You might be surprised what the absence of a single invoice could do to your credit.
Sometimes even the most financially responsible people are late paying a bill.
Maybe you forgot to write a check to your mortgage company. Or your credit card bill reminder email got trapped in your spam folder so you didn’t realize it was due. Or maybe you ran into financial difficulties and didn’t have the money to pay your bill when it was due.
If you’re used to paying your bills on time and in full, you might think that just one late payment wouldn’t be particularly serious. Unfortunately, being late on a payment even once can have long-term repercussions.
How Late Payments Affect Your Credit Score
Of the factors that go into calculating your credit score, payment history carries the most weight. Your payment history shows whether you pay your bills when you’re supposed to.
Lenders want to know that you’re able to pay on time before lending you money, and the higher your credit score, the more confidence they have in your ability to do so. Having excellent credit will not only increase your chances of getting a loan or credit card approval; it will also help you get the best interest rates available.
Here comes the problem of being late on a payment even once. This late payment is factored into your credit score and lowers it. The extent of the damage depends on two factors: the delay in payment and the high or low level of your initial score.
A 90 day late payment will hurt your score more than a 30 day late payment. Makes sense.
But it may surprise you: just one late payment will hurt a high credit score more than a lower credit score. People with poor credit often go there because they are already used to being late with payments. When your score is high and you miss a payout, it’s more noticeable.
How much of a hit will your credit score take?
According to FICO, just one 30-day late payment could drop 90 to 110 points for someone with a 780 credit score who has never missed a payment before. Ouch. To make matters worse, a late payment can stay on your credit report for up to seven years. If you get it wrong even once, that mistake could haunt you for a long time.
That said, you get a little leeway to have your late payments declared. By law, late payments can only be reported to the credit bureaus after 30 days past due.
If you miss a bill due March 15 but pay it by April 10, you’re safe. Although you may face late fees from the issuer in question.
Also, in some cases, a lender may give you the benefit of the doubt. If, for example, you’re a longtime credit card holder who’s never missed a payment, your credit card company might let a single late payment slip rather than report it.
Avoid late payments
People usually pay their bills late for one of two reasons: they forget or they don’t have the money.
The first problem is easily solved by automating your invoices.
For example, you can arrange to have your mortgage payment deducted from your checking account each month. Or you can set your cable bill to be paid at the same time each month. Even credit card companies allow you to automate your payments. You can usually choose to pay the full balance, the minimum payment, or a specific amount on a certain day of each month.
Avoiding delays due to financial issues is a little trickier. Your best bet is to maintain a healthy savings level. That way, if you spend all of your paycheck in a given month and still have bills to pay, you’ll have the ability to tap into and receive those payments on time.
Following a budget will also help you avoid falling behind due to missing funds. Once you have a better idea of how much you can afford to spend, you’ll be less likely to overdo it.
We all make mistakes. Unfortunately, being late on a bill even once could have serious consequences. It pays to take steps to avoid late payments and keep your credit score intact.
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