Whether your bank account balance was low, you forgot to make a payment, or the mail arrived late, missing a due date on a credit card or loan feels terrible. If you don’t take quick action, a late payment can negatively affect your finances for years to come.
This post will explain what happens when you make a late payment, how your credit gets affected, and tips to minimize potential damage. Plus, I’ll answer a question from a long-time Money Girl Podcast listener named Daniel S., who’s trying to help his daughter boost her credit after missing several payments.
How do late payments affect your credit?
You probably know that not paying a credit account on time is a serious no-no in the financial world. But you may not realize how you pay bills is the most critical factor that credit scoring models, like FICO and VantageScore, use to calculate your credit scores.
Your payment history is the “king of credit” because it typically makes up 35% of your scores. Other essential factors are your total debt, credit utilization ratio, number of accounts, and recent credit inquiries. But none carry as much weight as your payment history.
A record of paying credit accounts on time shows you’re responsible with money. It suggests that your good behavior will continue, and you aren’t likely to miss payments or default on debt.
But when you have late payments or accounts in collections, they indicate that you aren’t dependable and may not repay debts regularly or at all. The consequences are stiff. Even one late payment can drastically reduce your scores, especially if you have good or excellent credit.
It makes sense that creditors and other merchants like insurers, landlords, and utility companies want to do business with customers who appear to be financially responsible. Businesses shudder at hiring expensive collectors and attorneys to go after past-due accounts.
So, the better your credit, the lower your interest rates, insurance premiums (in most states), and upfront security deposits will be. Dependable borrowers and customers with high credit scores get rewarded handsomely because lenders and service providers compete for your business.
READ ALSO: Understanding zombie debt–tackling old debts effectively
How do late payments affect your finances?
In addition to having a late payment added to your credit reports, lenders penalize you directly in different ways. One is charging a late fee. How much a creditor can tack on to your following statement depends on the agreement or application you signed and the state where you live.
However, the Consumer Financial Protection Bureau (CFPB) enacted a rule to combat excessive credit card late fees. Starting in May 2024, the typical late fee dropped from $32 to $8.
Car loans and mortgages usually come with a late grace period of 10 or 15 days, after which you get charged a fee that could be 4% or 5% of the overdue payment. If you continue to miss due dates, you’ll pile hundreds of dollars on top of the amount you already owe.
With credit cards, another penalty you typically face after paying late for two consecutive months is an increase in your annual percentage rate (APR) up to 29.99%.
And by the way, that crazy-high rate gets applied to your entire outstanding balance, not just to future charges. Additionally, you might lose accrued credit card rewards or a 0% interest promotional offer.
RELATED: 7 credit mistakes that could cost you
How does being in collections affect your credit?
If your payment is over 180 days past due, your creditor may sell your debt to a collector. Then, the collection company will attempt to get the overdue balance and fees from you.
Having a debt in collections is much more serious than having a 30- or 60-day late notice on your credit reports, and it causes a more significant dip in your scores. Like a late payment, an account in collections stays on your credit reports for seven years from the date you first became delinquent, even after you pay it off in full.
While you can’t make a valid, bad debt disappear from your record, paying it shows creditors that you honored your financial obligation. How much a bad debt hurts your credit depends on factors such as your scores before the bad mark and the amount of debt you didn’t pay.
However, as you make on-time payments and add positive data to your credit reports, the impact of late payments or an account in collections lessens with time.
Good credit helps you save money and improve your finances in other ways, even if you never borrow a dime. Listen to episode 780 or Money Girl to learn more.
How does medical debt in collections affect your credit?
One exception to the credit-reporting rules is when you have medical debt. For healthcare services you received after January 2022, the No Surprises Act prohibits debt collectors from reporting delinquent accounts to credit bureaus without trying to collect from you first. They must wait at least 12 months to report an unpaid bill to the credit bureaus.
That gives you time to verify, dispute, negotiate, and pay a past-due medical debt before it hurts your credit scores. Plus, starting January 2023, credit bureaus can no longer add medical debt of less than $500 to your credit report.
In addition, unlike other types of delinquent debt that remain in your credit file for seven years, a past-due medical debt must be immediately removed from your history once you pay it in full.
However, the consumer protections you get for medical debt don’t apply if you use a credit card to pay for it. So, if you can’t afford a medical bill, never charge it on a credit card. You’ll be much better off negotiating a debt directly with your healthcare provider, who may offer a payment plan or reduced settlement.
