Late Payments Affect Credit Score

Despite your best efforts, it is only human to forget to pay bills on time or clear off credit card dues. Along with leaving you with an unpleasant feeling of failing to meet your obligation, it can also jeopardise your credit file and score.

So does missing a payment affect credit score? Here’s what you need to know

Missing to pay on the scheduled payment date is known as a late payment. However, such payments do not make it to your credit file immediately. Most lenders won’t report you to the credit bureaus. However, you may still have to pay a penalty for missing paying on time.

Usually, credit providers give a grace period of 14 days past the due date for making late payments. But it's important to note that late payments can be reported regardless of the amount outstanding.

Even if you repay the minimum amount due on the credit card or loan after the grace period is over, it can be recorded as a late payment on your credit report.

Subsequently, as debt on your account continues to remain unpaid and you incur significant arrears, it is flagged as a default. Under Australian laws, when you have $150 or more as outstanding debt which is overdue for at least 60 days, it gets reported as a default in your credit report.

Prior to reporting, the credit provider is required to send at least two notices demanding the payment of the outstanding debt. They also need to wait for at least 14 days from the date of the second notice before reporting it as a default.

Since different credit reporting agencies use different scoring models, it is not possible to know exactly how many points get knocked off from your credit score in case of late payments or defaults.

Late payment affects your credit score as repayment history is one of the key factors considered by credit check companies when calculating your score. Making payments on time consistently signals that you are a creditworthy borrower who is careful with finances. However, when your payment is late regularly, it suggests that you are under financial strain and may not be able to repay your debts. The further you fall behind your payments, the harsher it is for your credit score. Take a look at how to improve credit score.

But why do unpaid bills affect credit score? Unpaid utility bills are bad news for your credit score though utility companies are not obligated to report to credit rating agencies. Unpaid utility bills affect credit scores when they become delinquent and sent to a collection agency. Since collection agencies are mandated to share information with credit reporting bodies, such delinquencies can bring your score down.

Clear off the dues immediately

The longer you wait to pay the outstanding amount, the higher are the chances of your credit score dipping. Once you realise that you may have missed making payments on the due date, pay it off as early as you can.

Ensure you pay on time going forward

Making timely payments on all accounts in the future will balance out the negative credit information on your file. Over time, this can help you to improve your credit score.

Ask the credit provider to waive the penalty

Credit providers charge a late fee to penalise the borrower for failing to honour the payment obligation. If this is the first time you have missed making a payment and your credit history is otherwise spotless, you can request the lender to excuse you from paying the late fee.

Work towards reverting to the original interest rate

Certain credit providers may hike the interest rate on account of late payments. In most cases, six months of timely payments can reset the revised interest rate to the original one. Make sure to go back to making timely payments so that you don’t have to pay additional interest.

Details of any missed payments stay on your credit report for two years.

If your account is reported to be in default, the information shows up on your credit report for five years. The details are not deleted even if you repay the outstanding amount.

Serious credit infringements are also included in your credit report and the information stays for seven years. A default is flagged as a serious credit infringement when:

• You have outstanding debt, but you haven’t repaid it despite the credit provider contacting you several times, or
• You have an unpaid debt, but you no longer appear to stay at your last known address and haven’t provided the lender with a new address.

Once you pay such debts, it is classified as a default, and the details stay on your credit report for five years.

All of the above send negative signals about your creditworthiness to a prospective lender and bring down your credit score. Moreover, consistent late payments can hurt your score even more when you already have a poor credit score.

If you pay bills later regularly, here are some strategies to help you get back on track:

Set up auto-pay

Check if your bank offers a direct debit or auto-pay facility on your account. It ensures that money gets debited from your account on a scheduled date. You can choose the payment due date as your scheduled date to minimise the chances of missing payments.

All you need to ensure is keeping your account sufficiently funded so the funds can be debited as instructed. If your account has insufficient funds, you may end up paying additional fees for a penalty for overdraft.

Set up reminders

Manually set up reminders on your phone or computer to remind you about the payment due dates at least three to four days in advance.

You can also check if your credit provider offers SMS/email reminder services about your upcoming credit card payments and sign up for those.

Pay off minimum amounts due

Even if you don’t have enough funds to pay off your entire credit card bill, ensure to pay off the minimum amount due each month on the scheduled payment date.

It can prevent the repayment from getting flagged as a late payment and help protect your credit score.

Pay throughout the month

You can consider staggering payments through the month. Doing so ensures you already pay some amount by the due date.

It also keeps your balance in check and improves your credit utilisation, which significantly impacts your credit score.

If you notice that information about loan repayments or bill payments has been incorrectly captured in your credit report, get in touch with the concerned credit provider that may have misreported it. If your issue is still unresolved, you can contact the credit reporting bureau that has prepared the report and raise a query to dispute errors on your credit report.

Usually, a credit reporting body’s website will have an option to raise a dispute about your credit report. Use it to explain why you think a particular entry of your repayment history is wrong and upload all the relevant supporting documents such as payment receipts.

The credit bureau will forward relevant information to the credit provider who reported that particular entry and ask them to investigate the claim. If the repayment entry is found to have been incorrectly reported, the relevant credit bureaus will be notified so that they can correct the information.

If your complaint is still not resolved, you can contact the Office of the Australian Information Commissioner, the national regulator of privacy and information.

Now that you know how late payments affect credit score, don’t fall into the vicious cycle of making them. Even when you opt to purchase under the buy now pay later scheme, clear off your dues on time to avoid getting classified as a defaulter.

With ClearScore, you can get your free credit score report to better understand how late payments affect your credit rating and how you can take all possible steps to boost it.