You’re probably aware that your credit score holds a lot of weight in determining your financial health and can influence a lot of major life decisions. It affects everything from loan approvals to interest rates.
Among the factors influencing your credit score, payment history is the biggest one, accounting for about 35% of your total FICO score. Late payments can seriously impact your credit score, leading to long-term financial consequences. Understanding their impact and learning to avoid them can help you maintain a healthy long-term credit score and avoid costly mistakes.
Keep reading as we explain how late payments affect your credit score, the broader consequences they bring, and practical strategies to avoid missing payments.
How Late Payments Affect Your Credit Score
When you make a late payment on any debt—whether a credit card, mortgage, auto loan, or student loan—it can significantly hurt your credit score. The total impact depends on several factors, including how late the payment is and your credit history before the missed payment.
1. The 30, 60, and 90-Day Rule
Creditors will usually report any late payments to credit bureaus once a payment hits the 30 days late mark. Payments 30 days past due can drop your overall score by 60 to 110 points, depending on your previous credit standing. The longer a payment remains unpaid, the more damage it does:
- 30 Days Late: The impact can still be remedied at this stage if the payment is quickly made, though you may incur late fees.
- 60 Days Late: After 60 days, your credit score drops further, and additional fees may accumulate. Repeated 60-day late payments signal a larger financial issue to creditors, further reducing your credit score.
- 90 Days Late: Once payments are 90 days late, they cause significant damage to your credit score. Accounts that reach this stage may be sent to collections, leading to a mark on your credit report that can remain there for seven years.
2. How Long Do Late Payments Stay?
As mentioned above, a late payment can stay for up to seven years on your credit report. This is calculated from the date of the first missed payment.
However, the impact of a late payment on your score will slowly decrease as time goes by, especially if you continue to make on-time payments. Generally, your score is most affected in the first two years after a missed payment.
Broader Consequences of Late Payments
Late payments don’t just hurt your credit score—they can lead to a range of other financial challenges that affect your overall financial health. Have you ever heard of the snowball effect?
1. Increased Interest Rates
Late payments indicate a higher level of risk to potential lenders, which can result in higher interest rates on future loans. Higher interest rates mean you’ll pay more over time, whether on a mortgage, personal loan, or credit card balance.
Some issuers of existing credit cards impose a penalty APR after a late payment. This higher interest rate can apply to your balance and any new purchases, making it harder to pay down your debt.
2. Difficulty Securing New Credit
Lenders evaluate your payment history when you apply for new credit. Recent late payments on your record may lead to denied applications for loans, credit cards, or even rental agreements. Even if you’re approved for credit, you will likely receive less favorable terms, such as higher interest rates or lower credit limits.
3. Late Fees and Increased Debt
Your creditor will likely charge a late fee when you miss a payment. Over time, these fees can add up and compound your debt, especially if you miss multiple payments. Some credit card companies could also impose a penalty APR, which can increase the amount of interest you’re charged on your balance, further deepening your financial burden.
4. Collections and Legal Action
The creditor may send your account to a collections agency if a payment remains overdue for several months. This can lead to additional damage to your credit score, as accounts in collections appear as negative marks on your credit report. In extreme cases, creditors might also take legal action to recover unpaid debts, resulting in wage garnishment or other legal consequences.
How to Avoid Late Payments
The best way to avoid the financial consequences of late payments is to stay proactive about your bills and financial obligations. Here are several strategies to help you avoid missing payments and protect your credit score:
Set Up Automatic Payments
One of the easiest ways to avoid missed payments is by selecting auto-pay for recurring bills. It is usually pretty easy to go into the interface and set up these scheduled payments, creating one less thing for you to worry about each month. You can decide whether you want to make minimum payments or pay in full, if you have the budget, it is always best to pay the full statement balance each month.
Use Payment Reminders
If you prefer to make manual payments, set up reminders to alert you when a payment is due. Many financial institutions and credit card issuers allow you to opt into email or text reminders a few days before your payment date.
Create a Budget
Late payments often result from cash flow issues, where you simply don’t have enough funds to cover your bills. Creating and sticking to a budget helps ensure that you always have money set aside to cover essential expenses, such as credit card payments, loans, utilities, and rent. Budgeting apps or simple spreadsheets can help you track your spending and set aside money for bills.
Build an Emergency Fund
An emergency fund is critical to ensuring you can make payments on time, even when unexpected expenses arise. Aim to set aside three to six months’ worth of living expenses in an easily accessible account to cover costs like medical bills, car repairs, or job loss.
Contact Your Lender for Assistance
If you know you’ll be late on a payment, it’s better to contact your lender in advance. Many creditors will work with borrowers by offering temporary payment plans, deferring payments, or waiving late fees if you can explain your financial situation.
How to Recover From Late Payments
If you’ve already missed a payment and seen the effects on your credit score, you can take steps to repair the damage.
- Make All Future Payments on Time: The best way to improve your credit score after a late payment is to make sure all future payments are made on time. As the negative mark ages, its impact will diminish.
- Pay Off Any Outstanding Debt: Reducing your overall debt will help improve your credit score over time and reduce the amount of interest you pay. Prioritize high-interest debt and work to lower your balances.
- Dispute Errors on Your Credit Report: If you believe a late payment was incorrectly reported, you can dispute the error by calling the credit bureau. Providing documentation and proof of payment can help remove inaccuracies from your report.
Don’t Let Late Payments Get the Best of You
Late payments can be detrimental to your financial health and your credit score, affecting everything from interest rates to loan approvals and future life decisions.
However, with careful planning, automatic payments, and proactive communication with lenders, you can avoid missed payments and maintain a strong credit profile. If you’ve already made a late payment, there’s still hope for recovery through timely payments and reducing your debt over time. By understanding the impact of late payments and how to avoid them, you can take control of your financial future and protect your credit.
You might also be interested in: Secured vs. Unsecured Credit Cards: Which Is Right for You?
