Your credit score plays a vital role in your ability to achieve financial freedom. Securing loans, mortgages, insurance policies, and even jobs can be made easier when you have a good credit score. In comparison, a bad score can limit your borrowing and investment options and dramatically impact your future. Let’s take a look at five consequences of late payments on your credit score.
Late payments are one of the biggest factors affecting your credit score
Payment history is one of several factors that affect your overall credit score. The amount of credit you’re currently using, the length of your credit history, the mix of credit types you have open, and the frequency with which you apply for new credit are also considered in your credit score calculation. Payment history is generally considered the most important factor when determining your credit score. This is because it’s one of the clearest indicators of your trustworthiness in repaying debt. This is why late payments can have such a detrimental impact on your credit score.
Late payments hurt your credit score for several years
Entries on your credit file remain for years. This means that late payments can impact your score long after they occur, even if you’ve been diligently making payments on time ever since. The length of time a late payment stays on your file varies from country to country, so check your local laws. In the UK, you can expect a late payment to remain on your credit file for six years. Keep in mind that your credit score will gradually improve over this six-year period as long as you keep up with future payments.
The more late payments you have, the worse your credit score is
Each late payment has a negative impact on your credit score. So, the higher the number of late payments in your credit history, the lower your credit score falls. Similarly, having multiple late payments with multiple different lenders can be more detrimental than having lots of late payments with a single lender.
It’s so important to take pre-emptive action if you find yourself struggling financially. If you miss one payment, contact your lender as soon as possible to discuss a temporary pause or reduction in your payment plan. Consider any upcoming payments with other lenders and if you think you’ll struggle to pay, make arrangements with them in advance.
You can minimise the impact of late payments that occur for good reason
Sometimes late payments occur for unavoidable reasons, such as illness or redundancy. In these cases it’s possible to add a notice of correction to your credit file to explain the reason. This won’t wipe the late payment from your credit file or change your credit score, but it will be considered by lenders who check your file in the future. As a result, it could help you to secure more offers or better interest rates. Keep in mind that you’ll have to submit a notice of correction to each credit reference agency individually. In the UK, they are Experian, Equifax, and Transunion.
Late payments that become defaults can further worsen your score
What constitutes a late payment depends on the terms of your credit account. Most lenders won’t file a late payment until at least 30 days after a payment’s due date. If you go on to miss future payments over the course of three to six months, you run the risk of a default. This is where the lender closes the account.
Defaults are considered more serious than missed payments, so they have an even more detrimental impact on your credit score. Even if you repay the owed funds, the default will remain on your credit file and affect your score. If you fail to pay the owed funds, your lender could apply for a County Court Judgement (CCJ) against you, which is where a court can demand that you repay the money. A CCJ will further reduce your credit score and could make it very difficult to secure credit in future. This is why it’s so important to resolve late payments as soon as possible so they don’t escalate.
Avoid late payments to protect your financial freedom
Late payments can have a significant impact on your credit score and limit your ability to secure credit in the future. Be sure to make arrangements with your creditors if you feel at risk of missing a payment. If you realise you’ve missed a payment by accident, settle the amount as soon as possible to minimise the impact on your credit score.
