Any bill that is listed on your credit report as not having been paid on time should be taken very seriously, whether it’s from a lender, a utility company or any other monthly biller. Not only are there direct financial implications associated with late payments, such as late fees and interest, but there are also less tangible repercussions that stem from the crucial role that payment history plays in the construction of our credit scores.
Below, we’ll take a closer look at the importance of on-time bill payments as well as the steps you can take to make sure you stay on the right side of payment history.
Credit Scoring Concerns
- Payment History Is The Biggest Credit Score Ingredient: Prospective lenders and service providers are keenly interested in your ability to meet monthly payment obligations, as this provides an indication of how financially responsible you are and whether you can handle additional debt. That’s why payment history is typically the most-emphasized component of consumer credit scores.A single missed payment alone won’t wreck your credit, however. Credit scoring companies consider the percentage of your monthly bills that you have been paid on time over the past 24 months, and they do so for each of your accounts as well as for all of them in aggregate. Sandwiching a late payment between strings of on-time payments will therefore help devalue your mistake and keep your credit headed in the right direction.
- Stopping The Advance Of Delinquency Is Essential: Late payments are not created equal. The longer you wait to pay outstanding amounts, the worse the damage to your credit gets. That’s because the "payment history" portion of credit scores includes the number of days by which each of your accounts is delinquent as well as the number of accounts that are at least 30 days past due.
- Collection Accounts Intensify Credit Damage: If you do not make up a missed payment within a certain period of time –30 days for a loan or 180 days for a credit card, for instance – your balance will be turned over to a collection agency. Accounts in collections are specially noted on credit reports and can significantly drag down your credit score. And once an account has been turned over to collections, you no longer will be able to change its status back to "current" on your credit report.
- Ignored Delinquencies Can Turn Into Summary Judgments: If you ignore an unpaid bill long enough, the collecting party – either the original lender or a debt collection agency – could file a lawsuit against you. And if you don’t show up in court, a judgment could automatically be levied against you as a result. This will leave you with a court order to pay the amount in question as well as a public record that remains on your credit report for seven years.
Interest, Fees & Other Financial Implications
- Late Fees Add Up Quickly: Most monthly billers will assess a late fee for missing a payment due date, even if just by a day. You may be able to get them to waive this fee the first time you’re charged, but that’s not a trick likely to work more than once, if at all. It’s not just the fee you have to worry about, either, as this charge will be added to your balance and begin accruing interest, thereby making your tardiness increasingly expensive as time goes by.
- Penalty Pricing May Apply: Depending on the type of account in question and the number of due dates you’ve missed, your interest rate may be increased as a result of your payment problems. This so-called "penalty rate" may even apply to existing balances, in addition to debts you incur after the higher rate kicks in, thereby making it much harder and more expensive to pay off amounts you owe.
- Missed Payments Can Reduce Credit Limits: Many of the most popular credit cards employ a feature known as No Preset Spending Limit (NPSL), which is a fancy way of saying that your credit limit is determined each month based on factors such as your recent spending and bill-payment habits and the overall economic climate. As a result, if a missed payment drags down your credit score, it could result in a lower spending limit in subsequent months. This reduction in available credit could, in turn, bring down your score even further.
- Tardy Car Payments May Keep Your Engine From Turning Over: Some car dealers are now implanting devices in vehicles that prevent them from starting if a monthly loan or lease payment has not been made. You obviously don’t want to be stranded without your ride to work, and these devices are most often required for borrowers who have below-average credit scores – two excellent examples of why it really pays to make on-time payments.
- Missed Payments Are Bad For Your Health: Given that financial problems are among the top stressors for Americans these days, missed payments and all of the costs and correspondence that come with them stand to be fairly taxing from an emotional perspective. And since health problems have serious financial implications of their own, this is a vicious cycle that’s best to avoid if possible.
How To Make Sure You Never Miss Another Payment
- Set Up Automatic Payments For At Least The Minimum Amount: Some monthly bills must always be paid in full. Others, such as credit card bills, allow you to keep your account current by paying only a certain minimum amount while paying off the rest over time. In either case, you should have the option of establishing automatic monthly payments from a deposit account such as a checking account or prepaid card. Automatic payments take forgetfulness out of the late-payment equation, making it so the only thing you need to worry about is having enough cash in your account for the automatic withdrawal to be processed when your payment comes due.
- Add Due Dates On Your Calendar & Use Email Reminders: Regardless of whether you decide to take advantage of automatic monthly payments, arranging for notifications about upcoming bills can be helpful. Such alerts can serve as a reminder to review your monthly statement for accuracy or to make sure that you have enough funds in your payment account to cover all of your pending bills. This will also give you a better idea of when your monthly bills fall each month, enabling you to take any necessary steps to improve your cash flow.
- Pay Credit Card Bills Early & Often: There’s no rule against paying your credit card bill more than once per month. In fact, doing so can actually help expedite credit-building efforts by effectively reducing your credit utilization. Multiple monthly payments also enable you to more closely track spending and thereby improve budgeting performance. Keep in mind, however, that some credit card companies will still process the full amount of any previously established automatic payment if you make an unscheduled payment in the period between when your monthly statement is generated and when your recurring payment is withdrawn from your deposit account.
Hopefully, taking the above steps will help your bill payment practices, and thus your credit score, improve. If you’re interested in making your monthly bills a bit more management, check out WalletHub’s budgeting tips.