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 gmeyer@meriwest.com
Don't forget our Free Financial Education Workshops offered here at our main office in San Jose:
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