The Truth About Late Payments And Its Credit Score Effects

frustrated womanWe all have to live with a lot of financial obligations. You cannot escape these because we live in a consumerist society wherein we are required to earn more to finance our needs. We have to buy the products and services that will help sustain what we need to survive. This results in a lot of bills that has to be paid – usually on a recurring monthly basis.

Study shows that paying the bills is the top financial concern of Americans. They want to make sure that all of them will not be forgotten and will have enough funds to avoid late payments. When you are late on any of your financial obligations, it usually has consequences. It can be the termination of a service, a penalty charge or a negative mark on your credit report.

You are probably not surprised to hear that your credit score has a big impact on your finances.

According to CardHub.com, more than 53% of Americans have a credit score that is 700 and up. All in all, it is a good figure. But that does not mean it cannot go down. You need to be constantly vigilant when it comes to your score. That means making sure you are displaying your best payment behavior.

There are a lot of financial opportunities that could be lost if you let your credit rating go down the drain. You could lose the chance of getting a low interest rate on a home loan that will give you your dream house. Not only that, a lot of employers are checking out the credit reports of applicants. This can cost you that corporate job that you have been eyeing for years.

Effects on your credit score for various delayed payment scenarios

If you want to take care of your credit score, you need to make sure that you will keep your late payments to a minimum. There are several factors affecting your credit report but one of the most significant are late payments. Your payment history affects 35% of your credit score. Your payment behavior plays a very important role in this. So if you are constantly sending late payments, you can expect that your score will not be in good shape.

Experian.com released an infographic that showed the State of Credit in 2013. According to the study, the generation with the lowest credit score is the millennials. Although they have the lowest, they are only second to their parents, the Gen X, when it comes to late payments. Here is the credit score and late payment statistics per generation according to the infographic.

  • Greatest Generation (66+): credit score (735), late payment (0.14)

  • Baby Boomers (47-65): credit score (700), late payment (0.33)

  • Generation X (30-46): credit score (653), late payment (0.61)

  • Millennials (19-29): credit score (628), late payment (0.58)

Based on these figures, you can see that there is a connection between the late payments and the credit score of a person. The more you go past your due date, the more it will leave a bad mark on your credit report.

While that is true, there are some important misconceptions that you need to know about your late contributions and your credit rating.

  • One late payment. Some people think that “being late just this time” still holds some bearing in your records. Do not think that even one late submission of your payment will not have an effect. FICO, the creator of the most prominent of all credit score formulas (FICO score), conducted a research and found that a 30 day late payment can bring down a score by up to 75 points. Not only that, it will stay on your record for the next 7 years.

  • 30 days late. It is a common practice wherein creditors will only report a late payment to credit bureaus after 30 days. However, you have to remember that there is no rule that prohibits them from reporting you even after a day past your due date. So do pay off your dues as soon as you have the money to do so.

  • Seven year taint. Although the late payment will be on your record for the next 7 years, that is does not mean it will have the same effect as it did during the first time it was placed there. Usually, your payment behavior for the last 6 months will have more bearing as compared to how you paid your dues 3 years ago. As it spends more time in your credit report, it will lose significance. But still, the fact that it is there may or may not matter to the lender – or whoever is looking at it.

  • Late payments are equal. Although it should, this is not true. The longer you go without paying your dues, the more destructive it will be for your credit score. The same is true when you have multiple late contributions. Do not assume that one is the same as 5 late payments. The latter is much worse.

The bottom line is, when you submit your payments, it has to be always on time. There is nothing better for you to do than that. It is okay to be early – but never late. You are not just endangering yourself to a bigger balance through penalties and charges, you are also tainting your financial reputation through your credit report.

Why paying on time matters to your credit score

We’ve mentioned that while a lot of factors affect the rise and fall of your credit score, none is more significant than your late payments and we will tell you why.

When you get a loan, one of the most important questions that a lender will inquire about is your ability to pay. You may think that your income should be enough to grant you an approval. You have never been more wrong. It is an important factor, yes, but you also have to understand that they are more concerned about your commitment to pay them back. Some people have enough income but after considering their payment behavior, they are still not granted the loan. Your income does not immediately mean you are responsible with your money and financial obligations.

Apart from that, avoiding late payments can also keep debt crisis at bay. The fact is, going past your due date will result in penalty charges. That will be added to your current balance and in most cases, that is included in the computation of your interest rate charges – which is also added to your overall debt amount.

Avoiding this destructive habit is actually quite simple. It takes a great deal of self control and discipline and that is not so impossible to implement. Here are some tips that you may want to look into help you avoid late payments.

  • Organize your payments. Plot them in a calendar and set up reminders.

  • Change your due date. You can actually request your creditors to change your due date so you can take care of payments all at the same date.

  • Set up automatic payments. You can also set up automatic deductions from your account so that your payments will take care of itself.

  • Stop taking on unnecessary debts. Lastly, you may want to keep a lid on unnecessary credit spending. If you cannot afford to buy something in cash, then just don’t buy it.