Editorial Policy

How Late Payments Wreck Your Credit Score

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By Eva Norlyk Smith, Ph.D.
May 22, 2009

If there is one surefire way to trash your credit score, it’s paying your credit cards late. There’s a whole avalanche of unpleasant effects that unfolds when credit cards are paid late, and nasty late fees to the tune of $35 are the least of them. Here’s what happens when credit cards are paid late and how it affects a person’s finances and credit score.

Step 1. Late fees. If a payment arrives late by even an hour, the account will be assessed a late fee, which can run as high as $35. The late fee will be assessed each month the payment is late.

Step 2. Increased interest rate, increased minimum payments. If several payments are late within any given six-month period, the card issuer will increase the credit card APR to a punitive default rate, typically in the range of 29.99 –34.99%.

When the credit card interest rate changes to the default rate, the minimum payment also increases or even doubles. The result is a snowball effect, where a couple of late payments change the terms on the account, making it even more difficult to meet the next payment, and so on.

Step 3. The late payment shows up on the credit report. Card issuers report the status of all accounts to the credit bureaus every month. So if at the 30-day mark a payment still has not been received, the late payment will be reported to the credit bureaus. Any entries about late payments will remain on the credit report for seven years.

Now it gets dicey. If you have other credit cards, the late payment notice on the credit report may alert other card issuers that you’re behind on payments. That could cause them to slap a default interest rate on other credit cards – even if payments on those cards are current. Card issuers have the right to do this under what is known as the universal default clause. It will create another snowball effect, causing not just increased interest charges on the other credit cards, but again, much higher minimum payments.

Step 4. The credit score drops. A full 35% of the FICO score is based on a person’s payment history, so late payments make the credit score take a dive. Just how badly the score is affected depends on how late the payment is and whether there are records of other late payments.

A payment that is 30-60 days late will cause a person’s credit score to temporarily dip when it is reported as “currently 30 (or 60) days late.” If there are repeated entries about 30-60 day late payments, however, they will cause lasting damage to the credit score.

At the 90 day mark, the credit score suffers permanent damage. Credit scoring systems are focused on predicting the risk of permanent defaults, and the 90-day mark is the magic number where a person is deemed much more likely to walk away from his or her debt obligations. According to Credit.com, even just one 90-day late payment will damage the credit score as much as a bankruptcy filing, a judgment, a collection or repossession.

Step 5. The card issuer does a charge-off. At around the 180 day mark, the card issuer will typically take steps to charge off the debt and sell it to a 3rd party collection agency. A charge-off is a serious blemish on the credit report and it will make the credit score plunge even further. At this point, the credit score will be so low that it will affect a person’s ability to take out any type of loan. It could even affect the ability to get a job or rent an apartment or house, as employers and landlords often check the credit report to evaluate how reliable a prospective employee or tenant is.

In short, not paying at least the monthly minimum on your credit card is one of the surest ways to torpedo your financial health. Instead, if you have trouble making your credit card payments, look for ways to consolidate your credit card debt to lower your monthly payments. If you’re experiencing financial hardship because of life events you had no control over, call your card issuer to see if they might be willing to reduce your credit card payments temporarily.