For borrowers, it can be a difficult task to keep up with monthly debt obligations, especially when the number of credit accounts increases over time. Although it may be challenging to remember due dates or amounts due, it is important for individuals to keep a close eye on when accounts need to be paid.
A late payment on a mortgage, credit card account, personal or auto loan can have a detrimental affect on your overall creditworthiness, regardless of how late the payment actually is. The affect of a late or missed payment can stay with you – and your credit report – for as little as a few months up to years into the future.
What Constitutes a Late Payment?
According to MyFICO.com, a payment is deemed late when a creditor or lender does not receive the minimum amount due by the stated due date. In some instances, creditors provide a grace period to borrowers that allows payments after the due date to be submitted. A grace period is typically no more than 15 days past the original due date, but each creditor differs in their policies surrounding payment timelines.
It is important to know where your creditors stand when it comes to late payments so that you can effectively manage expectations if a payment is going to be late or remitted past the grace period.
Late Payment Effects
Each creditor imposes different penalties for payments entered or received after the initial due date, which may include the following:
Late fee: A payment that is not received on time may incur a late fee from the creditor, either as a flat fee, such as $10 or $25, or as a percentage of the payment due, such as 1% or 5%. Failing to make payment after the grace period may also result in a late fee, often higher than what is imposed after missing the initial due date.
Interest rate increase: While not a practice of all lenders, some creditors include a stipulation in a credit or loan agreement that gives them the right to increase your interest rate as soon as a payment due date is missed. This is most often stated as the default APR in your credit card or loan agreement. An increased interest rate may prolong the repayment of an outstanding balance, as well as increase your monthly payment due.
Credit Report / Score Changes: Missing a payment due date has a direct impact on your credit report and score. Most creditors are quick to submit missed payment information to the three major credit bureaus, especially after a due date has gone past 30 days without payment. If a creditor reports your late payment, it has the potential to stay on your report for up to seven years.
Additionally, because payment history represents 35% of your total credit score, a missed payment may keep your score low for an extended period of time. These changes to your creditworthiness can dampen your ability to receive affordable credit in the future, as other lenders may perceive you as a high default risk borrower.
How to Resolve a Late Payment
If you have missed a payment or due date in the recent past, there are remedies to get back on track with your creditors. First, it is important to make the payment that was missed as soon as possible. The longer delinquency remains outstanding, the more detrimental it is to your credit profile. Once the payment is made with your creditor, it is beneficial to request removal of the late payment fee. Typically, lenders can remove a late payment fee if you do not have a history of missed or late payments, and are in good standing with them.
After you have addressed the late payment fee, it may be worth asking about the penalty APR that was imposed. Because a higher interest rate can have a substantial impact on the future monthly payments due, it is helpful to get the APR reduced back down to your original rate. Lenders have the capacity to revert an APR, but may only be willing to do so with a promise from you to pay by the due date for a certain period of time.
Finally, it is necessary to create a system to assist you with paying on time for all future bills. Whether that involves utilizing an online budget tracker or a homemade spreadsheet to input all credit accounts and due dates, developing a plan to pay your accounts is the best action you can take to ensure timely payment into the future.