In episode 851 Laura reviews six ways to use credit cards to build excellent credit scores that will improve many areas of your financial life. Listen in the player below:
4 Tips to Minimize Damage from a Late Payment
I received the following question from Daniel:
“Hi, Laura. I’m a long-time listener and fan of your podcast. My 27-year-old daughter moved to New York City two years ago to pursue a passion in the publishing world. While she has been punctual with all her bills, she had some personal issues this past spring, a breakup with a live-in boyfriend, and she stopped paying an $8,000 credit card bill for four months.
When she embarrassedly admitted it to us, my wife and I helped her pay the minimum balance due, but her credit score had already received a big hit and is now 540. To make things worse, without a boyfriend paying his share, she must find a new, less expensive apartment, while her credit is down.
Is there anything my daughter can do to repair her credit score, seeing that all her other bills have been paid on time? Is there a better chance to improve her credit if she immediately pays off the entire credit card balance?”
Thanks for your question, Daniel! I’m sorry that your daughter hit a financial rough patch. I’ll answer your question by covering four tips that can help minimize damage to your credit scores after a late payment.
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Settle your account quickly.
The sooner you pay a past-due amount, the better your chances of squeaking by without any late fees or rate penalties. Creditors can’t report a delinquency to the nationwide credit bureaus until 30 days after the due date. Your mistake won’t appear on your credit reports if you get caught up before then. However, the creditor can still charge you a late fee.
If you’re like Daniel’s daughter and don’t get caught up quickly and one or more late payments get reported to the credit bureaus, they stay on your credit reports for up to seven years. Unfortunately, even if it’s your first time making a late payment or you’re always on time on other accounts, it will get factored into your credit scores and drag them down for a period.
On the flip side, your on-time payments stay on your credit reports for ten years, helping to boost your scores. So, you must avoid making additional late payments.
Note that if a creditor pegs you as late, but it’s in error, you should immediately dispute it with the credit bureaus. Inaccurate or unverifiable information must be removed by law.
However, if you were at fault for a late payment, the creditor is not obligated to retract it, even if you pay the debt. The purpose of your credit file is to reflect an accurate account activity history.
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Contact your creditor.
If you get your past-due account settled but are disappointed to get charged a late fee, contact your creditor to discuss it. If your payment was late by accident, such as getting lost in the mail, explain the situation and ask what’s possible.
Lenders and card companies want to keep good customers happy, so they may waive fees, especially if it’s your first late payment and you’re polite to a customer service representative. Remember that being rude or panicked never gets you anywhere when asking for a favor.
Since Daniel’s daughter missed four months of credit card payments, it isn’t likely that they’ll give her a break on late fees–but it couldn’t hurt to ask for a portion of them to be waived.
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Make future payments on time.
If your credit scores went down or you got hit with a high penalty APR after a late payment, be extra cautious about never being late again. If you make six months of on-time credit card payments, your issuer must reset your interest rate to the pre-penalty rate.
Your credit scores will slowly improve as you build a history of positive information and the late payment ages. Credit models tend to favor new data more than old entries, so be vigilant about staying on track.
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Create automatic reminders.
If you made a late payment because you don’t have a good system for paying bills, it’s time to get organized. You could use a spreadsheet, calendar reminders, or a smartphone app to stay on track.
Many financial institutions allow you to create email or text notifications to remind you about an upcoming due date. That’s a great way to ensure a deadline never slips past you again.
I pay bills using my bank’s online bill payment system and double-check what I owe using a simple Google Sheet. Every bill and due date I must pay monthly is on a separate row, and each month has a column where I enter an “x” once the bill is set to pay online.
One strategy to ensure you never miss a minimum credit card payment is to set it up to pay automatically. Even making the minimum payment helps you build credit. You don’t get “extra credit” for paying more, but it’s wise to pay your balance in full each month, when possible, so you don’t accrue interest charges.
Daniel asked whether his daughter’s credit could improve faster if she immediately paid off the $8,000 credit card balance. An important rule to boost your credit is keeping your credit utilization lower than 20% to 25%.
For instance, if your card has a $10,000 available credit limit and your balance is $8,000, you have an 80% credit utilization ($8,000 / $10,000 = 0.80), which is too high. A wise plan would be to reduce the card balance to no more than $2,000 or whatever 20% is for your card’s credit limit. Significantly reducing your credit utilization is one of the fastest ways to boost your credit.
To sum up, few people, including me, can say they’ve never missed a payment due date. No, it’s not fun to slip up and get penalized, but don’t beat yourself up about it. Just use the tips I’ve covered here to minimize potential damage from a late payment, chalk it up to a learning lesson, and make sure it doesn’t happen again.