Friday, June 1, 2012

Late Payments will have you Hurtin’ for Certain!

Paying our Visa card or car loan late is not something we want to do, but sometimes due to our finances or forgetfulness, it does happen. There is no worse feeling than mailing that payment and knowing it will be at least 30 days late. We know that there will be a mark on our credit and many of us believe that mark will be with us forever! I can tell you it will not be with us forever.

Most loans and credit cards give us a grace period in which to make our payment. If we make the payment before or on the last day of our grace period, our payment will be on time. If you let that payment go one extra day past the grace period, your payment will be considered 30 days late by your lender. Be careful with the grace period. Pushing the cut-off date to the wire can lead to consequences, depending on when/how payments are processed. This should be a last resort, it isn’t advisable.

How does that affect your credit? It depends on how much credit you are utilizing and how it is managed.
  • If you have a lot of credit like a home loan, an auto loan, and some credit cards that are kept current, one late payment won’t take you completely out of the credit market. Yes, your score will drop as a result of the late payment but because you are managing several other forms of credit properly, the late payment’s affect on your credit will not be too severe. As you make your future payments on time, the effects of the late payment will be mitigated by the good credit you are continuing to manage.

  • If you have a limited credit file and that credit card is the only card you have; that late payment could have a strong effect on your credit score. The late payment, whether you have an extensive credit file or a limited one, will be with you in your file for the next seven years. But, surprisingly, it does not have the same weight upon your score for the entire time.

The effect of late payments on your credit score is “front loaded.” What I mean by this is that 70% of the effect that late payment has on your score takes place in the first 24 months after the late payment! After that initial 2 year period, you will see your credit score bump up and, as it becomes 36 months, 48 months, and further into your past, its effect will be diminished each year and you will see your score bump up each year until it drops off your credit report completely at the end of the 7th year. You can help yourself further by making all other debt or credit payments on time. Good credit offsets bad credit.

By the way, there is one additional cost to paying your credit card bill late: Penalty Interest. In many cases, paying your card late will not only decrease your credit rating, it can cause an increase in the rate you are paying for credit! Your interest rate can increase dramatically. It not uncommon for your interest rate to go straight up to 29.99% or even more with just one late payment. Depending on how large your credit card balances are, this can cost you thousands of dollars in additional interest charges and prolong your time in debt. Most issuers will require you to have six months of on time payments before reducing your rate. You need to check with your card’s issuer to determine their particular policy on late payment penalty interest.

One late payment is a cause for concern, but it is not, by any means, the end of the world or end of your credit file. One of the ways you can assure yourself that you will not be late is to utilize your online banking and bill pay here at Meriwest Credit Union to set up your automatic payments. Simply fund your account with your direct deposit, set your payment schedule in online banking as a transfer or in bill pay as an automatic payment and let the free online banking payment service do the rest!

Questions? Ask the Meriwest Credit Union Guy at

Don't forget our Free Financial Education Workshops offered here at our main office in San Jose:

Free Financial Education Class: Real World Budgeting for Teens
Wednesday, June 13, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA


Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

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