Sadly, late payments on loans and debts have an immediate and lasting negative effect on your credit score. Banks and lenders can be merciless when it comes to trawling through your payment history, and if you even have one late payment, applications for new loans will be declined as your seen as a credit risk.
What if it is only a few days late?
For example, if you are only a few days late in paying your credit card, it is mostly likely that this will not appear on your credit history. You will be charged the late fee, but your lender will assume this is a onetime accident and not report it to the three credit Bureaus, Experian, Equifax and TransUnion. But if you are consistently late in repaying, or miss a payment by more than thirty days, lenders will report the missed payment. This will then be on your credit report (for up to seven years) and future lenders will be able to see it. It is unlikely you will be able to secure another loan while a late payment is on your credit report. But, as time passes lenders will see you as less of a risk if you continue to pay bills on time after the event of the late payment – so you may be able to get a loan depending on the history and severity of the late payment.
Missed Payments and your Credit Score
After a missed payment is reported to the credit bureaus, this will also negatively affect your credit score. Payment history makes up 35% of your credit score, meaning after a late payment your score will reduce drastically. There are other factors involved in how much your credit score will decrease, these include –
- Your current credit score
- How late the payment was
- History of late payments
For example, if you previously had a good credit score and no history of late repayments, your score after the late repayment may only decrease by 10%, instead of the full 35%. Making sure you have the best credit score possible can really be a big help in the future if you miss payments. Boosting your credit score can take time, as the best way to do it is to pay off loans. But this can be completed more quickly in some situations, for example selling a house requires paying the mortgage on paper, even when in reality a new mortgage is being arranged in the process. But there are some simpler ways to boost your score such as –
- Keep a landline phone
- Keep a bank account with the same bank you have been with the longest, even if you open new accounts elsewhere
- If you have been the victim of fraud – report it. This way any fraud related to your accounts will not be documented as your activities
- Switch onto an energy tariff where you will receive a bill (as opposed to a prepayment meter)
- Have a credit card and spend around 20% of the limit each month and completely pay it off.
Debt Collection Agencies
If you constantly make late payments, especially beyond thirty days, it is likely your lender will send your account to a debt collection agency. There are many horror stories around concerning debt collectors, and many may be drastically inflated, but it is still a truth that you should take steps for this never to happen. Even if you do not have a lot of debt on an account, your lender may consider your account delinquent if you consistently make late repayments; and delinquency is far more damaging to your credit report and score than normal late repayments. Generally a lender will not send your account to a collection agency unless the payment is more than one hundred and twenty days late, but this is not a hard and fast rule. Being consistently only a few days late may also drive your lender to take the more drastic option. Not only is being contacted by a debt collection agency a very scary experience, it will also be far more expensive to you as you will be charged more than your debt, as you will also need to cover the costs of the agency. If you are late with a payment make sure you pay it as soon as possible, and then make sure you pay on time next month to avoid your account being passed to a debt collection agency.