The Truth About Late Payments

Late payments can really damage your credit report. They drop your credit scores in a hurry-affecting your ability to get credit, interest rate, credit limits, insurance rates or even a job.

Late Payments

You may think you know what a late payment is… It means you don’t have the payment in by the due date, right? Nothing is as it seems in the world of credit reporting, however, so let’s begin by talking about what qualifies as a late payment.

There’s a couple of ways that lenders look at late payments. One is how they view them externally (how they report them to credit reporting agencies.) The other is internally (how they keep track of your payments in your account information). The one we’re most concerned about is external.

The Effect on Your Credit Report

Before you do anything with your credit, you have to think about how it will look on your credit report. You don’t want anything that is going to show up 30-, 60-, 90- or 120-days late. Some lenders are so strict, even a payment that’s processed one day after the due date will show up late on your report. It can show up as a 30-day late payment, which stays on your report for seven years.

You’ll want to avoid this the most: recent late payments. Ones long past will hurt enough…ones from just months ago will drag your score down tremendously.

Pay Early

Because of this, I recommend that you actually send in your payment at least one week before the due date, allowing time for mail and processing. You may want to consider paying by phone or online, which usually process quicker.

Internal Credit Monitoring

It is important to understand how lenders keep track of your payment history-and what they do with it. You’re tracked in something called the “Master File.” Make no mistake…they know everything about your account: average balance, bounced checks, limit increases, credit limit status, payments that have been late (and by how much.) That’s just the start of what they know about you! The information that they have about you in the Master File will be used to determine your ongoing creditworthiness-if they should work with you if you have a financial crisis, if you request a credit limit increase, etc.

FICO Score Simulator

Believe it or not, it is possible to know how much a negative credit action, such as a missed payment, is going to impact your credit score before it happens. It’s called a FICO Score Simulator. You can access it at www.myfico.com. Play around with it, and you’ll see how important it is to make all of your payments on time.

How to protect yourself
Here’s how to manage your accounts to reduce your chances of a late payment: