, and how frequently you have paid late.
If you have a high score such as 780 and you’ve never had a late payment before, a 30-day delinquency can drop your score by 90 to 100 points. In comparison, someone with a lower score and previous late payments could only see their score drop by 60 to 80 points with an additional late payment.
According to Experian, one of three main credit bureaus (the other two being TransUnion and Equifax) the credit score ranges are set like this:
- More than 800: Exceptional.
- 740-799: Very good.
- 670-739: Good.
- 580-669: Regular.
- 579 and below: Poor.
As you can see a drop in points can entirely change the way creditors or lenders see you when applying for a loan or credit card. Having a regular credit score isn’t the same as having a good one. Therefore, it could mean only getting loans with higher interests, having to pay security deposits, difficulty when renting or buying a house or car and other disadvantages.
Late payment will remain recorded on your credit report for 7 years after the account was initially marked as late. However, as time passes, it will lose the negative impact it has on your credit score.
Will a Partial Payment Keep Me from Being Reported Late?
The short answer is: no.
While it might feel like a sincere effort to at least pay something when you can’t afford the whole payment, it won’t keep your account from being reported late or being sent to collection. It’s a persistent myth. Very persistent, but still a myth.
How Can I Avoid or Limit Damage by Late Payments?
Make a budget and try to have your account up to date as soon as possible. The sooner you do it, the less damage to your credit and the sooner you can improve your creditworthiness. Remember. 30 days late isn’t as damaging as 60 days late. After that, focus on avoiding additional late payments that will affect your credit score and cost you late fees by taking simple steps:
- Set up automatic payments: This will help you avoid late payments if your main problem is that you keep forgetting when to pay your bills. Of course, you have to make sure you have enough money to cover the payment. It works well with payments that are the same amount every month, but not with payments that can vary drastically month to month.
- Set up electronic reminders: Email or text message alerts are ideal for this. You can set them up to alert you when your bills are due in a few days.
- Select payment due dates suitable for you and your paydays: Many credit card companies allow it.
- Work out a payment plan with your creditors: If you know in advance that you’re going to be late on one of your credit accounts, you can contact your creditor and work out a payment plan to avoid a negative item on your credit report that will greatly affect your score.
- Regularly monitor your credit report: Make sure your credit report is as accurate as it can be, and that any late payment has fall off of it after the appropriate amount of time has passed.
- Dispute: If you see anything unusual on your credit report and you believe it to be an error made by the lender, you can make a legal dispute and challenge it. The negative item is removed from your report and will no longer affect your credit score.
- Ask for a Goodwill Adjustment from the original creditor to eliminate late payments: Many times creditors are happy to grant “goodwill adjustments” if the previous payment history is relatively good and the person has established a good relationship with the creditor. This is probably the easiest and safest way to remove a late payment from your credit report. For the person to take action, they must write a letter to the creditor, explaining the situation (for which he was late) and asking him to “forgive” the late payment and adjust his credit report accordingly. Bear in mind the creditor is under no obligation to consider your request or to comply with it.