Here’s What You Need to Know About Late Payments And Its Effect on Credit Score

Late payments can stay on your credit score for up to 7 years. Payments can be reported late to the major credit bureaus (TransUnion, Experian, and Equifax) by the lender if payment is made 30 days past the due date. Late payments can pop up on your credit report if you are unable or forget to make payment on the due date. According to Experian, “A late payment can stay on your credit reports for up to seven years and could impact your credit scores during the entire period it's there. Late payments tend to have the biggest impact when they first appear, and you can work to build your credit while waiting for late payments to fall off your credit reports.” 

Late payments can span from loan repayments, credit card payments, and other automatic payments and monthly payments. If you are able to bring your credit account current before the 30 day grace period ends, the creditor will not report the payments as late to the credit bureaus. If you bring your account current past the 30 day period, the late payment(s) will drop off your credit report after 7 years. If you never bring your account current, the creditor will likely close the account, charge off the debt, and send it to a collections agency. From NerdWallet,  “A charge-off occurs when an account is seriously delinquent — for credit cards, that’s after 180 days of not making the minimum payment. Your payment has to be that late before it can be written off by the creditor as bad debt for tax purposes. But even if your bank has written off the debt as uncollectible, you aren’t necessarily off the hook.”

How do late payments affect credit scoring? 

First, a longer delinquency will hurt your score more than shorter ones. For example, a 90-day late payment would be more damaging, usually, than a 30-day late payment. The number of delinquent payments also matters. Typically, more delinquencies result in more negative impacts on your credit score. The good news is, in most cases, as the delinquency age, the negative impact on your credit score should decrease.

What about student loans?

Student loans that are defaulted on will remain on your credit rating for 7 years. Student loans are a type of installment loan, such as an auto loan. From  Experian:  “Missing a student loan payment is no different than missing a payment on any other type of installment loan. These late payments will remain on your credit report seven years from the date the account first became delinquent and was not brought current.”  The good news is that the negative impact on your credit will decrease over time. You can help your credit recover by paying all past due balances and continuing to make on time payments. 

Can you remove late payments from your credit score?

First, get current on any past due balances. The sooner you can pay off your balances, the better. The negative impacts on your credit score from late payments can worsen the longer they are left unpaid. 

Let’s say you want to go a step further, and actually get these derogatory marks removed from your credit score. There are a few options that may help get late payments removed, and they vary based on the situation. 

• Write a goodwill letter. There is no guarantee that this will work, but you can write a letter to your lender explaining the situation, taking responsibility for the late payments, and showing your intention to pay the late payment. An example of a goodwill letter to a lending agency: 

• Call your lender and negotiate a debt settlement. Your lender may remove the late payment if you negotiate an agreement to settle your debt. This could look like an agreement to make partial payments, or settle the debt in full. If you are able to negotiate an agreement, you should ensure you get it in writing. 

• You can dispute the late payments on your credit report. If you find any late or charged-off payments on your credit report that should not be there, you have the right to dispute these derogatory marks with the credit bureaus. According to TransUnion, “If a credit bureau can't verify the accuracy of information on your credit report, it must remove the information. Federal and state laws give you the right to challenge inaccurate information, and the information that you need to request removal is included on your credit reports. In many cases, you can challenge inaccurate information online.” 

Check your credit reports

Credit reports and credit scores are different, keeping up to date with what exactly is on your credit history will help ensure you are not being penalized for inaccurately reported derogatory marks or late payments, as well as help you visualize what makes up your credit scores. Checking your credit report frequently will help you catch potential identity theft, monitor your credit, and help you dispute erroneously reported delinquent payments. There are many free, online resources available to check your credit report, including directly from Experian. 

Why you should avoid late payments 

Late payments can damage your credit, but it’s important to understand that some late payments can hurt your score more than others, and that paying off your delinquent payments before they become charged-off or sent to collections, can help. 

From MyFICO: You may have noticed on your credit report that a late credit card payment is listed by how late the payments are. Typically, creditors report late payments in one of these categories:

• 30-days late
• 60-days late
• 90-days late
• 120-days late
• 150-days late
• Charge off (written off as a loss because of severe delinquency)

A 90-day late payment will be more damaging than a 30 late payment, and if your creditor takes action and charges off the debt, that will have the most damaging effect. 

It is important to pay off late payments prior to collections action, if you can. By repaying your past due balances, you can help bring your account current. Before being late for any payment, reach out to your creditor. You may be able to negotiate an agreement that works well for both parties. Again, make sure to get this in writing! If your creditor won’t work with you, try to avoid letting your payments become delinquent so your lender does not send the debt to a collections agency. Once a debt is sent to collections, you are no longer able to bring that account current. 

What about the impact on my FICO score?

A FICO score is a 3 digit number based on the information in your credit report. Your FICO score helps lenders determine how likely you are to pay back a loan. This will then determine how much you will be able to borrow, how long you have to repay, and how much interest will be charged. 

Most lenders rely on FICO scores as a fast, reliable indicator as to whether or not they can lend to you.

One of the most important things to remember about your FICO score is that payment history makes up 35% of your FICO score. Making payments on time is important for your overall FICO score.

How to avoid late payments

Having even one late payment can negatively impact your credit score, so how can they be avoided?

Sign up for automatic payments! One of the easiest ways to avoid late payments is setting up autopay. This is when you authorize your creditor to issue automatically deducted payments from your checking account on each due date.

If you choose automatic payments, you will often be able to opt for monthly payments for the full amount, which will help you avoid paying interest. Some creditors may also agree to a set amount each month. 

The most important thing to keep in mind when considering automatic payments is you must have sufficient funds in your account when these payments are due. If not, you may incur additional charges from your bank for overdraft or insufficient funds. Missing an automatic payment not only risks bad credit,, but also could cause your bank account to overdraft.

Try setting your automatic payments shortly after paydays to ensure sufficient funds. You may also want to make a habit of checking your account balance frequently so you have a better idea of what is in your account. 

Set up reminders for your automatic payments! These could be notes, reminders on your phone, calendar events etc. Anything to help you remember you have a scheduled payment coming up. 

What happens if you do miss an automatic payment? 

According to Credit Karma...

• You may be charged a late fee. You could be on the hook for a late payment fee that can often range from $25 to $35.
• Your interest rate may go up. Your credit card issuer may increase your interest rate because of your late payments, although such increases are subject to limitations imposed by the Credit CARD Act of 2009. This could mean that a promotional interest rate may be forfeited and set to the default interest rate, or your interest rate may be set to a penalty interest rate.
• Your late payment could show up on your credit reports. If your payment is late, in particular if it’s more than 30 days late, your late payment may show up on your credit reports and the three major credit bureaus may be notified. Not only that, but it could stay on your credit reports for seven years.
• Your credit scores may drop. Your payment history typically accounts for a large percentage of your credit scores, so a missed payment on your report could potentially have a dramatic effect on your credit scores, depending on how late your payment is, how often you have late payments, and other factors. 

Summary

Credit scores can be confusing, and life happens. When considering how to improve or maintain your credit, take some extra time setting up automatic payments to prevent late payments. Late payments play a significant role in determining what goes on your credit report and your credit score overall. Try to pay any past due balances as soon as possible, to avoid having them sent to collections, and remember, the later the payment, the bigger the impact you will see on your credit report.

Late payments happen, but you have options. Negotiating with lending companies, writing a letter of goodwill to your creditor, and paying past due balances are all ways you can try to mitigate the damage of late payments.