Missed or late payments often stay on your credit report for years
Paying with credit has become a way of life for millions of Americans. Ever since the small plastic cards began gaining popularity in the 1950s in the U.S., we have been buying everything from fuel to frozen custard on credit. As we welcome summer, many of those with revolving credit card balances continue to carry debt – and often rising interest rates – into the next season.
Unfortunately, as the amount of debt owed increases, so does the number of accounts that are considered past due. Credit card delinquency rates rose above 2% in the third quarter of 2022, according to data from the Federal Reserve. And when a loan becomes delinquent, it can set off a chain of events that can negatively impact your financial future for years to come. As in? Your interest rate can rise sharply, meaning you will be required to pay more for the loan moving forward.
The Impact of One Late Payment (Cue The Fees)
At some point, many of us will miss the due date on a loan payment. If you find yourself in that boat, you should make it right – and pay the bill – as soon as possible. And if you are among those who always pay on time, kudos to you! As a reminder, here’s what can happen when you don’t have the money (or, sometimes, simply forget) to make an on-time payment on a revolving credit account or another loan.
If you are past the grace period many lenders offer, you will likely first be hit with a late payment fee. And if it’s your first late payment, a lender can charge you $30, notes creditcards.com. Pay late again within six months, and you can be charged up to $41. Because card issuers have a multitude of agreements with their customers that can change annually, it’s a good idea to take some time and read the fine print on your credit card agreements to find out exactly what can happen if you pay late. The most important details are usually found on your monthly statement.
More Negative Effects of Paying Loans Late
- Losing a promotional interest rate (such as 0% APR)
- Receiving a penalty APR
- Paying more on current balances
What if You Are More Than a Month Late?
If you are more than 30 days late making a payment, most lenders will report that inaction to one or more of the three major credit reporting agencies – Equifax, Experian, and TransUnion. When that happens, it can affect your credit score in a major way: Late payments can stay on your credit reports and affect your scores for seven years, according to the Consumer Financial Protection Bureau.
Real-Life Examples
VantageScore created a guide to show what can happen when people with different credit scores miss a credit card or mortgage payment. Unfortunately, the better your credit score, the bigger hit you will likely face if you become 30 or 60 days late with a payment. That means someone with a credit score between 660 and 740 who was 30 days late with a credit card payment may have their credit score lowered by up to 90 points, according to the VantageScore analysis. Another person with a score between 550 and 600 could have their score reduced by up to 50 points if they were 30 to 60 days late with a loan payment.
The Bottom Line
Paying all of your loans on time, every time, is the best way to build and maintain a solid credit score. If you know you are going to miss a payment, take action. Call your lender and ask for an extension. To help guard against chronic late payments, go ahead and make it easy on yourself. Set up some automatic deductions from your checking account to pay your bills at the same time every month, say right after payday. When you do that, you can help protect your credit score and your ability to borrow in the years ahead.
Jean Chatzky with reporting by Casandra Andrews