Late Payments and Your Credit: Tips to Minimize the Damage
Laura explains what happens when you make a late payment, how your credit is affected, and gives tips to minimize the potential damage. Plus, she answers a question from a long-time Money Girl Podcast listener who’s wondering what to do about an account that accidentally became delinquent.
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Whether it’s because your bank account is low, you forgot, or the mail was late, missing a due date on a credit card or loan feels terrible. If you don’t take quick action, a late payment can negatively affect your finances for years to come.
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.