If you struggle to make a payment or payments, you may wonder what the effects of going past your due date might be. Whether you are a few days late or more than 30 days late, there are implications for your late payment.
Not all effects of a late payment will affect you forever, but there are things you should know and consider before you fall behind on your payments.
Late Payments Cost More Money
Most banks charge a fee once your payment is late. Whether they charge the fee right away or after a grace period depends on the terms of your loan. Some banks offer a 10 or 15-day grace period. This gives you a little leeway to get your payment in before it costs you more money.
If you don’t have a grace period or you go beyond it, you may pay more money for the monthly bill. Some creditors charge a percentage of your payment or balance, yet others just charge a flat fee for late payments. Either way, your monthly payment goes up until you make your payments on time.
Late Payments can Cause Interest Rate Spikes
Depending on the type of debt that you pay late, you may wind up with a higher interest rate as a result of the late payment. This is usually the case with revolving debt. If you read your credit card agreement, you’ll likely see the default interest rate that your credit card jumps to if you miss a payment. This occurs after just one day – credit cards don’t have grace periods beyond the due date.
The interest rate spike is most common with credit cards that have introductory rates. Let’s say you have a 0% APR for 12 months. If you miss a payment during that time, you void the agreement and will likely have a much higher APR from that point forward.
Late Payments can Damage Your Credit Score
Here’s where things get sticky. If you make your payment more than 30 days late, chances are that it will affect your credit score. If you make your payment between one day late and 29 days late, though, the credit bureaus won’t know about the late payment and your credit score remains unaffected.
Once you hit that 30-day point, though, the creditor will likely report the late payment to the credit bureaus. The credit bureaus will then report the late payment. They report late payments in 30-day increments. If you get caught up before your account is 60 days late, then the credit bureaus will report you current again. If you don’t make up your payment before it hits the 60-day mark, though, you then get hit again.
The damage that a late payment does to your credit score depends on how late you make your payment:
- 30 days late – Your credit score will likely drop, but it won’t be a permanent drop. As long as you get current on the debt, the decrease in your score will be temporary.
- 60 days late – Getting 60 days behind on your debt can have a more drastic effect on your credit score. Like the 30-day late, though, the drop isn’t forever; once you get current on the debt, the score should start to increase.
- 90 days late – If you get to the point of 90 days late, you do more permanent damage to your credit score. Credit scoring models are set up to determine how likely you are to get 90 days behind on your debts. If you get to that point, the decrease in your credit score lasts longer.
If you get beyond 90 days late, the account will typically be charged off or sent to collections. This could have an even further damaging effect on your credit score as the collection agency tries to recoup the money. Collection agencies typically report to credit bureaus (in a negative way), which furthers the damage to your credit score.
How to Recover From a Late Payment
If you made a late payment, don’t assume that your score will never improve. There are simple ways that you can make things right again:
- Make your payments on time – Once you get caught up, try to stay there. Any further late payments increase your likelihood of becoming 90-days late, which can decrease your credit score. Show creditors and the credit bureaus that you can remain current on your debts.
- Don’t open new credit – While it can be tempting when you receive pre-approved offers in the mail or online, don’t open new credit. Young credit or new credit lowers your credit age, which damages your credit score. Let your current credit ‘age’ and help your credit score increase.
- Pay your balances down – Try to keep your utilization rate at 30% or less. This means that you shouldn’t have more than 30% of your available balances outstanding on any revolving debt. This will help improve your credit score and decrease your likelihood of default.
Late payments aren’t the end of the world, but you should try to stay as on time with your payments as you can. If you find that you can’t make your payment, make sure you keep the creditor informed. If you are able to get current before your account hits 30 days late, you may even be able to ask them to waive the late payment penalty as a one-time courtesy. Many creditors are willing to help their borrowers out that way.