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If you’ve had a pretty good credit history then a late payment or two couldn't hurt much, could it? Yeah, it absolutely could. In fact, what it will do to your credit is much worse than you might imagine. The reason for this is that 35% of your credit score is based on your credit history and missing a payment will severely damage your history.
What late payments will do to your credit score
The first and most important thing is that a late payment will negatively affect your credit score. According to the credit reporting bureau Experian a missed payment is the single biggest indicator of credit risk so this will have the longest lasting and greatest impact on your credit. It's thought that one late payment will reduce your credit score by 60 to 110 points. Of course, there are other factors that will affect your score such as how late the payment was and your history of late payments. The website Credit Sesame says that in a worst case scenario your credit score could drop by 35%. However, if you’ve had an otherwise good credit report and this is your first late payment your credit score will probably only drop about 10%.
Understanding when a payment is late
The good news is that if you are late in making a payment on a credit card this won't show up on your credit report until it's at least 30 days past due. What this translates into is that if your payment is less than 30 days late your lender may not report it to the three credit bureaus. Also, credit card companies must send your statements 21 days before your payments are due. What this means is that technically you have at least 50 days after the billing cycle closes to make your payment before it's reported to the credit bureaus. Unfortunately, this 30-day rule doesn't apply to mortgage payments, car payments or other installment loans. When you make a late payment on one of them it could show up on your credit report at anytime.
Late fees can be a killer
Whenever you're late in making a payment – even by a single day – you'll be hit with a late fee. This fee is typically $25 to $35. If you have more than one late payment these fees can get out of control in a hurry. However, if your account is in good standing with the exception of just one late payment then you may be able to talk your lender into reversing the late payment penalty fee. All you need to do is call and request the fee be reversed or forgiven. If at first you don't get a positive response, ask to speak with that person's supervisor.
Kiss that promotional offer goodbye
Did you recently transfer a bunch of high-interest credit card debt to a 0% interest balance transfer card? Did this get you 12 or even 18 months’ interest free? That's a pretty good deal. But missing just one payment could invalidate that promotional offer and so you would be required to immediately begin paying interest on your balance. And just one late payment could even mean losing any credit card rewards, points or miles you have accumulated.
Your APR will likely be jacked up
A late payment could result in your interest rate being increased or the amount of your available credit decreased. If you’re more than 60 days late on a payment the National Consumer Law Center says you could actually be hit with a penalty APR as high as 30%. Think about that for a minute. You’d basically be paying $30 interest on every $100 you had borrowed.
Late payments are a big red flag
One or more late payments will be a big red flag when you try to get credit in the future. Lenders will view that as a danger sign and may not approve your application for a credit card or loan. This red flag can affect other areas of your life, too. For example, when you apply for a new apartment the landlord may pull your credit report, see those late payments and decide not to rent to you. Your insurance company may raise your premium as a result of those late payments and they might even affect your ability to get a new job.
It could take two years for your credit to recover
Fortunately, your credit can recover from a late payment. Unfortunately, there’s no way to say how long this will take as there may be other negative issues on your credit reports. VantageScore (a competitor to the FICO score) believes it will take between one to two years for your credit score to fully recover from a late payment. And late payments will stay in your credit reports for seven years though they won’t affect your credit score for that long.
Restoring your credit after late payments
If you’ve have one or more late payments the first thing you will need to do to restore your credit is get your account(s) current. Then in the future you will need to show a good history of on-time payments. If all you can do is pay the minimum amount on a credit card, then at least pay it so you can stay current. It would also be good to set up automatic payments so that you will never again miss one. If for some reason you can't make an automatic payment to one or more of your lenders, then set up reminders on your Google or iCal calendar. You might also see of you can get all your payments moved to a single date, which should then be easy to remember. Finally, monitor your credit score to keep an eye on your progress. You may already be getting your credit score from one of your credit card companies but if not, you can get it on a website such as CreditKarma.com or from one of the three credit reporting bureaus (TransUnion, Experian, Equifax). You should also get your credit report from either the credit reporting bureaus or on the website www.annualcreditreport.com.
Beyond this, here's a brief video that reveals three other tips for fast credit repair.