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Late Payment

How to Avoid Late Payments and Protect Your Credit

When you open a financial account with a company, whether it's a car loan or a streaming subscription, you agree to make your payments on time or face consequences. The fallout of a late payment can vary based on the creditor and type of account, but it's wise to take steps to avoid late payments rather than find out the consequences firsthand. Chief among the reasons to pay your bills on time is that it protects against credit score damage.

The information in your credit report represents the building blocks of your credit scores, which companies calculate using complex math algorithms called credit scoring models. The most commonly used credit scoring models rank payment history as the most important factor, so paying late can have a strong negative impact on those numbers.

Lenders use credit reports and credit scores to determine qualification and set interest rates, so taking steps to avoid late payments will help keep your scores up, interest rates down and options open. Here's how.

How to Never Miss a Payment

After you apply for and obtain a credit product, the lender typically reports your payment history to one or more of the three major credit reporting agencies—Experian, TransUnion and Equifax. Credit scoring companies then produce credit scores based on that info. Scores calculated by FICO® and VantageScore®, the most common credit scoring companies, range from 300 to 850, with higher numbers predicting lower credit risk. Because payment history is the most important factor in these scores, even one missed payment cycle can harm your credit.

Avoiding late payments is always best, and there are a number of effective strategies you can employ:

  • Add due dates to your personal calendar. Making a note of the due dates for all your bills can help you stay on track each month. Each time you look at your calendar, you'll have a visual prompt.
  • Choose the right account manager. Live with a partner? The person responsible for bill payment should have good organizational skills. If that's not you, let your partner take over. Stay in the loop, though, by checking your accounts periodically and make sure you're not overspending.
  • Make account management a routine. Decide on a day and time to review bills. For example, you may choose every Friday morning before work to pull out all of your statements and pay what needs to be settled up. If you make a weekly habit out of it, you won't have to deal with bills that pile up.
  • Set alerts and reminders. Upon request, most financial institutions will send you text alerts or emails to remind you of upcoming due dates. Those incoming messages won't allow you to forget to pay! Alternatively, set up reminders on your phone or computer for times when you're typically free and handle your bill-paying right then.
  • Enroll in automatic payments. Almost all banks and credit unions give you the option to set up automatic bill pay. The online bill payment system allows you to select the amount you want to pay a creditor on a certain date. That sum will be deducted from your checking account, then sent to the creditor on time. This works perfectly for loans because the payment is fixed, and can also be ideal for credit cards. Autopay features on a credit card often let you choose to pay just the minimum payment due, the full balance or a custom amount.
  • Use a third party. If you don't have the time and wherewithal for account management, hiring a service can make sense. Professional daily money managers help people do everything from pay bills to organize documents. If you really need assistance and can afford the typically hefty fees, they're worth checking out.

What to Do if You Can't Make a Payment

There may come a point when money is especially tight and making all your payments on time seems impossible. In that case, prioritize and strategize. Review your budget to identify any unnecessary expenses that you can reduce or eliminate so you can make your debt payments on time. Also consider various ways to scrape up some cash quickly so you can make the minimum payments, such as finding a side job, selling assets or borrowing money from a friend or family member.

If you still can't meet the due dates on your accounts, try these strategies for dealing with different types of accounts:

  • Mortgage payments: There are a number of remedies to explore when you can't send your entire mortgage payment on time, but start with contacting your lender as soon as you know you will miss a payment. If the problem is temporary, a forbearance may work. In this case, the lender agrees to a reduction or even complete suspension of payments for a few months. Longer-term options include loan modification, which allows you to change the terms of the loan with your current lender, and refinancing the loan with a new lender so the payments are more affordable.
  • Auto loans: Before missing a car loan payment, contact the lender and explain that you're at risk of falling behind on your car loan. You may be able to arrange a deferment, which would allow you to skip a small number of payments without penalties or fees. The number of payments you can defer depends on the lender, so don't count on it for repeated delinquencies. If you need permanently reduced payments, consider refinancing the loan to secure a lower interest rate or a longer repayment period.
  • Personal loans and credit cards: If you worry you'll fall behind on these payments, jump on the phone immediately and explain your situation to your card issuer. You may be able to enter into a hardship plan where you send no or lower than normal payments for a few months while keeping your account in good standing.
  • Utility and other monthly bills: Contact your utility company to ask if you can delay a payment for a month or two. If your income is low or you're unemployed, you may qualify for the Low Income Home Energy Assistance Program, which helps individuals and families pay their energy bills. While utility payments typically do not hurt your credit unless an account is sent to collections, it's still important to communicate with your provider to keep your account in good standing and avoid any service disruption.

What to Do if You've Already Missed a Payment

If you have already missed a due date, take steps to offset further damage:

  • Pay before you miss an entire cycle. Missing a due date will usually trigger a late fee, but a late payment won't appear on your credit report until it's more than 29 days delinquent. That means you have some time to come up with the money before it does result in credit damage.
  • Communicate with the lender. Although it's better to contact your lender before missing a payment, it's still wise to call after. At the very least you may be able to have the late payment fee waived.
  • Resume timely payments. The more on-time payments you have listed on your credit report, the better for your score, so get back on track as soon as possible.

Once you're 30 days or more past due on a payment, the late payment will be noted and added to your credit report. Since creditors don't necessarily report updated information to the credit bureaus every day, it may take a few weeks for the late payment to show up on your credit report, at which point it may begin to have an impact on your scores.

How Do Late Payments Affect Your Credit Score?

After you miss a complete billing cycle, a notation will appear on your credit report that a payment is 30 days late. Miss another and it will show as 60 days late, and so on.

Your current credit profile will dictate the level of scoring damage late payments can have on your credit scores. In general, the higher your credit scores are now, the more your scores will drop after a late payment appears. If your credit scores are already on the low side, a late payment will still have an effect, but it won't be quite so dramatic.

The good news is that the impact of late payments on your credit scores typically decreases over time. And with plenty of positive activity afterward, a single late payment will have a diminished impact. Late payments stay on credit reports for seven years; once that time is up and the delinquency is no longer reported, your scores won't be impacted at all.

To better understand the effect your payment history has on your credit, get your free credit report and scores from Experian and review them carefully. You'll want to track the age of any late payments and know when they're due to be removed. If you believe a late payment is showing up in error, you may want to dispute it. Indicate the date the late payments should have been wiped clean from your report, and your file will be updated if the payment is found to be in error.