Normally you are on time with your payments, but somehow you managed to miss one this month. What are the consequences of a missed payment, and how do you minimize their effects?
Missing a single credit card payment may not seem like a big deal, but, as Matt Schulz, Senior Industry Analyst at CreditCards.com observes, "…even just one single late payment can really impact your credit." How far your credit score drops and how long the drop lasts depend on how you handle the situation.
To limit damage, you must submit the missed payment as soon as possible. Usually, a bill must be at least thirty days past due to be considered as a late payment to be reported to the credit bureaus. Make your payment before that thirty-day mark, and you may be able to avoid many of the typical consequences of a late payment.
A bill that is sixty days past due is considered more serious, but the effects of thirty and sixty-day delinquencies are relatively limited, as long as the offense is not repeated. However, once you let a bill go to ninety days past due, you are considered to be at high risk of failing to pay other bills and the effect on your credit score is long-lasting – up to seven years, similar to the effects of bankruptcy.
As soon as the bill becomes overdue, you will generally be assessed a late fee – although some credit cards will waive this fee for a single missed payment. You may also lose your grace period to pay in full and avoid interest. Instead, you will be charged interest on the average daily balance.
If you have a good credit history and make the payment in a reasonably short time, you can ask the card issuer to waive the fee as a goodwill gesture to a good customer. It usually takes at least two months of on-time payments to restore your grace period.
A more painful consequence of a late payment is the penalty interest rate. Card issuers have the right to raise your annual percentage rate (APR) to cover the extra risk that you now present (and also to remind you not to miss a bill again). Penalty APRs are considerably above the normal APR, often 30% or more. Your card issuer's terms and conditions page will outline the rate, when it applies (typically after a bill is sixty days late), and how many on-time payments you will have to make in a row to bring the APR back down to the normal rate (a total of six on-time payments is common).
Not all cards assess late fees or apply penalty interest rates, but generally, you will pay for that privilege (through either a monthly fee or some other tradeoff).
Ironically, the size of the credit score drop and the recovery time is greater for those who have better credit scores prior to missing a payment. Research shows that borrowers with FICO scores of 680 tend to drop 60-80 points with a missed payment and take nine months to recover their previous credit score, while borrowers with a 780 score lost 110-130 points and took seven years to fully restore their credit. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Installment loans such as mortgage loans and auto loans do not generally have penalty APRs, but they can have their own set of concerns. For example, late fees for mortgages can be painful because they are often assessed as percentages of the mortgage payment – which can be quite large.
If you are cutting it close with your cash flow, pay whatever you can toward a bill by the due date. Try to make the most of the grace period if you must, but make sure that you send in your payment with enough time for the bill to be received. Accruing some extra interest is usually more desirable than the cumulative effects of a missed payment.
In short, do whatever you can to make at least some of the missed payment on time. If you do miss a payment, pay as soon as possible, and take steps to prevent a repeat offense and to minimize the damage. No credit score can afford multiple hits.
If you want more credit, check out MoneyTips' list of credit card offers.