We have just passed the month of March 2019 that is the last month of this Financial Year and it is always a mad rush during this month to make investments that can help you save the maximum amount in tax. These investments can be done all through the year, but most of us tend to put them off to the last moment.
Sadly enough, most people try to put off financial work till the last minute or forget completely about it until it is either past the due date. We do not at times take financial obligations seriously or do not fully understand the implications of this tardiness until it is too late.
This results in the non-payment of dues or late payment of dues which arises from taking loans or having credit card dues. Some of the major reasons for these are:
- Forgetfulness: This is one of the major reasons given by defaulters. This might be due to plain oversight or being occupied with work or other issues. Even though they have the means to pay their dues, they forget about it and later pay it with penalties
- Cash crunch: This is the case where a person does not have enough funds available to pay off their dues
Prior to the introduction of credit information services or credit bureaus, as they are popularly known as, individuals had the ease of securing credit in spite of defaults or late payments as there was no flow of data regarding these defaults between the banks/ financial institutions.
Now with the operations of Credit bureaus, all information regarding an individual's credit behavior right from the application stage to approval of the same to repayment and loan closure is reported to the credit bureaus. This data is processed according to the methodologies created by the bureaus to assign credit scores to individuals. So, it has become easy to track a person’s credit history.
There is hardly any chance of a late payment or default going missing from your credit score. Everything is reported and each action of yours does have an impact, either positive or negative, on your credit score.
How Does Late Payment Affect Your Credit Score?
Late payments do affect your credit score. However, the magnitude of the effect may vary depending upon the duration of delay.
Generally, when you do not pay your dues by the due date, your lenders inform you over phone or email about the delay in case of loan EMIs. If it has been a plain case of oversight on your part, it is good to grab this opportunity to make the payment at the earliest. This would not result in any impact on your score.
It is also good to know all banks and financial institutions who are mandated to report to the credit bureaus have their own schedule of reporting customer data to the bureaus. So, as long as you pay off your dues before they are reported to the bureau, it might not affect your score to a major extent.
In case of any cash crunch, it is good to keep your lender under confidence. If it is a one odd instance of late payment, they may be ready to give you a special waiver if you have had good relationship and been a prompt payer.
The Effect of Longer Duration of Delay
An individual's credit score can bear various consequences for late repayments. A consumer might repeatedly make late payments on a single account for a few months or might skip a couple of payments altogether.
Delinquencies for loans are reported on 30, 60, 90 and 120 days past the due date. Naturally, the greater the number of late payments, the worse the effect on the credit score.
Additionally, late payments for one or many months on multiple accounts (e.g. on the credit card, auto loan or mortgage accounts) also leads to the account being termed delinquent.
If you have missed your due date but made up the payment before 90 days after due date, this is counted as a minor default. With this type of offense, your score will take a hit, but you can make up by paying future payments on time.
On the other hand, if you do not pay your bills after the 90-day period, it becomes a major offense, due to which your credit score will take a big nose dive.
Credit card companies follow a slight different schedule for reporting delinquencies.
If you have paid at least the Minimum Amount Due, then the other outstanding amount is rolled over.
However, if you have missed making the Minimum Amount Due, the card companies usually wait for a 30-day period before terming an account delinquent. Thus, while there is some leniency on credit card repayments, it is best to pay at least the minimum due on time to avoid the danger of delinquency.
Also, the effects of missed payments may vary from person to person depending on how well you are faring on other parameters on which your credit score is based.
Additional Reading: How do you deal with delinquent accounts?
Further, if you need to go in for Settling or Writing off of loans against any credit account, it will hit your credit score hard. It will become almost impossible for you to get a loan or credit card in the future. It will take time and a lot of hard work to improve your credit score.
Other Factors That Affect Your Credit Score
While delays in repayment of your loan EMIs or credit cards outstanding do impact your credit score, at the same time, there are many other factors as well that have a bearing on your credit score. It is good to know about them as well, as your overall credit score is an interplay of all the factors.
- Payment History: The most important factor. How regular you are on your loan payments
- Amounts Owed: Having very high debts or maxing out credit cards with dues continuing for many months will have a negative impact on your score
- Length of Credit History: The longer the credit history, the higher the credit score
- Credit Mix: Having a good mix of secured and unsecured credit is good for your score
- New Credit: Taking out credits within short time increases your credit risk
- Hard Inquiries: Each application for credit is a hard inquiry. The more the number of hard inquiries during a short period of time, the lower your credit score goes
As you can see, payment history is one of the most important factors when calculating your credit score. Without a good credit score, you will not get credit, or you will pay more for the credit for which you could have paid much less with a good credit score.
When it comes to financial matters, it is always best for a person to be prudent. One should never miss any dues and always make payments in full to make sure they do not suffer when they really need credit.