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It pays to be on time, especially when it comes to your bills, but what if life gets in your way and you are unable to pay them or you just forget a month ?
You’re not alone: late payments are more common than you might think, especially in difficult times. A survey carried out by the online rental platform Apartment List found that 32% of renters and landlords walked in in August with unpaid housing bills from a previous month. More than 20% owe more than $ 1,000, according to the survey.
No matter how they happen, you’ll want to deal with late payments right away. It can be easy to rule out a late payment as not being a big deal, but payment history is the most important factor in your credit score, which is an impressive 35% to be exact.
Lenders use payment history and credit score to gauge the likelihood of you paying off your debts. Therefore, late payments on your file may affect your eligibility for future credits and loans, such as a mortgage or credit card.
Failure to pay on time is “a sign of risk” for a lender, says Rod Griffon, Senior Director of Public Education and Advocacy at Experian. “If you can’t afford one lender, the question is, will you be able to pay another? “
If you are in a difficult situation due to job loss or other financial crisis, immediately contact your creditor to seek help and discuss your payment options. Many credit card issuers and lenders continue to offer temporary relief due to the coronavirus pandemic, so you may be able to work out another repayment schedule, lower interest rate, or forbearance.
Here’s what you need to know about late payments, how they affect your credit, and how to avoid them.
What happens when you are late on a payment?
There are many reasons why late payments happen, but the most important thing to know is that they will affect your credit score if they are more than 30 days past due, says Lauryn Williams, a certified financial planner and founder of Worth Winning, a financial planning company in Dallas, Texas. “If you’re only a few days late, you can still keep your credit in good standing, but you may have to pay late fees,” she says.
The impact of a late payment depends on how long it was owed and the terms of your agreement with the company you owe money to. Creditors and lenders typically don’t report late payments less than 30 days to credit bureaus, but some lenders and creditors wait 60 days before reporting past due payments.
A good rule of thumb to keep in mind: the later the payment, the greater the damage to your credit score.
Your credit probably won’t suffer as long as you pay before the 30-day mark, but you must pay it off in full. Partial payment will not prevent you from being reported late.
Try to avoid falling into the habit of paying your bills late. Even if you’re only a few days late and it doesn’t affect your credit score, you could still be charged late fees or sometimes a penalty interest rate by the creditor.
If you’re more than 30 days late, Griffin says your credit score could drop as much as 100 points. Late payment won’t hurt a low score as much, but it will still do damage.
Here is a fictitious example of the effect that a 30 and 90 day missed payment by credit card has on two people with different credit scores, according to FICO data. As you can see, Maria’s credit score drops more significantly if she misses a payment compared to Sofia.
|Starting credit score||607||793|
|Number of credit accounts||7||21|
|Total revolving / open balances||$ 5,760||$ 6,500|
|Credit score 30 days after missed payment||570-590||710-730|
|Credit score 90 days after missed payment||560-580||660-680|
How long do late payments stay on your credit report?
Once a late payment is reported to the credit bureaus, it can stay on your credit report for up to seven years. It will affect your credit score the hardest when it first happens. But the older it gets, the less impact it will have.
While you wait for a late payment to fall on your credit report, you can find other ways to build your credit. For example, do your best to make timely payments and avoid overcharging your cards, which keeps your overall use of credit low. Other strategies, like asking for a higher credit limit and paying more than the minimum amount owed each month, can also help.
What to do if you missed a payment
Don’t panic if you’ve missed a payment. The first thing to do is pay what you owe, if you can. You can also contact your creditor to see if this has already been reported to the credit bureaus and discuss how to update your account if you cannot make full payment on the spot.
“If you miss a payment, make it up as soon as you can,” Griffin says. “Let them know that you are facing some issues, especially today with COVID-19 and what we are going through with our economy. Lenders are able to work with you and want to make sure they are working with you.
Some creditors give borrowers a grace period, which can give you a few extra days to make a payment without additional fees or penalties. But they can charge you a fee, a penalty, or both as soon as you miss your due date.
If you’re late but can pay the bill right away, talk to your creditor to see if you can get a waiver or a refund of the late fees. Creditors have the right to deny your claim, but they may be willing to make an exception if you usually make payments on time.
If you’ve gone past the 30 days and can’t refresh your account, always contact your creditor to discuss options if you’re having difficulty. You may be surprised to learn that there are still options to rectify the situation.
But what if you’re really late? After 180 days without making the minimum payment, a creditor can “write off” your debt. You will still have to pay your debt in full, but the lender has taken it off their books and this could end up with a debt collector. When it comes to dealing with a debt collector, it is important to know your rights and how to react appropriately.
How to avoid late payments
The key to avoiding late payments is to create a habit that will make you much less likely to miss a due date in the first place. Your goal of paying on time should apply to all of your bills, including utilities, rent, and cell phone service.
Here are several strategies you can use to help you make payments on time:
1. Be proactive
If you think you are having trouble paying your bills, contact your creditor immediately – even before they are due – to explain your financial situation and see if any accommodations can be made.
“There are things you can do to change the situation. Talk to lenders and creditors early and let them know what’s going on, ”Griffin says.
Turn on-time monthly bill payments into a habit by signing up for an online account with each creditor and setting up personalized account reminders for upcoming bills. This will help you remember when each invoice is due, so you never miss a payment.
In recent months, millions of people have seen their income suddenly reduced or cut due to the coronavirus outbreak, so many financial institutions are providing temporary relief. This includes card issuers, mortgage lenders, student loan managers, and banks. Asking for help can seem a little daunting, but the benefits can be well worth it.
You can also make payments on your credit cards throughout the month. You won’t have to worry as much about the due date if you pay off your balance bit by bit throughout the month. Plus, regular payments can improve your credit utilization rate and your credit score.
2. Be strategic about the due date of your payment
Sticking to a consistent date and time to pay your bills can make it easier to manage your money. Many lenders and services will allow you to select or adjust payment due dates. You will likely need to phone a customer representative to make the request. They will ask you for the desired due date and then make the change. There are two ways you can do this: you can stagger some bills to match your salary, or you can pay all of your bills on the same day to help you remember them.
3. Set up reminders
To stay on top of your payments in the future, set up SMS alerts or calendar reminders a few days before invoices are due. Don’t hesitate to add more if you tend to forget easily.
4. Consider automatic payments
You can also consider automatic payments, as long as your account isn’t at risk of being overdrawn. An automatic payment withdraws a minimum payment as soon as you receive the invoice. You can always come back later to pay more, but this tool does most of the legwork for you.