The concept is simple enough: pay your bills before they’re due. This isn’t a suggestion; payment history is one of the largest components of how your credit score is calculated.
Lenders use your credit report as a measure of financial trustworthiness, and a track record of on-time payments is the single easiest way to prove you’re a reliable borrower. Ideally, you should be paying off your balance in full each month on all your bills: credit cards, line of credit, car loan, mortgage payment, cell phone and internet bill, etc.
Of course, if everyone neatly complied, I wouldn’t be writing this. Maybe a financial emergency cleaned out your savings, or you lost your job. Perhaps you’re disorganized and simply forgot to pay on time.
Unfortunately, the reason doesn’t matter: late payments shave precious points off your credit score. This has can knock you down into a lesser tier (from “good” to “fair,” for example) and potentially prevent you from qualifying for the best credit cards and mortgage rates. The later the payment, the greater the damage to your score.
Canada’s two credit bureaus, Equifax and TransUnion, keep their exact scoring models secret, but you can find out exactly how many late payments you have on your file by ordering a copy of your credit report. Think of your credit score as a grade, and your credit report as a report card: your credit report contains information about every single loan you’ve taken out in the last seven years, and shows how much debt you owe, the limit on each account, and whether you regularly pay on time. Your credit score is a numerical representation of all the information contained in that report, ranging between 300 and 900.
What counts as “late”?
On your credit report, payments are categorized as 30, 60, 90, or 120 days late. This is rated on a scale of 1 to 9, with a letter in front indicating what type of credit you hold:
- I: Installment credit, such as a mortgage or car loan, where you make payments in fixed amounts on a regular basis until the loan is paid off.
- O: Open credit, such as a line of credit or a student loan, where you borrow up to a certain limit and the total balance is due at the end of a certain period.
- R: Revolving credit, such as a credit card, where where you can borrow up to your credit limit as needed and make regular payments in different amounts, depending on your balance.
For example, if you pay off your credit card balance on time every month, you’ll have the highest R1 rating. If your payment is more than 120 days overdue but not yet in collections, you’ll slide down to an R5. If that debt falls to a collections agency or you declare bankruptcy, you’re slapped with the lowest rating, R9 — this is not somewhere you want to be.
However, if you make the payment within the first 30 days, it generally won’t be reported to the credit bureaus. That said, you’ll still be dinged with a late payment fee, whether it’s from your credit card provider or cell phone company. With some credit cards, your provider may jack up the interest rate if you miss two consecutive payments. Either way, late payments cost you.
How long do late payments stay on a credit report?
According to Equifax, your history of late payments, accounts in collection, and tax liens stay on your credit file for seven years. Bankruptcy stays on your credit report for 10 years from the date filed.
What should you do if you miss a payment?
The sooner you can pay it off, the better. If you’re in a serious financial bind and don’t know how or when you’ll be able to pay, call your creditor. They want you to pay off your debt, so they’ll try to work with you. In the meantime, try to keep making on-time payments on the rest of your bills. If you’ve otherwise been a customer in good standing, your creditor may agree to at least waive the late fee. Whatever you do, don’t ignore it or do nothing.
If you’re generally responsible, you don’t need to sweat the odd late payment. The credit bureaus’ scoring models take a number of factors into account: the number of accounts with delinquencies, the amount owed on each, and the number of late payments over seven years. With time (and a commitment to better habits), your late payment will be minimized.
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